A former fund rep has been fined and suspended for locking a client into a deferred sales charge (DSC) fund redemption schedule when she could have purchased cheaper, no-load funds that would have served her better.
A Mutual Fund Dealers Association of Canada (MFDA) hearing panel approved a settlement agreement with a former Investors Group Financial Services Inc. rep in Medicine Hat, Alta., who admitted to violating MFDA rules by recommending a trade that needlessly subjected his client to a seven-year DSC schedule and generated commissions for himself.
Under the settlement, Tyler Davidson was fined $22,500 and ordered to pay $5,000 in costs. He was also suspended for a month. The settlement noted that he’s no longer employed by a fund dealer but is licensed in the insurance industry.
According to the settlement agreement, Davidson opened a RRSP, a TFSA and a non-registered account for a client in 2014. As a client with more than $250,000 in non-registered assets, she was eligible to purchase no-load funds in the firm’s I-Profile program, which carried management fees that were 20-35 basis points lower than the funds she purchased, with no DSC schedule.
Instead, she was sold more than $400,000 worth of a DSC mutual fund that generated approximately $15,346 in commissions for the rep.
Four days later, he switched her to a portfolio of new mutual funds in the I-Profile program. However, the new funds retained the DSC schedule from the original fund, so the client paid $17,200 in DSC fees when she redeemed some of those funds.
“In some cases the proceeds redeemed from the sale of mutual funds subject to DSC were transferred to [her] RRSP account, and applied towards the purchase of additional DSC load mutual funds, which were subsequently redeemed by [the client resulting] in additional DSC fees,” the settlement said.
When the client sought to redeem some funds for a down payment on a house, the potential DSC fees caused her to instead borrow from a line of credit to finance the down payment.
In 2018, the client complained to the firm about the DSC purchase. After an investigation, the firm reimbursed her for the DSC fees and the interest on her line of credit.
The settlement noted that Davidson had no previous disciplinary history, co-operated with the MFDA’s investigation, and agreed to settle the case, saving enforcement resources.