An Ontario Securities Commission (OSC) hearing panel approved a no-contest settlement with Toronto-based Scotia Capital Inc. (SCI) on Friday that will see the firm and two of its business units pay close to $20 million to some clients.
SCI has agreed to compensate $19,997,821 to clients who were found to have paid an excessive amount of investment fees as a result of inadequacies in the firm’s compliance system. The firm has also agreed to a voluntary payment of $850,000 to the OSC.
However, counsel for the firm, the OSC and the chairman of the hearing panel reiterated multiple times that SCI has technically not admitted to or denied the facts within this case.
In 2015, SCI discovered that some clients in fee-based accounts at ScotiaMcLeod Inc. and HollisWealth Inc., two investment dealers within SCI, were also paying trailer fees for products such as mutual funds and exchange-traded funds. The firm realized that this had been going on since 2009 as a result of problems within the firm’s systems of control and supervision.
It was also discovered that, since late 2008, some clients were invested in a particular mutual fund with a higher management expense ratio when they would have qualified for a less expensive series within that same fund.
SCI and its business units, referred to as “the dealers” in the agreement, self-reported these circumstances to the OSC in February 2015, a factor that worked in their favour when the hearing panel decided to accept the no-contest settlement agreement, which it found to be in the public’s interest.
“The reality is that compliance inadequacies occur even at well-meaning registered firms,” said Tim Moseley, a member of the OSC and chairman of the hearing panel, on Friday. “It is critical that when such inadequacies do occur the registrant responds in the way that the Scotia dealers have.”
The OSC panel also took into consideration that the firm is compensating clients for the excessive fees and that the compensation was deemed “globally appropriate” by both staff of the OSC and counsel for the dealers. In addition, the firm’s promise to enhance its policies and procedures surrounding the compliance system was another factor that helped lead the panel in its decision to accept the no-contest settlement.
It was noted in the proceeding that a manager at the OSC will monitor the process of developing those enhanced controls.
The no-contest settlement sends a clear message to participants within the capital markets, said Yvonne Chisholm, staff litigator at the OSC.
“Staff expects registrants to have robust and effective compliance systems in place, systems that should do two things. First, [they should] provide reasonable assurance that registrants are complying with securities laws, including the requirement to deal fairly with clients with regard to fees,” she told the panel. “Second, these systems should allow registrants to identify and correct non-compliance with securities legislation in a timely manner.”
Chisholm also noted that OSC staff had not found any evidence of deliberate misconduct on the part of the dealers during the regulator’s investigation into the matter.
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