CIRO hearing finds firm was not approved to serve retail clients and violated KYC rules
Red Cloud Securities, which aims to identify global mining investment opportunities, must cough up more than $700,000 after continuing to serve retail clients without being approved to do so.
A Canadian Investment Regulatory Organization (CIRO) hearing also found that the Know-Your-Client (KYC) documentation Red Cloud used did not meet requirements, and that the company failed to establish and maintain a system of controls and supervision that was adequate.
Red Cloud, based in Toronto, Ontario, agreed to pay a total of $611,306.18 in disgorgement, a fine of $100,000 and costs of $15,000.
The hearing statement outlined how, prior to January 30, 2020, Red Cloud was an exempt market dealer (EMD) regulated by the Ontario Securities Commission, engaging in retail private placements. Subsequently, it became a dealer member of the Investment Industry Regulatory and was, therefore, limited to servicing institutional clients. It was also required to give up its registration as an EMD.
While Red Cloud eventually got approval from IIROC on October 26, in the period between January 30, 2020 and October 26, 2020, Red Cloud serviced retail clients although not approved by IIROC to do so.
Between February 2020 and August 2021, Red Coud sold or facilitated the sale of private placements to approximately 192 different retail investors, but “failed to establish and maintain a system of controls and supervision that was adequate to ensure that clients were qualified to purchase securities offered pursuant to prospectus exempt distributions, particularly the accredited investor exemption”.
Further, Red Cloud conducted the private placement transactions off book, and did not, until August 2021, consistently open client accounts on its own books, or obtain signed client account agreements, or issue trade confirmations or monthly account statements, and, until August 2021.
None of the clients engaged in the transactions were harmed and Red Cloud has since taken steps to remediate and rectify the contraventions.
