IIROC Hits TD Waterhouse Canada with Record $4 Million Fine

TD Waterhouse suggested paying a maximum of $500,000 while IIROC had requested a $5-million fine.

Canada’s mega regulator, the Investment Industry Regulatory Organization (IIROC), today sanctioned Toronto brokerage TD Waterhouse Canada Inc., a subsidiary of The Toronto-Dominion Bank, with a fine of $4 million. A hearing panel handed down the record penalty as TD Waterhouse failed to comply with the Client Relationship Model (CRM2) rules, namely not including position cost information within the company’s quarterly retail client account statements.

In addition to the fine, the discount brokerage must pay costs of $28,497 for its non-compliance since December 2015. TD Waterhouse suggested paying a maximum of $500,000 while IIROC had requested a $5-million fine.

The so-called Client Relationship Model 2 (CRM2) reforms were supposed to provide investors with more information about what they’re paying to brokers to have their money managed. The rules require brokers to outline advice and commission fees, which must be shown as a dollar amount, as opposed to simply as a percentage.

According to the settlement, TD Waterhouse didn’t include such information for nearly 175,301 clients within the quarterly account statement. Contrary to the position cost calculations and disclosure requirements, the fees were reported as “not determinable” when the information was available.

IIROC described the violations as “a wilful business decision” that breached TD Waterhouse’s obligations as a member of the self-regulated industry, which merited the maximum fine. “A failure of such magnitude is not, by any measure, a minor transgression,” it said.

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TD Waterhouse marked costs as “not determinable”

Although the broker was able to be fully compliant with the CRM2 requirements, it considered this compliance to be “potential litigation risks and client experience issues that might have resulted from its proposed manner of implementing compliance with the Position Cost Requirements.”

“This alternative solution included the acceptance of the business risk inherent in having a significant percentage (then believed to be approximately 8%) of client positions non‐compliant with the Position Cost Requirements of Rule 200. The evidence was that the 8% represented approximately 175,301 client accounts,” the panel said.

TD Waterhouse operates as a full-service retail brokerage and also offers order execution only services to retail customers through a separate division called TD Direct Investing.

The chief regulatory body in Canada has recently proposed a regulatory framework that provides clarity for derivatives activities. Among other things, all highly leveraged products offered to retail clients must be approved in advance by IIROC. Brokers must obtain prior approval for their leveraged products either when releasing new instruments or introducing any changes to the current offerings.

CFD sellers would also have their rights restricted with regard to the level of promotion of CFD contracts in order to eliminate existing regulatory arbitrage situations. Further, an additional risk warning would be required, clearly indicating the level of risk to which CFD buyers would be exposed. The risk disclosure statement provided must be approved by IIROC.

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