A registered representative in Waterloo, Ont. has been fined $50,000 by the Investment Industry Regulatory Organization of Canada for failing to make suitable investment recommendations to clients, among other regulatory violations.
In a settlement agreement released on Monday, IIROC reveals penalties against Matthew Beechey, who was formerly employed as a registered rep with TD Waterhouse Canada Inc.
IIROC found that in 2005 and 2006, Beechey recommended a structured product named Global Credit Preferred Corp. to several clients. GCP was a high-risk structured product that aimed to provide a dividend of 5.25% and repayment of the subscription price after a 10-year term. The dividend and redemption proceeds were derived from a portfolio of credit default swaps, and the returns were linked to the number of defaults (such as bankruptcy) within a reference portfolio of 129 companies.
Beechey recommended the product to clients without fully understanding it, and failed to take adequate steps to inform himself or his clients of the complexities and risks inherent in GCP, according to IIROC.
In some instances he mistakenly provided clients with incorrect information about GCP.
“By failing to fully understand the product, Beechey was not in a position to adequately explain the structure, terms, risk or mechanics of GCP to his clients. For example, the concept of credit default swaps was not explained to most of the clients by Beechey,” IIROC said in the settlement agreement. “These clients were unsophisticated investors with limited investment experience. Accordingly, the clients did not fully understand the complexities or risks inherent in GCP.”
There was a very significant amount of volatility in the net asset value of GCP. By December 2008, five defaulting events had occurred and the net asset value of GCP had declined to $3.45 from its original value of approximately $25.
The high-risk investment was not suitable for several of Beechey’s clients, who had been seeking safe investments to provide for their retirement, IIROC found. In addition, in the case of three clients, their new account application forms did not accurately set out their true investment objectives and risk tolerance levels.
As of the end of October 2007, six of Beechey’s clients had unrealized losses relating to GCP totaling $106,300, based on original investments totaling $227,000.
Under the settlement agreement, Beechey has agreed to pay a fine of $50,000, and to disgorge the $1,399.88 in commissions that he received in connection with the GCP transactions. He must also pay $3,000 in costs.
IIROC noted that Beechey wrote and passed the Conduct and Practices Handbook examination in October 2010.
Since November 2007, Beechey has been employed as an investment advisor with CIBC Wood Gundy in Waterloo.