IIROC panel sanctions rep for KYC violations

A regulatory hearing panel has fined and suspended a former rep for know-your-client (KYC) violations that enabled a risky trading strategy that saw clients lose over $1 million when the market suddenly crashed.

An Investment Industry Regulatory Organization of Canada (IIROC) hearing panel ruled that Yonathan Chanoch Shields, a former rep with R.J. O’Brien & Associates Canada Inc. in Toronto, must disgorge roughly $64,000.  Shields must also pay a $40,000 fine and $35,000 in costs after the panel found he violated IIROC rules by failing to meet his KYC obligations with nine clients.

In addition to the monetary sanctions, Shields was suspended for a year (to October 2022) and would be subject to a year of close supervision if he re-enters the industry.

The KYC failures underpinned the use of an unsuitable, high-risk options trading strategy that resulted in the clients losing approximately US$1.2 million due to “an unpredictable spike in volatility” on Feb. 5, 2018, the panel noted.

On that day, the U.S. Dow Jones Index plunged 1,500 points intraday and closed down almost 1,200 points amid an abrupt turn in market sentiment.

According to the panel’s ruling, the affected clients had all been referred to Shields by another client, Shane Dubin, who is also a broker (and former colleague) at his previous firm, Scotia Capital Inc.

The investors were referred to Shields so that they could participate in the options trading strategy after Scotia got out of the futures trading business in 2016.

“As a result, Shields assumed they understood the risks involved in this trading strategy, without making the inquiries suggested in his employer’s policy and procedures manual and without informing them of the nature and scope of the risks of trading options on futures,” the panel noted.

It also found that he failed to properly assess the suitability of the strategy for the clients.

“As Shields then proceeded to recommend trades to these clients without discussion or explanation, he necessarily also failed to exercise due diligence to ensure the suitability of these trades,” it said.

In the penalty hearing, IIROC staff sought a total of $130,900 in monetary sanctions against Shields (including disgorgement, a fine and costs); whereas he sought a penalty totaling $50,000.

The panel ordered total sanctions of more than $139,000 but also said that he doesn’t have to fully pay those sanctions before returning to the industry.

“Shields should be able to negotiate a payment plan with IIROC staff that does not preclude his re-registration after his suspension,” it said.

“Shields is in the middle of his career. His history in futures trading indicates that he has the potential to earn sufficient income to enable him to pay this amount, if given a reasonable opportunity,” it said.

In 2019, an IIROC hearing panel approved a settlement with Dubin that saw him fined $60,000 and ordered to pay $10,000 in costs for his role in referring the clients to Shields and making recommendations to Shields, despite no longer being qualified to trade options himself.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.