Investment dealer BMO Nesbitt Burns Inc. has been fined $1.5 million for supervisory failures involving a rep’s risky trading strategy.
A hearing panel of the Canadian Investment Regulatory Organization (CIRO) approved a settlement with the firm and a former rep over failures involving the deployment and oversight of trading in certain clients’ accounts.
As part of the settlement, the firm admitted to supervisory lapses. The former rep, Yujie (Jared) Liu, admitted to due diligence failures in connection with an investment strategy that he devised and used with a number of clients.
In settling the allegations, the firm agreed to a $1.5 million fine, to disgorge $146,876 in fees and commissions, and to pay $50,000 in costs. Liu agreed to an $80,000 fine, along with $63,258 in disgorgement, and to successfully complete the conduct and practices handbook exam before obtaining registration again.
The violations stem from a trading strategy Liu adopted in 2015, which involved shorting government bonds and investing the proceeds in preferred shares.
“In employing the strategy, Liu failed to adequately explain to clients the incremental risk created by shorting long-term [government] bonds and investing in preferred shares, each of which was interest-rate sensitive,” the settlement said.
Additionally, he failed to adequately advise clients of the implications for their positions when interest rates declined in 2018, the settlement said — a development that decreased the value of the preferred share holdings and increased the cost of covering the short positions.
As a result, the clients’ accounts saw the value of their portfolios drop by approximately $39.7 million between the end of October 2018 and May 2019.
BMO was aware of Liu’s strategy, but the regulators alleged the firm failed to properly oversee the trading.
Specifically, the firm allowed clients to be overweighted in fixed-income securities relative to the preferences set out in their know-your-client documents, CIRO alleged. Further, the firm “failed to consider the risk of the portfolio as a whole, and failed to give due consideration to the increased risk associated with the combination of the two constituent elements of the strategy.”
The settlement said the firm has since improved its account supervision system, adopting a new electronic alert system and launching a supervisory dashboard to improve the oversight of investment strategies that involve potentially risky elements, such as the use of leverage and short selling.
Additionally, the settlement said BMO compensated 12 of Liu’s former clients as part of lawsuit resolutions and other proceedings, which covered “a significant portion of their capital losses along with the fees and commissions” they paid.
The disgorgement ordered in the settlement with CIRO reflects fees and commissions paid by investors that did not receive compensation.