The Ombudsman for Banking Services and Investments (OBSI) said Thursday that Vaughan, Ont.-based fund dealer FundEX Investments Inc. has refused to follow one of its recommendations for compensation in connection with an exempt market product that one of its reps sold off book.
OBSI recommended that the firm compensate a Saskatchewan couple to the tune of $106,123, after it found that they lost over $100,000 on an investment that was recommended by their former FundEx rep.
According to the dispute resolution service, the failed investment in an exempt mortgage product was made off the dealer’s books. Yet, OBSI found that the clients had no reason to suspect that it was fundamentally different from any other investment they’d made through the firm.
“[The clients] had reason to believe they were properly dealing with a FundEX representative selling a FundEX-approved product,” OBSI said. And, it concluded that the firm should be held responsible for their losses.
According to OBSI’s investigation report in the case, the firm prohibits its reps from dealing in off-book securities; and, it wasn’t aware of, and did not approve of, the rep’s outside business dealings. OBSI says the firm also argued that the couple should have known that the product in question was not approved by the firm because, among other things, the rep’s recommendation did not come on FundEX letterhead; the couple’s payment was made directly to the company involved, not through FundEX; and, the investment did not appear on the couple’s account statements from FundEX.
Indeed, OBSI reports that the rep in question was permanently banned from the industry by the Mutual Fund Dealers Association of Canada (MFDA) following disciplinary proceedings, which found that he sold exempt market products without FundEX’s knowledge and approval, and knowingly concealed the activities. He was also fined $225,000 and ordered to pay costs of $7,500.
In this case, OBSI disagreed with the firm though, concluding that the clients had no way of knowing that the product in question was different from other investments they’d made through the rep. “In all of the circumstances, we find it was entirely reasonable for [the clients] to have believed that [the rep] was authorized by FundEX to recommend and sell the Medallion Mortgage investment and that it was approved by and made through FundEX.”
OBSI also ruled that the firm should be held liable for their loss, and that there’s “no basis to attribute any responsibility” to the clients themselves. As a result, it recommended that FundEX compensate them for $102,763 plus interest of $3,3602 for total compensation of $106,123.
OBSI says that the firm declined to provide any compensation in the case. OBSI has no power to enforce its compensation recommendations on a firm. When a firm declines to follow its recommendation, it is required to publish the fact of the refusal.