CIRO Probe Highlights Risks of ‘Shadow’ Investment Sales, Advisor Conflicts

By Sharon Henderson

November 10, 2025

Toronto – The Canadian Investment Regulatory Organization (CIRO) is set to hold a hearing next February involving Michael and Jessica Kemp, former representatives of Kemp Financial Group Inc., raising concerns about the potential for undisclosed conflicts of interest and the increasing scrutiny of advisors directing clients toward investments outside traditional channels. The allegations – involving referred clients, compensation, and unapproved outside activity – underscore the risks inherent in ‘shadow’ investment sales and the importance of robust regulatory oversight.

CIRO alleges the Kemps improperly referred clients to an exempt market dealer (EMD) and received compensation for those referrals without the knowledge or approval of their sponsoring firm. They are also accused of engaging in securities-related business outside the approved facilities of their dealer member – a practice known as unapproved outside activity. While the specifics of the alleged misconduct remain under investigation, experts suggest this case highlights a growing trend of regulatory focus on advisor conduct, particularly in the increasingly complex world of alternative investments.

“The rise of the exempt market and the proliferation of alternative investment products create opportunities for both investors and advisors, but also introduce new avenues for potential conflicts of interest,” explains a former regulator, speaking on background. “Referral arrangements, in particular, require a high degree of transparency and diligent oversight to ensure that the client’s best interests are always prioritized.”

The Exempt Market and the Allure of Higher Returns

The exempt market allows companies to raise capital without the costly and time-consuming process of preparing a prospectus. While this can be beneficial for both issuers and investors, it also carries inherent risks. EMDs play a crucial role in this market, but their oversight has been a growing concern for regulators. “The appeal of the exempt market often lies in the potential for higher returns,” notes a financial advisor who specializes in alternative investments. “However, those higher returns come with increased risk, and advisors have a responsibility to ensure clients fully understand those risks before investing.”

Referral arrangements are not inherently problematic, but they can quickly become so if not handled correctly. According to CIRO’s Client Focused Reforms (CFRs), any arrangement that creates a material conflict of interest must be disclosed to the client, and steps must be taken to ensure the client's best interests are prioritized. “The key is transparency,” explains a compliance expert. “Advisors must be upfront about any compensation they receive for referring clients to other firms or products. They also need to demonstrate that the referral is truly in the client’s best interest, not just a way to earn an extra commission.”

CIRO’s Increasing Enforcement Focus

CIRO (formerly IIROC and the MFDA) has been stepping up its enforcement efforts in recent years, particularly in areas involving conflicts of interest, unsuitable investments, and unauthorized trading. According to CIRO’s 2025 Enforcement Report, the organization imposed over $10.3 million in fines, costs, and disgorgement, with a focus on cases that have a significant deterrent effect. “CIRO is sending a clear message that it will not tolerate misconduct,” states a regulatory analyst. “Advisors need to be aware of their obligations and ensure they are complying with all applicable rules and regulations.”

Several recent enforcement actions have involved advisors accepting undisclosed compensation for referring clients to other firms or products. In one case, a former approved person was permanently banned and fined over $1.6 million for selling shares and debentures of a company he incorporated and operated, soliciting money from clients for those purchases, and engaging in undisclosed outside business activities. “These cases demonstrate the seriousness with which CIRO views conflicts of interest,” the analyst adds.

Kemp Financial Group: A Family Business Under Scrutiny

Kemp Financial Group, described as a second-generation family business, presented itself as a boutique wealth management firm specializing in serving families and business owners. Their website emphasized a personalized approach to financial planning, legacy building, and long-term relationships with clients. However, the allegations now leveled against Michael and Jessica Kemp raise questions about the firm’s practices and compliance procedures.

Currently, neither Michael nor Jessica Kemp are registered in the securities industry. The nature of the alleged misconduct is now subject to a formal hearing by CIRO, which will determine whether the Kemps violated any regulatory rules and, if so, what penalties should be imposed.

“This case serves as a cautionary tale for all advisors,” concludes a compliance professional. “Even seemingly minor infractions can have serious consequences. It’s essential to prioritize client interests, maintain transparency, and comply with all applicable rules and regulations.”

The hearing is scheduled for February 2026, and the outcome is likely to have implications for the broader financial industry, further highlighting the need for robust oversight and enforcement in the increasingly complex world of investment advice.