CIRO penalizes firm and advisor for not clearly explaining trading strategy risks to clients
In a significant regulatory action, BMO Nesbitt Burns Inc. (BMO NBI) and an associated investment advisor have been fined over $1.6m by the Canadian Investment Regulatory Organization (CIRO).
This fine was imposed for their failure to properly inform clients about the risks associated with a trading strategy. The strategy in question involved investing in preferred shares and short selling of Government of Canada bonds.
The fines were imposed after a detailed review of the strategy's implementation between December 2017 and May 2019.
The contentious strategy entailed clients investing in preferred shares using funds from short selling Government of Canada bonds, a method chosen to leverage low-interest rates for investment in preferred shares.
Despite the potential financial advantages, the strategy was heavily dependent on interest rates, making it sensitive to market fluctuations—a detail not adequately communicated to the clients involved.
CIRO's investigation revealed that BMO NBI did not have an effective system in place to supervise and control client accounts engaging in this strategy.
The firm allowed a misalignment between clients' documented investment profiles and their actual investments, particularly an over-representation of fixed income securities.
Furthermore, BMO NBI was found to have not fully considered the combined risk from both elements of the strategy, short selling, and preferred share investments, leading to increased client exposure to market volatility.
The settlement includes a direct financial penalty of $1,500,000 against BMO NBI, alongside an order for disgorgement of fees and commissions totaling $146,876 related to the implicated accounts.
The investment advisor involved faces a fine of $80,000 and is required to disgorge $63,258 in fees and commissions.
Additionally, costs of $5,000 and $50,000 were levied against the investment advisor and BMO NBI, respectively.
This settlement underscores the critical importance of risk communication in financial advisory roles and highlights the regulatory expectation for financial institutions to maintain stringent supervisory and control systems.
The agreement, sanctioned by CIRO's hearing panel, aims to serve as a reminder of the responsibilities held by financial advisors and institutions to their clients, particularly in the accurate and comprehensive explanation of investment risks.
