Quick Facts
Overview
Royal Mutual Funds Inc., a mutual fund dealer registered in all Canadian provinces and territories, was fined $125,000 by CIRO for failing to maintain adequate controls and supervision to ensure CESG requests were submitted for eligible Registered Education Savings Plan (RESP) accounts.
The settlement also included $10,000 in costs. The violations stemmed from back-office operational deficiencies that led to missed CESG applications, potentially depriving 1,475 client accounts of approximately $1,045,046 in government grants.
Details of the Case
Royal Mutual Funds Inc. offered RESP accounts to clients, allowing them to apply for CESG payments, which are federal government contributions to encourage savings for post-secondary education. Clients provided necessary information and executed forms to apply, with Approved Persons required to input this into the firm's back-office system and select "Yes" for CESG. However, the firm's processes lacked validation mechanisms to confirm accurate marking of accounts or detect changes in application status, resulting in unsubmitted requests despite client eligibility.
The issue came to light in September 2020 when Employment and Social Development Canada (ESDC) reviewed promoters, including those linked to Royal Mutual Funds Inc. via Royal Bank of Canada (RBC) as a promoter. ESDC's May 17, 2021, report identified 16 out of 30 reviewed accounts where CESG was not requested despite provided documentation. The firm then reviewed all RESP accounts opened since 1998, confirming 1,475 eligible accounts with missed requests.
This failure violated Mutual Fund Dealer Rules 2.5.1 (requiring policies and procedures for compliance with laws and rules) and 2.1.1 (requiring fair dealing and high ethical standards). The firm did not detect the issue internally until ESDC's review. Post-identification, the firm remediated by recovering eligible grants, compensating for older missed payments, and enhancing controls.
WORKED EXAMPLES
Initial ESDC Review Findings
In May 2021, ESDC reported that after examining 30 RESP accounts, 16 instances showed no CESG request despite clients providing required information and executing forms.
- This affected accounts opened as early as 1998.
- Impact: Highlighted systemic gaps, leading to the firm's broader review.
Firm's Internal Review Results
Following ESDC's report, the firm identified 1,475 eligible RESP accounts where CESG was not requested, spanning October 2001 to May 2021.
- Accounts dated back to 1998.
- Aggregate impact: Potentially $1,045,046 in missed CESG payments across all accounts.
Back-Office Process Deficiency
The firm's operational process failed to validate CESG markings, resulting in accounts incorrectly set to "No" despite client requests.
- In some cases, changes to application status were not detected.
- Impact: Led to unsubmitted applications for potentially eligible accounts, affecting client savings growth.
Remediation for Recent Misses
The firm submitted requests for CESG on accounts with misses in the prior three years, recovering $295,405 from the government.
- Applied via promoter RBC to Canada Education Savings Program (CESP).
- Impact: Directly restored funds to client RESP accounts.
Compensation for Older Misses
For misses older than three years, the firm credited $749,641 directly to accounts, plus $293,083 for lost growth.
- Total firm-paid compensation: $1,042,724.
- Impact: Ensured clients received equivalent value, totaling $1,338,129 with recovered amounts.
Fines and Penalties
Key Quotes
"Between October 2001 and May 2021, the Respondent failed to establish and maintain an adequate system of controls and supervision to ensure requests were submitted for Canada Education Savings Grant payments on behalf of eligible client accounts, contrary to Mutual Fund Dealer Rules 2.5.1 and 2.1.1." (From the Settlement Agreement)
"The Respondent failed to detect that clients were not receiving CESG payments to which they were entitled until the issue was raised by Employment and Social Development Canada." (From the Reasons for Decision)
"The penalty of $125,000 is a significant monetary penalty, which provides a large measure of general and specific deterrence to the Respondent and others in the securities industry." (From the Reasons for Decision)
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