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MFDA Agreed Statement of Facts

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File No. 201725

IN THE MATTER OF A DISCIPLINARY HEARING PURSUANT TO SECTIONS 20 AND 24 OF BY-LAW NO. 1 OF THE MUTUAL FUND DEALERS ASSOCIATION OF CANADA

Re: Byron Heinz Daues

Agreed Statement of Facts

I. INTRODUCTION

  1. By Notice of Hearing dated March 24, 2017, the Mutual Fund Dealers Association of Canada (“MFDA”) commenced a disciplinary proceeding against Byron Heinz Daues (“Respondent”) pursuant to ss. 20 and 24 of MFDA By-law No. 1.
  1. The Notice of Hearing set out the following allegations:
    1. Allegation #1: Between August 21, 2014 and March 1, 2015, the Respondent engaged in securities related business in respect of three clients when he was not registered to engage in these activities, contrary to MFDA Rule 2.1.1.
    2. Allegation #2:   On or about March 2, 2015, the Respondent submitted account forms to the Member to process transactions in respect of three clients which concealed that the Respondent had engaged in securities related business when he was not registered to engage in these activities, contrary to MFDA Rule 2.1.1.
    3. Allegations #3: In August 2012, the Respondent failed to ensure that investment recommendations he made to client AR were suitable for her having regard to the client’s relevant “Know-Your-Client” factors, including the client’s age, time horizon and investment objectives, contrary to MFDA Rules 2.2.1 and 2.1.1.
    4. Allegation #4: Commencing on May 10, 2015, the Respondent misled Staff of the MFDA during an investigation into his conduct, thereby failing to cooperate with the investigation, contrary to section 22 of MFDA By-law No. 1 and MFDA Rule 2.1.1.

II. IN PUBLIC/ IN CAMERA

  1. The Respondent and Staff of the MFDA (“Staff”) agree that this matter should be heard in public pursuant to Rule 1.8 of the MFDA Rules of Procedure.

III. ADMISSIONS AND ISSUES TO BE DETERMINED

  1. The Respondent has reviewed this Agreed Statement of Facts and admits the facts set out in Part IV herein. The Respondent admits that the facts in Part IV constitute misconduct for which the Respondent may be penalized on the exercise of the discretion of a Hearing Panel pursuant to s. 24.1 of MFDA By-law No. 1.
  1. Staff and the Respondent jointly request that the Hearing Panel determine, on the basis of this Agreed Statement of Facts, the appropriate penalty to impose on the Respondent.
  1. Staff is seeking the following penalties:
    1. a permanent prohibition on the authority of the Respondent to conduct securities related business in any capacity while in the employ of or associated with an MFDA Member, pursuant to s. 24.1.1(d) of MFDA By-law No. 1;
    2. a fine of at least $50,000, pursuant to s. 24.1.1(b); and
    3. a costs award of at least $10,000, pursuant to s. 24.2 of MFDA By-law No. 1.
  1. The Respondent has been recently discharged from bankruptcy and claims to be impecunious and unable to pay any amount towards a fine or costs.

IV. AGREED FACTS

  1. Staff and the Respondent agree that submissions made with respect to the appropriate penalty are based only on the agreed facts in Part IV and no other facts or documents. In the event the Hearing Panel advises one or both of Staff and the Respondent of any additional facts it considers necessary to determine the issues before it, Staff and the Respondent agree that such additional facts shall be provided to the Hearing Panel only with the consent of both Staff and the Respondent.  If the Respondent is not present at the hearing, Staff may disclose additional relevant facts, at the request of the Hearing Panel.
  1. Nothing in this Part IV is intended to restrict the Respondent from making full answer and defence to any civil or other proceedings against him.

Registration History

  1. The Respondent had been registered in the mutual fund industry since April 2000.
  1. From March 22, 2007 to July 22, 2011, the Respondent was registered in Ontario as a mutual fund salesperson (now known as a dealing representative) with IPC Investment Corporation (“IPC”), a Member of the MFDA. From June 21, 2007 to December 31, 2009, the Respondent was also registered in British Columbia as a mutual fund salesperson with IPC.
  1. From September 8, 2011 to August 21, 2014, and from March 2 to March 6, 2015, the Respondent was registered in Ontario as a mutual fund salesperson with Keybase Financial Group Inc. (“Keybase”), a Member of the MFDA. Keybase terminated the Respondent on March 6, 2016 as a result of the events described below.
  1. The Respondent is not currently registered in any capacity the securities industry. The Respondent states that he is currently employed at a duct cleaning company.
  1. At all material times, the Respondent conducted business in the Courtice, Ontario area.

The Respondent Settles a Proceeding with the MFDA

  1. On August 19, 2014, the Respondent entered into a Settlement Agreement (the “Settlement Agreement”) with Staff of the MFDA (“Staff”) which including the following admissions of misconduct:
    1. commencing in July 2011, the Respondent engaged in personal financial dealings with a client when he borrowed $40,000 from client AS which he failed to repay, thereby giving rise to a conflict or potential conflict of interest which the Respondent failed to address by the exercise of responsible business judgment influenced only by the best interests of the client, contrary to MFDA Rules 2.1.4 and 2.1.1; and
    2. the Respondent failed to report the following events, each of which constituted a complaint in respect of personal financial dealings with a client, to the Member within 2 business days or at all:
      1. client AS’s verbal complaint to the Respondent in each of September, October, November and December 2011 in respect of the Respondent’s failure to make payments on account of the monies he borrowed from client AS;
      2. client AS’s written complaint to the Respondent, dated January 18, 2012, in respect of the Respondent’s failure to make payments on account of the monies he borrowed from client AS; and
      3. client AS’s civil action commenced against the Respondent in March 2012 claiming damages of $40,000 plus costs and interest, in respect of the monies he borrowed from client AS;

      contrary to MFDA Policy No. 6, subsection 4.1(b)(v).

  1. On August 21, 2014, a Hearing Panel of the MFDA accepted the Settlement Agreement and issued an Order (the “Settlement Order”) which included, in accordance with the agreed terms of the Settlement Agreement, the following terms:
    1. a two (2) month suspension from conducting securities related business while in the employ of or associated with any MFDA Member, pursuant to s. 24.1.1(e) of MFDA By-law No. 1;
    2. a fine in the amount of $10,000 pursuant to s. 24.1.1(b) of MFDA By-law No. 1;
    3. costs in the amount of $5,000 pursuant to s. 24.2 of MFDA By-law No. 1; and
    4. the Respondent shall in the future comply with MFDA Rules 2.1.4 and 2.1.1.
  1. Between August 21, 2014 and October 21, 2014, the Respondent was suspended from engaging in securities related business pursuant to the terms of the Settlement Order.
  1. As a result of the Settlement Order, the Respondent’s registration in Ontario as a mutual fund salesperson was suspended commencing August 21, 2014.
  1. Following the expiry of the period of suspension under the Settlement Order, the Respondent applied to the Ontario Securities Commission to reactivate his registration in Ontario as a mutual fund salesperson. The Respondent’s registration as a mutual fund salesperson was reactivated on March 2, 2015.

Engaging in Securities Related Business While Not Registered & Submitting Account Forms Which Concealed Unregistered Activities

Client MH
  1. Commencing February 11, 2015 (before his registration as a mutual fund salesperson was reactivated), the Respondent had telephone conversations and exchanged emails with client MH and her spouse regarding, among other things, a $5,000 contribution to the clients’ RRSP account.
  1. On February 18, 2015, the Respondent emailed an Order Request Form to client MH and instructed the client to sign the form without dating it. The Respondent also instructed client MH to return the signed Order Request Form to the Respondent with a cheque for the $5,000 investment in the clients’ RRSP account.
  1. On February 23, 2015, the Respondent emailed client MH’s spouse to confirm receipt of a cheque dated February 28, 2015 in the amount of $5,000 for an investment in the clients’ RRSP account.  On the same day, client MH’s spouse replied to the Respondent by email to confirm that the Order Request Form had been signed and would be mailed to the Respondent shortly.
  1. On or about March 2, 2015 (the day his registration as a mutual fund salesperson was reactivated), the Respondent recorded the date on the Order Request Form as March 2, 2015 so that it appeared as though the form had been signed on that date, and submitted the form to Keybase to process the purchase in the clients’ RRSP account. The Respondent also submitted the clients’ cheque to Keybase to provide the funds to process the transaction.
Client RB
  1. On February 16, 2015 (before his registration as a mutual fund salesperson was reactivated), the Respondent met with client RB and received instructions from the client to process a $5,000 purchase of mutual funds in the client’s Registered Retirement Savings Plan (“RRSP”) account.
  1. In addition, the Respondent arranged for client RB to sign an Order Request Form to process the purchase of mutual funds and received a cheque from RB dated February 26, 2015 for the amount of the transaction.
  1. On or about March 2, 2015 (the day his registration as a mutual fund salesperson was reactivated), the Respondent recorded the date on the Order Request Form as March 2, 2015 so that it appeared as though the form had been signed on that date, and submitted the form to Keybase to process the purchase in the client RB’s RRSP account. The Respondent also submitted the client’s cheque to Keybase to provide the funds to process the transaction.
Client BF
  1. In February 2015 (before his registration as a mutual fund salesperson was reactivated), the Respondent received instructions from client BF to make a contribution to the client’s Tax Free Savings Account (“TFSA”).
  1. The Respondent mailed an Order Request Form to client BF, and instructed the client to complete the form and to return it to him with a cheque for the amount of the contribution to the TFSA.
  1. In February 2015, client BF signed the Order Request Form and returned it to the Respondent by mail, with a cheque in the amount of $5,500 dated February 28, 2014.
  1. On or about March 5, 2015 (three days after his registration as a mutual fund salesperson was reactivated), the Respondent recorded the date on the Order Request Form as March 3, 2015 so that it appeared as though the form had been signed on that date, and submitted the form to Keybase to process the purchase in the client BF’s TFSA. The Respondent also submitted the client’s $5,500 cheque to Keybase to process the transaction.

Unsuitable Investment Recommendations

Client AR
  1. On August 9, 2012, the Respondent met with client AR and arranged for the client to complete New Account Application Forms (“NAAFs”) to transfer three accounts to Keybase, namely a Registered Retirement Income Fund (“RRIF”), a spousal RRIF and a Life Income Fund (“LIF”).
  1. At the time the accounts were transferred to Keybase, client AR was 69 years old, recently widowed, and intended to use the investments for retirement income. The Respondent recorded client AR’s time horizon as 5-10 years and her risk tolerance as low to medium.
  1. The Respondent recommended that client AR invest the proceeds of the RRIF, spousal RRIF and LIF in mutual funds which were subject to deferred sales charges (“DSCs”). Mutual funds which were subject to the DSCs were not suitable investments for client AR.
  1. The investments recommended by the Respondent permitted client AR to withdraw up to 10% of the value of the investments each year without incurring DSCs. However, any amounts withdrawn by the client which were greater than 10% of the value of the investments each year would be subject to DSCs.
  1. Immediately after the Respondent processed the purchase of mutual funds which were subject to DSCs in her accounts, the Respondent set-up a systematic withdrawal plan (“SWP”) in each account which automatically redeem a pre-arranged amount of the client’s mutual fund holdings to provide the client with monthly income, as described below:

Spousal RRIF

Amount Invested

Date Invested

Date of 1st SWP

Monthly SWP Amount

$31,935

October 11, 2012

November 15, 2012

$1,000

RRIF

Amount Invested

Date Invested

Date of 1st SWP

Monthly SWP Amount

$56,193

August 22, 2012

October 15, 2012

$1,800[1]

LIF

Amount Invested

Date Invested

Date of 1st SWP

Monthly SWP Amount

$80,289

October 5, 2012

December 17, 2012

$1,048

  1. The SWPs set-up by the Respondent in client AR’s accounts exhausted the 10% available without the client incurring DSCs (as described in paragraph 26 above) approximately three months after RRIF and Spousal RIF accounts were opened, and approximately eight months the LIF was opened.
  1. As a result of the Respondent’s investment recommendations, client AR began incurring DSCs shortly after she invested.
  1. The Respondent’s investment recommendations with respect to client AR’s RRIF, Spousal RRIF and LIF were unsuitable for the client having regard to her having regard to the client’s relevant “Know-Your-Client” factors, including the client’s age, time horizon and investment objectives.

Misleading MFDA Staff

  1. In February 2015, Staff of the MFDA commenced a review into the Respondent’s conduct with respect to client AR, as described above. Among other things, the review considered whether the Respondent had discussed with client AR the DSCs that applied to her investments.
  1. On May 10, 2015, Staff of the MFDA requested that the Respondent provide evidence that he had discussed DSCs with client AR.
  1. In response the request from Staff of the MFDA, the Respondent provided copies of notes from his meetings with client AR on December 19, 2012 and August 2, 2013.
  1. Prior to submitting copies of his notes from his meeting with client AR, the Respondent altered the notes of his meetings with the client to, among other things, include the content underlined below:
    1. “I did review the three sales charge options with [client AR], being FE, Low Load and DSC and she did not wish to pay any upfront fees and did not anticipate withdrawing monies from her open account for a number of years. She agreed that the DSC option made [sic] most sense at this time.”; and
    2. “We reviewed the three types of sales charges, including DSC, to choose from and the positive and negative aspects of each, pending the length of time she plans on holding on the various funds and under what circumstances.”
  1. The Respondent falsely represented to Staff of the MFDA that the content of the notes had been made of the time of his meetings with the client.

Misconduct Admitted

  1. By engaging in the conduct described above, the Respondent admits that:
    1. between August 21, 2014 and March 1, 2015, he engaged in securities related business in respect of three (3) clients when he was not registered to engage in these activities, contrary to MFDA Rule 2.1.1;
    2. on or about March 2, 2015, he submitted account forms to the Member to process transactions in respect of three (3) clients which concealed that he had engaged in securities related business when he was not registered to engage in these activities, contrary to MFDA Rule 2.1.1;
    3. in August 2012, he failed to ensure that investment recommendations he made to client AR were suitable for her having regard to the client’s relevant “Know-Your-Client” factors, including the client’s age, time horizon and investment objectives, contrary to MFDA Rules 2.2.1 and 2.1.1; and
    4. commencing on May 10, 2015, he misled Staff of the MFDA during an investigation into his conduct, thereby failing to cooperate with the investigation into his activities, contrary to section 22 of MFDA By-law No. 1 and MFDA Rule 2.1.1.

Execution of Agreed Statement of Facts

  1. This Agreed Statement of Facts may be signed in one or more counterparts which together shall constitute a binding agreement.
  1. A facsimile copy of any signature shall be effective as an original signature.

[1] The monthly SWIP increased to $3,600 commencing December 15, 2012

DATED: Nov 14, 2017

"Byron Heinz Daues"

Byron Heinz Daues

 

“Shaun Devlin ”

Staff of the MFDA
Per: Shaun Devlin
Senior Vice-President,
Member Regulation – Enforcement

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