By Nils Preshaw
We are consulted periodically by investment firms and advisors from across Canada who are the subject of potentially damaging and embarrassing allegations of regulatory non-compliance. A recent matter handled by Kornfeld LLP Partner, Nils Preshaw, demonstrates opportunities to assist our clients in successfully defending against such allegations.
A former client filed parallel complaints with the Canadian Investment Regulatory Organization (“CIRO”) and the Ombudsman for Banking Services and Investments (“OBSI”) alleging the investment firm had:
- recommended unsuitable and excessively risky investments;
- failed to follow the client’s instructions to invest in safer products;
- engaged in excessive trading and charged unjustified commissions; and
- caused the client to suffer losses of their investment principal and certain commissions.
Retained within days of initial complaints Kornfeld conducted a thorough review of the documentary record including Know Your Client (“KYC”) forms, account opening packages, years of investment recommendation emails, trade cost summaries, and performance reports before assisting with preparation of a comprehensive response arguing:
- No fiduciary duty. The accounts were advisory in nature. All investment decisions required the client’s prior approval. The firm did not exercise discretion and therefore did not have fiduciary obligations as alleged;
- Suitable investments, client-approved. The client had signed KYC forms on multiple occasions, documenting the client’s investment objectives, risk tolerance, and lengthy time horizon. The client personally reviewed and amended these forms and raised no objection to the recorded parameters. Emails showed that every recommended trade was submitted to the client for approval before execution, with written rationale;
- No net loss. Despite the client’s allegations, the investment firm’s own performance summary — compiled from bank statements — demonstrated the client had actually achieved a net gain across all accounts after all fees and trading costs were considered; and
- Limitation period. Given that the client had received regular account updates and accessed accounts online throughout the relationship, Mr. Preshaw noted that if litigation was ever initiated a significant portion would likely be limitation-barred.
The CIRO and OBSI Process — What Investors and Firms Should Know
If unsatisfied with an investment firm’s response to a complaint a client may choose to escalate the matter to several regulatory bodies with significant potential repercussions:
- CIRO – the national self-regulatory body that oversees investment dealers and their registered representatives. A complaint to CIRO may result in an enforcement investigation into whether applicable rules were breached. CIRO can impose significant disciplinary consequences including fines, suspensions, permanent bans and, in limited circumstances, disgorgement; and/or
- OBSI – a free, independent dispute resolution service. All CIRO dealer members are required to participate. The OBSI can investigate unresolved investment complaints and recommend compensation up to a maximum of $350,000. Importantly, OBSI cannot force a firm to pay; it can only recommend. If a firm refuses a recommendation, OBSI can publish the firm’s name and its findings on its website. The OBSI process typically begins once the firm has had 90 days to respond to a client’s formal written complaint, or if the client is not satisfied with the firm’s response.
Both the above processes involve a detailed review of account documentation, client correspondence, and KYC records. Both processes include mandatory virtual or in-person interviews of investment firm personnel and registered representatives.
Firms and advisers facing CIRO and/or OBSI investigations should retain experienced legal counsel who understands the evidentiary record and the regulatory standards that apply.
In this case, Mr. Preshaw successfully defended the investment firm and its advisers throughout both the CIRO and OBSI processes, advising on written responses and attending interviews alongside multiple witnesses.
CIRO’s Enforcement Department completed its investigation into the conduct of both registered representatives and the firm’s supervision of them. CIRO determined it would not be taking any further action and has closed its enforcement file(s).
OBSI reviewed multiple years of account documentation and client correspondence before declining to recommend any compensation.
Results were clear:
- the investments held in the client’s accounts from inception to transfer were suitable given documented KYC parameters;
- the advisers’ responses to the client’s concerns were reasonable and consistent with the obligations of an advisory (non-discretionary) account;
- trading fees were sufficiently disclosed, correctly charged, and accepted by the client by way of a signed trade cost schedule; and
- there was no evidence of unreasonable or excessive trading indicative of churning.
The result was a complete clean bill of health: no compensation ordered, no penalties imposed, no regulatory findings against Mr. Preshaw’s client or any of the investment firm’s registered representatives.
Lessons for Investment Firms
This matter illustrates several recurring themes in investment disputes:
- Documentation is decisive. The strength of this case rested almost entirely on the firm’s retained records: signed KYC forms, handwritten notes, written trade recommendations sent to the client for approval before execution, and regular performance summaries. Firms that maintain thorough, contemporaneous documentation are in a strong position to defend a complaint.
- Advisory accounts carry distinct protections. In a non-discretionary advisory relationship, it is the client — not the adviser — who approves each investment decision. Regulators and courts take this distinction seriously. A signed relationship disclosure that clearly sets out these obligations is an important part of any firm’s compliance framework.
- KYC forms signed by the client carry significant weight. Both CIRO and the OBSI treat a client’s signed KYC parameters as reliable evidence of their stated objectives at the time. Where a client later claims those parameters were inaccurate, the burden is on them to explain why they signed documents that said otherwise — particularly where KYC documents show that the client reviewed and even revised specific figures.
- Early, robust engagement matters. A prompt thorough response to a complaint or legal demand can sometimes prevent litigation, CIRO / OBSI complaints, or can substantially narrow issues in dispute. In this case, the investment firm’s documented positions, established from the outset, formed the backbone of its defence throughout both CIRO and OBSI regulatory proceedings.
- Limitation periods are a real defence. Investment disputes often arise long after the events complained of. Where an investment firm can show that a client had received regular updates or perhaps accessed their investment accounts periodically online, limitation periods can run from the date the client first suffered or reasonably ought to have known about any alleged losses.
How We Can Help
Nils Preshaw of Kornfeld LLP acts for investment firms, registered advisers, and financial institutions facing investor complaints, regulatory investigations, and civil claims. His experience spans:
- responding to demands and pre-litigation correspondence;
- guiding firms and individuals through CIRO enforcement proceedings and OBSI investigations;
- preparing personnel for regulatory interviews;
- conduct of civil claims in the BC Supreme Court and Court of Appeal; and
- advising on compliance and documentation practices to reduce regulatory exposure.
If your firm has received a client complaint, demand, or notice of a regulatory inquiry, we encourage you to seek legal advice promptly. Early intervention almost always improves outcomes.
Nils Preshaw is a lawyer in Vancouver who regularly advises and assists clients regarding civil litigation and appeals. He has served as a Tribunal Member for CIRO, chairing disciplinary hearings of registered persons in the mutual fund industry. Mr. Preshaw can be reached at npreshaw@kornfeldllp.com or by telephone at +1 (604) 331-8300.