RBC Dominion Securities Inc. (RBC DS) is paying $3.4 million in a settlement with the Canadian Investment Regulatory Organization (CIRO) to resolve allegations that the firm failed to properly supervise a pair of reps.
A CIRO hearing panel approved a proposed settlement with RBC DS, which agreed to pay $1.8 million in disgorgement, a $1.5-million fine, and $100,000 in costs for failing to adequately oversee futures trading by two of its registered reps.
According to the settlement, between June 2017 and March 2022, the firm failed to properly supervise futures trading by reps Hongjia Liu and Regan Espeseth, which allowed the traders to “engage in widespread and prolonged periods of high-volume and high-risk discretionary trading” across much of their client bases.
While both reps engaged in discretionary futures trading, there was no connection between their activities — Liu was based in Vancouver, and engaged in discretionary trading between mid-2017 and the end of 2019, while Espeseth was in Saskatoon, and was involved with discretionary trading between July 2020 and March 2022.
During those periods, the reps’ commissions “far exceeded the next highest producing futures advisors,” the settlement said, noting that it would’ve been difficult for them to trade as actively as they did if they were adhering to the firm’s requirement to contact their clients before each trade.
Liu’s trading came to the firm’s attention after one of his clients threatened legal action for alleged unauthorized and unsuitable trading in their accounts — whereas an internal investigation into Espeseth’s trading was prompted by concerns about his personal trading that were raised by the firm’s U.S. compliance team.
“Liu’s strategy was aggressive. He took a ‘one-size-fits-all’ approach to his futures clients, writing naked futures contracts and receiving premiums for the contracts sold. This was a very high-risk strategy whereby the maximum profit was the premium received for writing the contract, but the maximum loss was potentially unlimited,” the settlement noted.
Espeseth’s trading also generated large commissions, pursuing a strategy that “involved a widespread pattern of buys and sells in the same commodities, with the same maturity dates, for very short-term time periods” — a strategy that he also used in his own accounts, which ultimately caught the attention of the firm’s compliance team.
In total, the reps executed almost 40,000 orders, generating $9.3 million in gross commissions, although the settlement noted that it was difficult to determine how many of these trades were discretionary, given the nature of speculative futures trading.
Most of Liu’s clients lost money (a total of $8.7 million), whereas Espeseth’s trading was profitable for the majority of his clients, the settlement said.
In both cases, the size of the commissions their trading generated, both in absolute and relative terms, along with the speed and volume of their trading activity “could have, and should have, been flagged and prompted corrective action by RBC DS given the regulatory requirements for futures and futures options trading,” the settlement said.
Additionally, the firm should’ve been alert to red flags raised by their trading activity, it noted.
As a result, the self-regulatory organization (SRO) alleged that the firm “failed to establish, maintain, and enforce an adequate supervisory system for futures and futures options trading.”
“Key deficiencies included the narrow scope and limited effectiveness of Tier 1 and Tier 2 reviews, a lack of communication between supervisors, and the failure to ensure supervisory responsibilities were properly carried out,” CIRO said.
In addition to the monetary sanctions, the SRO noted that “RBC DS has taken steps to improve the systems for the supervision of futures trading.”