BMO Nesbitt Burns Inc. is being sanctioned by the Investment Industry Regulatory Organization of Canada (IIROC) for failing to supervise a former rep who admitted to generating high commissions from unsuitable trading in new issues for a couple of clients.
An IIROC hearing panel approved a settlement that saw BMO Nesbitt Burns admit to violating IIROC rules in connection with oversight failures involving Paul Brum, a former rep in Vancouver.
According to the settlement, Brum “executed frequent trades in new issues” in a couple of client accounts, “which resulted in high turnover ratios in their accounts. The trading strategy executed by Brum was not suitable for these clients.”
The high commission levels were flagged in the firm’s internal oversight reports that are intended to identify excessive trading, conflicts of interest and unsuitable, high-risk trading, but the regulator found that the firm “failed to query or prevent Brum’s trading in these client accounts in a timely manner and accordingly did not adequately supervise Brum.”
Specifically, the settlement noted that the employees supervising Brum “were not adequately trained to consider and failed to appreciate the significance of the high frequency of trading in new issues on the suitability of the strategy for the accounts.”
It also said that BMO Nesbitt Burns “ought to have more fully queried the high-volume new issue trading in the accounts and required Brum to explain how the active short-term trading was suitable.”
In settling the case, the firm agreed to pay a $125,00 fine and $15,000 in costs.
Brum, who left the firm in 2017 and is no longer registered, settled allegations brought by IIROC in 2020 involving his trading activity.
In that settlement, he admitted to recommending an unsuitable short-term trading strategy that involved new issues. He agreed to a $10,000 fine and an 18-month suspension.
According to IIROC’s settlement with the firm, after the unsuitable trading was discovered, Brum was also subject to internal discipline, which included a $10,000 fine and a warning letter.
And, in addition to the regulatory sanctions, the firm has already also paid over $675,000 in compensation to the clients to make up losses they suffered due to the unsuitable trading. Brum contributed $300,000 to the compensation settlement, it noted.
Since then, the firm has also beefed up its supervision of new issue trading to prevent similar violations in the future, the settlement said.