Market regulators targeted Caldwell Investment Management Ltd. with possible fines and suspension on Thursday, alleging the mutual fund firm overcharged clients by directing trades to its wholly owned dealer when rival firms offered better prices.
The enforcement branch of the Ontario Securities Commission (OSC) alleged that over a period of almost four years, 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.”
According to the OSC, Caldwell Investment steered most of its client trades to its own investment dealer, Caldwell Securities Ltd., “placing it in a clear conflict of interest.” The OSC’s enforcement arm is requesting fines, disgorgement of any commissions that came from breaking the rules and termination, suspension or restriction of Caldwell Investment’s registration, which could shut down the mutual fund firm.
None of the allegations have been heard before independent adjudicators and on Thursday, company vice-president Elizabeth Naumovski said in an e-mail: “Caldwell Investment Management Ltd. has been in discussions with OSC staff for some time and has been working to resolve the issues. Caldwell Investment Management Ltd. will have no further comment for the time being.”
Both Caldwell Investments and Caldwell Securities are privately held Toronto-based firms controlled by founder Thomas Caldwell and his family; son Brendan Caldwell is the president and CEO of the mutual fund manager. Thomas Caldwell was inducted into the Investment Industry Association of Canada’s Investment Industry Hall of Fame in 2014.
Caldwell Investments ran nine mutual funds and had up to $400-million of assets under management during the nearly four-year period the OSC alleges the firm failed to get the best prices for its clients.
As an example of how stock and bond trades played out, regulators allege Caldwell Investment’s balanced mutual fund did 66 per cent of its stock trades with unaffiliated dealers at an average cost of five cents a share, a commission that included compensation for research from these firms. The Caldwell Investment fund sent 34 per cent of its trading with Caldwell Securities at an average commission of 16 cents a share, a price that did not include any research.
After reviewing Caldwell Investment’s buying and selling of blue-chip stocks such as BCE Inc., Bank of Nova Scotia and Onex Corp., the OSC alleged the fund paid Caldwell Securities commissions that ranged from 4.4 to 13.4 times the fees it paid to unaffiliated dealers. The OSC said the fund manager’s trading decisions “ultimately conferred a benefit on Caldwell Financial Ltd., the common shareholder of Caldwell Investment and Caldwell Securities.”
The mutual fund manager’s clients signed an agreement that states Caldwell Investments “shall at all times ensure that the prices charged and services provided by Caldwell Securities are competitive,” according to the OSC. The regulator said despite this undertaking, the firm “was unable to provide [OSC] staff with evidence that Caldwell Investment ensured that the prices charged and services provided were competitive.”
The OSC also alleges that Caldwell Investment made “inaccurate and misleading” statements to regulators on its potential conflict of interest with Caldwell Securities when it filed paperwork that stated “equity trades were executed on terms that were as favourable or more favourable than could be executed through another dealer.”
Andrew Willis