A Mutual Fund Dealers Association of Canada (MFDA) hearing panel has issued its reasons for decision in the 2021 case concerning Kentville, Nova Scotia area dealing representative, Scott Nichols.
In a settlement agreement, Nichols agreed to a four-month suspension, which expired in February 2022. He also paid a fine of $30,000 and costs totalling $5,000 after he agreed that he allowed and helped an unregistered representative to transfer accounts and conduct business for four clients.
In the reasons for decision’s agreed facts, the MFDA also spells out the unregistered representative’s transgressions, namely that the individual, dubbed KK in the decision documents, redeemed $83,538 from his own spouse’s accounts, without her knowledge or authorization, before committing suicide in April 2018.
According to the MFDA’s documents, KK had been registered as a dealing representative with Investors Group Financial Services Inc. At the time, he serviced the accounts of his spouse, named “client 1” in the decision documents. At no time was KK a joint account holder or in any way authorized to trade in that client’s investment accounts without authorization. Without her knowledge, KK processed redemptions in her account at Investors group, redeeming $87,657 without authorization.
When he resigned from Investors Group and went to work for Quadrus Investment Services Ltd. where Nichols was the branch manager, KK worked in an unregistered support role and was paid by Nichols’ firm, Nichols Wealth Management Inc., previously known as Harvest Wealth Management Inc., directly.
During that time KK transferred his wife’s accounts and the accounts of three other clients to Quadrus. At the time of the transfer, KK’s wife was unaware that the value of her remaining investments amounted to less than half of the value of her account prior to the processing of the unauthorized redemptions at Investors Group.
Nichols did not meet with any of the four clients but signed new account application forms, trading documentation and allowed KK to set up pre-authorized contributions and process approximately 20 transactions in the new accounts. The clients in question believed KK was the approved person at Quadrus responsible for their accounts. They did not know KK was unregistered.
“By allowing an unregistered individual to open new accounts at the member and make investment recommendations for clients that the respondent had not met, the respondent facilitated stealth advising by the unregistered individual, and failed to perform the necessary due diligence to learn the essential facts relative to the clients,” the MFDA states.
When KK presented Nichols with a limited trading authorization (LTA) form for client #1’s account, authorizing approved persons to accept verbal trading instructions, Nichols signed the authorization and witnessed client #1’s signature “thereby making it appear as though he had explained the provisions and implications of the LTA to client #1 and witnessed her signature on the form.”
When KK advised Nichols that the client wanted to redeem $40,041, he instructed KK to obtain the client’s signature on the trade tickets rather than rely on the LTA. Client #1 did not sign the trade tickets and did not authorize the transactions, but after presenting Nichols with tickets purportedly signed by the client, KK arranged for the redemptions to be deposited into a joint bank account he had access to. When Quadrus’ trade supervision staff flagged the account for being inconsistent with her documented risk tolerance, KK provided Nichols with an updated know your client (KYC) form which appeared to be signed by client #1, indicating that her risk tolerance had changed from medium to high.
Once he was the representative of record, KK cleared the remaining balance out of her accounts without her knowledge or authorization.
Client #1 has since been reimbursed by Nichols’ errors and omissions insurance. There is no evidence that any other clients suffered financial losses.
In addition to his fine and suspension, Nichols will be subject to close supervision for 12 months in the event he ever seeks to become re-registered.