Registered Representative fined $80,000 for lack of suitability due diligence
The importance of due diligence in selecting suitable investments for clients has been highlighted in a decision by a hearing panel of the Canadian Investment Regulatory Organization (CIRO).
Yujie (Jared) Liu, an employee of BMO Nesbitt Burns Inc. (BMO NBI) who was a Registered Representative from 2016 to 2021, was found by the regulatory panel to have failed to use due diligence to determine the suitability of an investment strategy used in certain client accounts and was fined $80,000.
His firm was also found to have failed to have robust supervision and control systems in place with regards to trading activity and suitability of investment strategies used for those client accounts. It has been fined $1.5 million for contravening Dealer Member Rules 38.1 and 2500A.
While the hearing panel’s decision document does not give full details of the strategy used by Liu due to its complexity but it does say that 16 clients were impacted through their investments in preferred shares. They were aged between 38 and 53 and had net worth of between $2 million and $42 million and most had risk tolerance of between 10% and 40%.
The client accounts experienced an aggregate decline in value of approximately $40 million from the end of October 2018 to May 2019.
What the rules say
CIRO’s Dealer Member Rules requires “due diligence to ensure that the acceptance of any order from a client is suitable for such client based on factors including the client’s current financial situation, investment knowledge, investment objectives and time horizon, risk tolerance and the account or accounts’ current investment portfolio composition and risk level.”
The rules also require firms to “supervise the activities of each partner, Director, Officer, Registered Representative, Investment Representative, employee and agent of the Dealer Member that is reasonably designed to achieve compliance with the Rules of the Corporation and all other laws, regulations and policies applicable to the Dealer Member’s securities and commodity futures business.”
As well as the fine, Liu agreed to disgorgement of fees and commissions in the amount of $63,258, costs of $5,000, and a successful completion of the Conduct and Practices Handbook course before applying for registration and approval with CIRO. He remains at BMO NBI in a non-registered capacity.
BMO NBI agreed to disgorgement of fees and commissions in the amount of $146,876 and to pay costs in the amount of $50,000.
