Thursday, July 31, 2008

TD Waterhouse Fined for Improper Fund Sales

The Globe and Mail, Tara Perkins, 31 July 2008

TD Waterhouse Canada Inc. has been fined $2-million for not properly ensuring that only wealthy clients bought certain products and failing to ensure that staff only sold hedge funds to appropriate clients.

The Investment Industry Regulatory Organization of Canada said on Thursday that TD Waterhouse reached a settlement in which it admitted that, from 2001 to early 2005, it facilitated purchases of Olympus funds in client accounts without ensuring that clients were accredited investors. Accredited investors are generally those with more than $1-million in financial assets, or who make more than $200,000 a year.

Olympus funds were created by Norshield Financial Group, one of Canada's largest hedge fund companies, in 2001 to attract retail investors. Norshield was put into receivership in 2005 and, according to the Ontario Securities Commission, roughly 2,000 people had sunk a total of $160-million into the Olympus funds.

TD Waterhouse spokeswoman Susan Webb said that when the company learned that a “small number of Waterhouse investment advisers had made honest errors in allowing the non-accredited investors to purchase the funds, we ensured that the non-accredited investors received restitution.”

Alex Popovic, vice-president of enforcement at IIROC, said that TD paid $1,970,441 to put those people back in the position they would have been before they purchased Olympus funds.

TD Waterhouse also acknowledged that, from 2001 to the fall of 2004, it failed to establish and maintain alternative investment review or approval procedures; and from 2001 to 2005 failed to establish and maintain sufficient training and guidance to its investment advisers to ensure that the purchase of hedge funds was appropriate for its clients.

In addition to the fine, TD will pay $50,000 in costs.
Financial Post, Barbara Shecter, 31 July 2008

Brokerage TD Waterhouse Canada has agreed to pay a fine of $2-million as part of a settlement with regulators over the sale of hedge funds to clients who weren't qualified to own them.

The settlement reached with the investment Industry Regulatory Organization of Canada on Thursday stems from the sale of Olympus Funds between 2001 and 2005.

According to the settlement, TD "failed to establish and maintain alternative investment review or approval procedures" and failed "to ensure that the purchase of hedge funds were appropriate for its clients."

In addition, the brokerage failed to provide sufficient training and guidance to its brokers, IIROC said.

Alex Popovic, vice-president of enforcement at IIROC, said the size of the penalty was reduced by TD's co-operation, the repayment to clients of nearly $2-million, and a number of initiatives taken to correct the problems uncovered by the investigation.

"But for the fact they acted appropriately ... the fine would've been significantly higher," he said.

TD Waterhouse added training programs and internal controls, and fined or otherwise disciplined three brokers who sold Olympus funds to clients who were not deemed to have the required level of investment sophistication. Olympus funds were managed by Norshield Asset Management, a scandal-plagued fund manager that regulators ordered to cease doing business with clients in 2005.

An investigation into TD Waterhouse was started by IIROC's predecessor, the Investment Dealers Association, in the spring of 2006.

According to the settlement agreement, 31 TD Waterhouse clients subsequently complained about their investments in Olympus hedge funds, with most complaining that the funds had been portrayed as low risk, safe, or conservative.

The receiver for troubled Norshield Asset Management says about 1,900 retail investors in Canada invested in the group's funds. Olympus United Corp raised some $265-million from retail investors, according to RSM Richter Inc.

"TD was certainly involved in selling this particular product, and there were others," said Mr. Popovic.

The IDA began the investigation around April 2006. Ms. Webb said that, “since this goes back to 2006, we're confident that for some years we've had all of the right procedures and systems in place to make sure that things like this wouldn't happen. Outside of this investigation and process there are a number of changes that had taken place, so we're confident in all of the checks and balances that exist.”