The primary goal of securities legislation is the protection of the investing public. 1
The penalties imposed in a securities regulatory context should be protective and preventative, intended to be exercised to prevent likely future harm to the capital markets. 2
When determining the appropriate penalties to impose, the Hearing Panel should have regard to the following general principles:
- The protection of the investing public;
- The integrity of the securities markets;
- Specific and general deterrence;
- The protection of the MFDA’s membership; and
- The protection of the integrity of the MFDA’s enforcement processes. 3
The following list of factors should be considered in fashioning an appropriate penalty. This list is illustrative, not exhaustive, and the Hearing Panel should consider case-specific factors in addition to those listed here.
If a penalty is less than what others in the industry would reasonably expect for the misconduct under consideration, it may undermine the goals of the disciplinary process. Similarly, excessive penalties may reduce respect for the enforcement process and diminish its deterrent effect 4.
In appropriate cases, distinctions should be drawn between misconduct that was unintentional or negligent, and misconduct that was manipulative, fraudulent or deceptive. Distinctions should also be drawn between isolated incidents and repeated, pervasive or systemic violations of the MFDA’s By-laws, Rules and Policies.
Factors to consider include:
Deception – Attempts by the Respondent to conceal his or her misconduct or to lull into inactivity, mislead, deceive or intimidate a client, the Member or regulatory authorities.
Vulnerable clients – If there is evidence that the Respondent sought out or preyed upon “vulnerable” clients, then this should be seen as an aggravating factor worthy of a greater penalty. The MFDA disciplinary process must protect the investing public and in particular those clients with a lower level of investment knowledge or sophistication and those who place a high level of trust or reliance in a Respondent because of a unique or special relationship with him or her. The corollary is not true however: the fact that a client who was victimized by the Respondent is a sophisticated investor is not a mitigating factor.
Prior warnings – The Hearing Panel should consider whether the Respondent engaged in the misconduct at issue notwithstanding prior warnings or concerns expressed by the MFDA, another regulator, a supervisor or other individual.
Pre-meditation – Evidence of planning and pre-meditation are aggravating factors. Hearing Panels should consider the degree of organization and planning associated with the misconduct, including the number, size and character of the transactions.
Hearing Panels should consider a Respondent’s relevant disciplinary history in determining penalties. Relevant disciplinary history may include (a) past misconduct similar to that at issue; or (b) past misconduct that, while unrelated to the misconduct at issue, demonstrates prior disregard for regulatory requirements, investor protection or commercial integrity.
Past misconduct includes prior MFDA disciplinary proceedings, as well as warning letters and Agreements and Undertakings entered into with the MFDA. It may also include disciplinary measures imposed by other regulators and licensing tribunals, including terms and conditions or other restrictions placed on the Respondent.
Generally, Hearing Panels should impose progressive or escalating penalties on a Respondent for each successive instance of misconduct.
The fact that a Respondent has no prior disciplinary record should, in the absence of evidence to the contrary, lead a panel to a presumption that the Respondent was of good moral character prior to the misconduct. A good employment or internal discipline record is usually considered to be a mitigating factor because it demonstrates responsibility and compliance with regulatory requirements.
In certain cases, the misconduct at issue may be serious enough to nullify the mitigating effect of a clean disciplinary history or employment record.
Deterrence refers to the imposition of a sanction for the purpose of discouraging the Respondent and others from engaging in similar conduct. When deterrence is aimed at the Respondent, it is called “specific deterrence”, when directed at others, “general deterrence”. Investors must be able to rely on and have trust in the integrity and capability of mutual fund industry participants. Without effective deterrence, inappropriate conduct can continue and public confidence in the mutual fund industry and the fairness of the markets can be seriously damaged.5 An appropriate penalty will achieve both specific and general deterrence.6
A general deterrent is preventative. The notion of general deterrence is neither punitive nor remedial. A penalty that is meant to generally deter is a penalty designed to discourage or hinder like behaviour in others. It is therefore reasonable to consider general deterrence as a factor in imposing an appropriate penalty.7
Approved Persons and Members have significant responsibilities that they must meet if investors are to be protected and market integrity maintained. Approved Persons and Members who choose to act in ways that threaten the integrity of the capital markets must have the expectation that they will be held accountable through enforcement action by regulators.
General deterrence can be achieved if a penalty strikes an appropriate balance between a Respondent’s specific misconduct and industry expectations as to an appropriate penalty to be imposed. General deterrence serves to improve overall standards in the securities industry.
An admission of wrongdoing may also be a mitigating factor if it saves the MFDA and affected clients from a lengthy, complicated or expensive hearing. The extent of the cooperation provided by a Respondent during the course of the investigation and prosecution of the misconduct may also be a mitigating factor. Attempts by the Respondent to improperly frustrate, delay or undermine the investigation or hearing are aggravating factors.
Actual harm can sometimes be quantified by considering the types of transactions, the number of transactions, the size of the transactions, the number of clients affected by the misconduct, the length of time over which the misconduct took place and the size of the loss suffered by the client(s), other individuals or the Member. Harm can also be measured using less empirical, but more subjective factors, such as the impact of the misconduct on a client’s life (from an emotional, physical and/or mental perspective), the reputation of the Member and the reputation of the mutual fund industry or capital markets as a whole.
Hearing Panels should consider the extent to which the Respondent received a financial or other benefit from the misconduct, whether directly or indirectly. Restitution or disgorgement of such benefits by the Respondent is a mitigating factor. The extent of the mitigating value is affected by the timing: the sooner, the better; as well as the extent: full or partial.
The amount of a fine or other penalty depends on the facts of each case, including the need for specific and general deterrence. While prior decisions are instructive, the nature and extent of the penalty to be imposed in a given case cannot necessarily be determined by comparison with the penalties imposed in similar proceedings.
Although fines are frequently imposed in disciplinary proceedings, they are not required in all cases. A fine will normally be appropriate where the Respondent has received a financial or other benefit, whether directly or indirectly, as a result of the misconduct. Generally, the amount of the fine should reflect, at a minimum, the amount of the financial benefit. The amount of client loss or harm may also be a relevant consideration in determining the amount of a fine. The amount of the fine may be decreased or increased depending on the presence of mitigating or aggravating factors. As noted in the preceding section, any disgorgement or restitution made by the Respondent will normally be considered a mitigating factor in determining the amount of a fine.
A fine may also be appropriate in cases where there is no financial or other benefit to the Respondent. In such cases, the amount of the fine should be commensurate with the seriousness of the misconduct. In the most egregious cases, Hearing Panels should consider the maximum fines permitted under s. 24 of MFDA By-law No.1. The financial resources of the Respondent should also be taken into account in determining the appropriate fine. A fine must not be tantamount to a licensing fee to engage in the misconduct.
The suspension of the rights and privileges of membership of a Member or the authority of an Approved Person to conduct securities related business may be appropriate where:
- there have been numerous serious transgressions;
- there has been a pattern of misconduct;
- the Respondent has a disciplinary history;
- the misconduct in question has caused some measure of harm to the integrity of the securities industry as a whole; or
- a fine alone would be insufficient or inappropriate.
The length of the suspension will also depend on these and other relevant factors.
Permanent prohibition of the authority of an Approved Person to conduct securities related business or termination of the membership of a Member are severe economic penalties and should generally be reserved for cases where any one or more of the following factors is present:
- the public itself has been abused;
- the Respondent is ungovernable or refuses to cooperate with regulatory bodies;
- the misconduct has an element of criminal or quasi-criminal activity;
- the likelihood of recurrence is high;
- the Respondent’s conduct is such that it would undermine the public’s confidence in the mutual fund industry or the MFDA’s ability to regulate; or
- there is reason to believe that the Respondent could not be trusted to act in an honest and fair manner when dealing with the public, clients and other participants in the securities industry.
To address misconduct effectively in any given case, a Hearing Panel may also impose any one or more of the following penalties:
- a reprimand;
- conditions on the authority of an Approved Person to conduct securities related business (e.g. rewrite appropriate industry course);
- terms and conditions on the membership of a Member;
- the appointment of a monitor to oversee and/or report on the Member’s activities; or
- directions for the orderly transfer of client accounts from the Member.
The agreement as to facts and the admission of wrongdoing that are requirements of any settlement under s. 24.4 of By-law No. 1 are usually considered to be mitigating factors since they save the MFDA and affected clients from a lengthy, complicated or expensive hearing.
In considering a settlement agreement, a Hearing Panel may accept an agreement that contains requirements to be fulfilled by the Respondent that are in addition to the penalties that a Hearing Panel could impose under s. 24 of MFDA By-law No. 1.
- Pezin v. British Columbia (Superintendent of Brokers),  2 S.C.R. 557 at para.59.
- Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission),  2 S.C.R. 132 at para. 42″
- Re Parkinson,  MFDA Ontario Regional Council, File No. 200501 at p. 21
- Re Mills,  I.D.A.C.D. No. 7.
- Re Marc Lamoureux,  A.S.C.D. No, 125
- Re Mills,  I.D.A.C.D. No. 7
- Re Cartaway Resources Corp.,  1. S.C.C. 672 at para. 60