Vancouver-based mutual fund dealer Credential Asset Management Inc. is being sanctioned by securities regulators for violating sales practices rules by paying added compensation to reps for selling certain funds.
In settlements with both the British Columbia Securities Commission (BCSC) and the Mutual Fund Dealers Association of Canada Inc. (MFDA), the firm agreed to pay a total of $600,000 — a $300,000 payment to the BCSC, a $280,000 fine to the MFDA and $20,000 in costs to the MFDA.
The settlements follow admissions that the firm violated provisions of the mutual fund sales practices rules by providing differential compensation for certain funds.
Specifically, reps received added incentives to sell funds that were classified as “socially responsible” (SRI) and they earned extra incentives for sales of funds that were packaged in its portfolio program, which included funds from a related firm (Northwest & Ethical Investments LP) and third-party funds.
According to the settlements, the reps who received the extra pay were employed by both the fund dealer and financial institutions that sold the funds. The financial institutions paid the added compensation out of shared revenues from the fund sales.
As a result of the incentive structures, the dually-employed reps received $645,130 in bonus compensation in 2016 and 2017 for selling socially responsible funds, and $132,466 in added compensation for sales of the portfolio program funds.
Additionally, the firm paid performance bonuses to a pair of head office reps based solely on the sales of the funds in the portfolio program.
Those funds paid higher trailer fees to the dealer (an average 27 basis points higher for NEI funds and 15 basis points for AGF funds that were included in the program) for sales made as part of the portfolio program, compared with stand-alone sales of the same funds.
Despite the higher trailers, the settlements note that the end investors didn’t pay higher costs for those funds, nor did investors in the SRI funds that were subject to added incentives.
“[T]he enhanced compensation for the SRI mutual funds was intended to encourage dually-employed [reps] to recommend that clients consider environmental, social and governance factors in their investment decision-making process, as this was the core philosophy of this financial institution partner, rather than to specifically discourage investments in other funds,” the settlement noted.
The settlements also address the fact that the firm violated securities rules by failing to establish controls to prevent the payment of improper incentives.
Credential co-operated with the regulators in their investigations, which arose following a compliance review by the MFDA.
The firm also scrapped the differential compensation schemes in 2018, and has since taken other steps to correct compliance deficiencies, the settlements noted.