The Mutual Fund Dealers Association of Canada (MFDA) has sanctioned fund dealer Quadrus Investment Services Ltd. over lapses in the firm’s oversight of its compensation programs.
An MFDA hearing panel approved a settlement with Quadrus that fined the firm $600,000 and ordered it to pay $25,000 in costs after it admitted to past deficiencies in its supervisory controls related to sales practices and incentives.
The issues were uncovered during a coordinated review of industry sales practices carried out by the MFDA along with the Investment Industry Regulatory Organization of Canada, the Ontario Securities Commission (OSC) and other provincial regulators in 2016.
As a result of that review, the self-regulatory organization identified aspects of the firm’s compensation structure, from 2002 to 2016, that didn’t comply with sales practices rules and MFDA rules on conflicts of interest, by offering incentives (such as bonuses) that favoured proprietary funds over third-party funds.
After the regulators flagged the issue, the firm revised its compensation structure, and it also examined its past sales to determine whether clients were financially harmed or sold unsuitable funds as a result of the compensation structure.
“No evidence of direct financial harm to clients from any specific trades was identified,” the settlement said.
Additionally, the settlement indicated that the firm failed to establish controls to ensure compliance with the terms of an exemption from provisions of the mutual fund sales practices rule that the OSC granted the firm in 2009.
The exemption allowed reps that were only qualified to sell proprietary funds to also service accounts that included third-party funds.
However, the regulator found that the firm didn’t comply with all the terms of the exemption from about 2009 to 2018, and that, as a result, certain clients were charged inaccurate fees.
The firm voluntarily adopted a remediation plan to contact and compensate affected clients, the settlement noted.
Additionally, the firm has since revised its compensation system, the settlement said.