The Canadian Investment Regulatory Organization (CIRO) has come to a settlement agreement with National Bank Financial (NBF), fining it $1 million plus costs of $50,000 after NBF admitted to failing to adequately supervise a former rep with respect to note-taking and suitability, the regulator announced Friday.
The settlement still has to be approved by a hearing panel.
The former registered representative, Matthew Philip Ewing, was sanctioned in January for his conduct while he was employed by RBC Dominion Securities, Inc., and then NBF. Following a hearing, CIRO issued a 10-year ban, and hit him with a $75,000 fine plus $50,000 in costs.
Now, CIRO has found that NBF failed to adequately supervise Ewing between April 2021 and August 2022. While NBF questioned Ewing when it found note-taking deficiencies during periods of high trading volume and unsuitable trading in some client accounts, the regulator found it did not adequately pursue red flags, the regulator said.
Many trades, not enough notes
Most of Ewing’s clients transferred their investments from RBC DS when he was hired by NBF in March 2021. These accounts arrived invested in securities and some carried margin debt. Ewing told NBF that these accounts needed significant adjustments to comply with NBF’s framework.
The month after he was hired, Ewing and his associate Philip Soares averaged 267 trades per day. Between May and December 2021, Ewing, who was not registered or qualified as a portfolio manager, exceeded 200 trades on eight trading days.
NBF reviewed Ewing’s trades and asked him about the high volume and checked the quality of his notes. However, it only checked notes related to 12 of Ewing’s 5,887 trades in April 2021. After the regulator informed NBF of an investigation against Ewing in August, the dealer completed a review finding that 49% of Ewing’s June trades and 17% of his July trades reviewed did not have notes.
NBF asked about 13 trades selected from the July 2021 report, 12 of which did not have notes. Ewing did not produce the missing notes, nor any other missing notes for June or July 2021, but NBF still closed the inquiry.
“The small sample size, the inadequacy of the notes reviewed and Ewing’s explanation should have raised further red flags, and caused NBF to insist upon Ewing producing client notes confirming client instructions. NBF did not do so,” CIRO said.
High risk securities
In addition, almost 35% of Ewing’s book was invested in six high risk securities in December 2021, which were inconsistent with the stated account objectives for some clients.
Some of Ewing’s clients’ equity component outweighed the firm’s allowed equity percentage for their chosen investment profile. When NBF prompted Ewing to address these suitability concerns, CIRO noted he lied, saying that clients were aware of it.
Margin call
The number of Ewing’s client accounts using margin grew from 61 in April 2021 to 101 by November. There were 251 margin calls in August that year and 260 in November.
Despite some NBF staff knowing the number of margin calls in Ewing’s clients’ accounts, NBF didn’t take appropriate action to address the issue, CIRO said. By December, Ewing had more clients using margin than any other NBF advisor and NBF asked for an explanation. Ewing didn’t respond and NBF required Ewing to eliminate margin usage by May 2022.
Ewing continued to use margin without documented approvals. NBF extended the deadline to August, which Ewing missed, before suspending him in October and terminating him in November 2022.
As a result, NBF compensated 28 of the affected clients, and implemented new compliance measures to prevent similar failures from reoccurring.