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Report on Business Caldwell Investment Management to pay $1.8-million in settlement with OSC for overcharging mutual fund clients

The Ontario Securities Commission has ordered Caldwell Investment Management Ltd. to pay $1.8-million for breaking its obligation to clients over a four-year period, in the regulator’s first decision on a concept known as best execution.

Caldwell Investment overcharged mutual fund clients by directing trades to its wholly owned dealer, Caldwell Securities Ltd., instead of rival firms offering better prices on commissions, the OSC said.

“Over an almost four-year period, [Caldwell Investment] failed in its obligation to provide best execution of equity and bond trades for its clients which resulted in overpayments by its clients,” the watchdog’s decision read. Funnelling trades through its own dealer at a greater expense to clients represented “a clear conflict of interest,” it added.

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The mutual fund company will also pay $250,000 to cover investigation costs, but won’t face a suspension of its registration, the OSC – which is responsible for regulating Ontario’s capital markets – said in approving a settlement with Caldwell Investment on Friday.

The concept of best execution requires investment dealers to find the best trade option reasonably available on behalf of clients. The principle is designed to protect investors and foster confidence in Ontario’s capital markets, OSC vice-chair Tim Moseley said at Friday’s hearing.

Caldwell Investment ran nine mutual funds and managed assets ranging from $320-million to $495-million between Jan. 1, 2013, and Nov. 15, 2016, the period in which the OSC found the infractions occurred.

As an example of problematic dealings, the OSC said two-thirds of Caldwell’s balanced-fund equity trades were made through unaffiliated dealers at an average commission rate of 5 cents a share. The remaining third, however, were executed through Caldwell Securities, at an average commission rate of 16 cents a share.

The OSC also found instances where the same security was traded at Caldwell Securities with commission rates between four and 13 times higher than what was available at unaffiliated dealers.

Caldwell Investment and Caldwell Securities are closely intertwined, the OSC noted. They share both employees and an office.

By choosing Caldwell Securities for the majority of its trades across all funds, Caldwell Investment conferred a benefit on its sister company in the form of commissions paid by investing clients on equity trades and spreads on bond trades.

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Caldwell Investment lawyers argued that the company carried a genuine belief that using Caldwell Securities added significant value for its clients.

“Our portfolio managers had direct access to the Caldwell Securities trading desks. Such that they could have orders managed to a much greater degree," Brendan Caldwell, CEO of Caldwell Investments, said in an interview following the hearing.

Separately managed accounts also had a designated investment adviser who would meet with clients all around the province, which was rolled into Caldwell Securities’ cost, he added.

Both Caldwell Investments and Caldwell Securities are privately held Toronto-based firms controlled by the Caldwell family. Thomas Caldwell, Brendan’s father and company founder, was inducted into the Investment Industry Association of Canada’s Investment Industry Hall of Fame in 2014.

The OSC found Caldwell Investments also failed to have adequate policies and procedures in place to ensure it sought best execution for clients. In addition, the company also failed to provide accurate and sufficient information to an independent review committee.

“It’s a serious breach of the trust that was placed in [Caldwell Investments], and a serious violation of securities law,” Mr. Moseley said.

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But he also noted that Caldwell Investments hired a consultant in mid-2016 to re-vamp the company’s policies, and said it has co-operated throughout the investigation.

“We’ve changed our business considerably as a result,” Mr. Caldwell said.

This was the first best-execution proceeding brought before the OSC. The agency’s lawyers noted that fines can often be lower for first-of-a-kind cases. Caldwell Investments has already paid half the penalty and has nine months to pay the remaining half.

“Participation in capital markets is a privilege, not a right,” Mr. Moseley said at the end of Friday’s hearing.

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