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Notice of Hearing
File No. 201413


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: Edward S. Brown


NOTICE OF HEARING

NOTICE is hereby given that a first appearance will take place by teleconference before a
hearing panel (the “Hearing Panel”) of the Atlantic Regional Council of the Mutual Fund Dealers
Association of Canada (the “MFDA”) on July 10, 2014 at 11:00 a.m. (Newfoundland)
concerning a disciplinary proceeding commenced by the MFDA against Edward S. Brown (the
“Respondent”). Members of the public who would like to listen to the teleconference should
contact the Senior Hearings Coordinator at 416-945-5146 or mwynnyckyj@mfda.ca to obtain
particulars. The Hearing on the Merits will take place in Gander, Newfoundland at a time and
venue to be announced.

DATED this 12th day of May, 2014.

“Rohit Kumar”

Rohit Kumar

Director of Regional Councils

Mutual Fund Dealers Association of Canada
121 King Street West, Suite 1000
Toronto, Ontario
M5H 3T9
Telephone: 416-945-5136
Facsimile: 416-361-9781
Email: corporatesecretary@mfda.ca

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NOTICE is further given that the MFDA alleges the following violations of the By-laws, Rules
or Policies of the MFDA:

Allegation #1: Between about November 2003 and April 2007, the Respondent misrepresented,
failed to fully and adequately explain, or omitted to explain the risks, benefits, material
assumptions, features and costs of a leveraged investment strategy that he recommended and
implemented in the accounts of 9 clients, thereby failing to ensure that the leveraged investment
strategy was suitable for the clients and in keeping with the clients’ investment objectives,
contrary to MFDA Rules 2.2.1 and 2.1.1.

Allegation #2: Between about November 2003 and April 2007, the Respondent failed to ensure
that the leveraged investment strategy that he recommended and implemented in the accounts of
9 clients was suitable for the clients and in keeping with their investment objectives, having
regard to the clients’ relevant Know-Your-Client information and financial circumstances,
including but not limited to the clients’ ability to withstand investment losses and afford the costs
associated with the investment loans and, contrary to MFDA Rules 2.2.1 and 2.1.1.

PARTICULARS

NOTICE is further given that the following is a summary of the facts alleged and intended to be
relied upon by the MFDA at the hearing:

Registration History

1.
From December 1999 to July 2, 2008, the Respondent was registered in Newfoundland as
a mutual fund salesperson with Berkshire Investment Group Inc. (“Berkshire”). Berkshire
became a Member of the MFDA on March 8, 2002.

2.
On July 2, 2008, Berkshire amalgamated with Manulife Securities International Limited,
a Member of the MFDA. Following the amalgamation, Berkshire and Manulife Securities
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link to page 3 International Limited continued to operate as Manulife Securities Investment Services Inc.
(“Manulife”).1

3.
From July 2, 2008 to March 4, 2011, the Respondent was registered in Newfoundland as
a mutual fund salesperson with Manulife Securities.

4.
At all material times, the Respondent conducted business in Gander, Newfoundland.

5.
The Respondent is not currently registered in the securities industry in any capacity.

The Respondent Recommends a Leveraged Investment Strategy

6.
At all material times, the Respondent was the mutual fund salesperson responsible for
servicing the accounts of the 9 Manulife clients listed below:



Clients JK and MK

Clients CB and TB

Client LW and BW

Client CJ and EJ

Client GC

7.
Between about November 2003 and April 2007, the Respondent recommended and
facilitated the implementation of a leveraged investment strategy whereby the clients borrowed
monies and used the proceeds of the investment loans to purchase return of capital (“ROC”)
mutual funds for their accounts at Manulife.

8.
The leveraged investment strategy recommended by the Respondent was based on the
premise that the investments purchased by the clients with their investment loans would generate
sufficient returns to pay the clients’ borrowing costs, as well as provide them with excess
discretionary income, such that the clients would not have to incur any out-of-pocket expenses to
sustain the strategy.

1 In this Notice of Hearing, any reference to Manulife includes Berkshire and Manulife Securities International
Limited.
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link to page 4
9.
At all material times, the clients deferred to the Respondent’s recommendations
concerning the leveraged investment strategy.

10.
Relying on the Respondent’s recommendation, the clients borrowed in excess of the
amount they could reasonably afford to finance and invested the borrowed monies in return of
capital mutual funds (“ROC mutual funds”) offered by IA Clarington Investments and Stone &
Co. In total, the clients obtained investment loans in the amount of $700,000, as set out in the
chart below:

Clients
Date of Loan
Lender
Loan Amount
Clients JK and MK
December 22, 2004
BMO
$80,000
February 1, 2005
Manulife
$50,000
March 3, 2005
AGF
$50,0002
$180,000
Clients CB and TB
August 23, 2005
AGF
$50,000
Client LW and BW
November 14, 2003
BMO
$100,000
April 16, 2007
AGF
$60,000
April 24, 2007
AGF
$60,000

$220,000
Clients CJ and EJ
November 30, 2005
AGF
$50,000
April 12, 2006
B2B
$50,000
$100,000
Client GC
August 31, 2005
AGF
$50,000
September 20, 2005
BMO
$100,000

$150,000
Total Loans

$700,000

Allegation #1: Failure to Explain Leveraged Investment Strategy

11.
At the time the clients implemented the leveraged investment strategy in their accounts,
the clients were unsophisticated investors with limited investment knowledge. None of them had
previously borrowed monies to invest.

2 The AGF loan was for $100,000. $50,000 was used to repay the Manulife loan. $50,000 was new monies
borrowed.
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12.
The Respondent did not present the leveraged investment strategy to the clients in a fair
and balanced manner. During his discussions with clients, the Respondent focused on the
positive aspects of the leveraged investment strategy and did not disclose or discuss all of the
attendant risks and potentially negative outcomes. The Respondent either did not disclose and
discuss the likelihood of any risks materializing, or if he did discuss such risks and the likelihood
of the risks materializing, he did so in a manner that downplayed the likelihood of the risks
arising and the potential consequences for the clients if the risks did materialize.

13.
The Respondent failed or omitted to present the leveraged investment strategy to the
clients using performance projections based on conservative rates of return or declining market
conditions, including a negative rate of return (i.e. investment losses), which would have
demonstrated to the clients the potential range of outcomes that might arise if they chose to
implement the leveraged investment strategy and in particular, the consequences if the leveraged
investment strategy did not generate distributions sufficient to cover the clients’ costs of
servicing their investment loans.

14.
In the course of recommending the leveraged investment strategy to the clients, the
Respondent made one or more of the following representations to them:

(a)
the leveraged investment strategy would not require the clients to incur any out-
of-pocket expenses to cover the costs of the investment loans;
(b)
the ROC mutual funds could be relied upon to generate proceeds each month
which would pay the costs associated with the investment loans, and provide
additional monies that the clients could use to pay personal expenses, or deposit
into a “side account” (as the Respondent referred to it) and reinvest the monies in
the ROC mutual funds;
(c)
the value of the investments purchased with the borrowed monies would not
decline and/or would grow at a rate of between 8 to 12% per year; and
(d)
after 7 to 12 years, the clients could sell the underlying mutual funds purchased
with the investment loans, repay the investment loans with the proceeds from the
sale, and keep the monies accumulated in the “side account”.
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15.
The Respondent misrepresented, failed to fully and adequately explain, or omitted to
explain to the clients that:

(a)
the leveraged investment strategy had material risks associated with it;
(b)
the ROC mutual funds could reduce, suspend or cancel altogether the payment of
proceeds to investors, in which event the clients may not be able to rely upon the
ROC mutual funds to pay the costs associated with the investment loans and
provide additional monies;
(c)
if the ROC mutual funds reduced, suspended or canceled the payment of proceeds
to investors, then clients may be forced to incur out-of-pocket expenses or rely on
other sources of income, savings or credit to sustain the leveraged investment
strategy, or terminate the leverage investment strategy and possibly incur
financial losses;
(d)
if the clients terminated the leveraged investment strategy at a time when the
value of the ROC mutual funds was less than the amount of the outstanding
investment loans, the clients would be required to rely on other sources of
income, savings or credit, if any, to cover their investment loss and pay the
shortfall;
(e)
if the ROC mutual funds purchased with the borrowed monies declined in value,
then the clients would incur greater investment losses than if the clients had
purchased the same investments using their own monies; and
(f)
an increase in the cost of servicing the clients’ investment loans due to a rise in
interest rates may affect the projections concerning the sufficiency of the proceeds
paid to investors by the ROC mutual funds to cover the costs associated with the
investment loans and provide the clients with a supplementary source of income
each month.

16.
The ROC mutual funds were structured to pay monthly proceeds to investors which could
include a return of the capital originally invested by the investors. In the event that the value of
the underlying investments declined due to deteriorating market conditions, poor investment
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performance or other factors such that the amount of the monthly proceeds paid to investors
exceeded the increase in the value of underlying investments, there was a real and substantial
risk that the ROC mutual funds would be required to reduce, suspend or cancel altogether the
monthly proceeds paid to investors.

17.
Initially, the ROC mutual funds generated proceeds which were sufficient to pay the costs
associated the investment loans and provide supplementary income to the clients each month.
Commencing in 2008, the proceeds paid to the clients by the ROC mutual funds declined. The
reduced proceeds paid by the ROC mutual funds were insufficient to pay the clients’ costs of
servicing their investment loans and provide additional monies for deposit into a “side account”.

18.
As stated above, the proceeds paid by the ROC mutual funds to investors could include a
return of the capital originally invested by the investor. If the returns generated by the
underlying investments held by the ROC mutual fund were not sufficient to cover the proceeds
paid to investors, then the shortfall would, over time, reduce the value of the ROC mutual funds
purchased by the clients.

19.
At about the same time as the ROC mutual funds reduced the payment of proceeds to
investors in 2008, the ROC mutual funds also began to decline in value.

20.
At the time the Respondent recommended the leveraged investment strategy to the
clients, the Respondent knew or ought to have known that the clients could not afford to pay the
costs of servicing the investment loans or to withstand investment losses in the event the
leveraged investment strategy did not perform as the Respondent represented it would.

21.
All of the clients had limited investment knowledge, limited investing experience, and
had never previously borrowed monies to invest. The Respondent knew, or ought to have known
had he conducted reasonable diligence to learn the essential facts relative to the clients, that the
clients were unable to understand and appreciate the risks, benefits, material assumptions,
features, and costs of the leveraged investment strategy without adequate explanation by him.

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link to page 8 22.
As a result of the Respondent’s misrepresentations and omissions, the clients believed
that:

(a)
the leveraged investments they purchased would at least maintain their value, and
may increase in value, while also generating a continuous monthly cash flow;
(b)
the leveraged investment strategy was low risk and their investments were secure;
and
(c)
they would not have to incur any out-of-pocket expenses in order to implement
and maintain the leveraged investment strategy in their accounts.

23.
By engaging in the conduct described above, the Respondent misrepresented, failed to
fully and adequately explain, or omitted to explain the risks, benefits, material assumptions,
features and costs of the leveraged investment strategy that he recommended to the clients,
thereby failing to ensure that the leveraged investment recommendation was suitable for the
clients and in keeping with their investment objectives, contrary to MFDA Rules 2.2.1 and 2.1.1.

Allegation #2: Unsuitable Leveraging Recommendations

24.
At the time the Respondent recommended and assisted clients to obtain investment loans
in order to implement the leveraged investment strategy, the Respondent knew or ought to have
known the clients’ Know-Your-Client information as set out below3:

Clients
Ages
Occupations
Annual
Household Loan to Total
Household
Net
Net
Debt
Income
Worth
Worth
Service
Ratio
Ratio
Clients JK 54
Guide/Tourism
$45,000
$223,100
81%
36%
and MK
54
Home care
Clients CB 41
Construction (owner)
$70,000
$52,561
95%
66%
and TB
32
Bookkeeper
Clients LW 46
Superintendent
$98,400
$416,700
53%
35%
and BW
42
Office Manager

3 The Know-Your-Client information contained in the chart is captured at the time the Respondent recommended the
investment loan, or final investment loan where the Respondent recommended multiple investment loans.
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Clients
Ages
Occupations
Annual
Household Loan to Total
Household
Net
Net
Debt
Income
Worth
Worth
Service
Ratio
Ratio
Clients CJ 52
Plant Worker
$58,700
$115,400
87%
16%
and EJ
50
Seamstress
Client CG
59
Retired
$65,000
$280,300
54%
22%

25.
Most of the clients’ household net worth consisted of fixed assets, such as homes and
registered investments, which could not easily be converted to cash to pay the costs associated
with the investment loans or cover any investment losses arising from the leverage investment
strategy.

26.
At all material times, the Respondent knew or ought to have known that the leveraged
investment strategy was unsuitable for the clients having regard to the clients’ relevant Know-
Your-Client information and financial circumstances, in that, among other things:

(a)
the clients could not withstand investment losses arising from the strategy; and/or
(b)
the clients could not afford to service their investment loans using their own
personal income and without relying upon the distributions generated by the ROC
mutual funds.

Ability to Withstand Investment Losses
27.
The Respondent failed to consider, adequately or at all, whether the clients could
withstand investment losses without jeopardizing their financial security if the leveraged
investment strategy did not perform as the Respondent represented it would.

28.
As a result of implementing the leveraged investment strategy, the clients incurred
significant investment losses, the full particulars of which will be provided prior to the hearing
on the merits.

29.
The investment losses have jeopardized the financial security of the clients.

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Ability to Afford the Costs Associated with the Investment Loans

30.
The Respondent failed to consider, adequately or at all, whether the clients could afford,
and were willing to pay out-of-pocket, the costs associated with the leveraged investment
strategy in the event the leveraged investment strategy did not perform as represented by the
Respondent and in particular, if the ROC mutual funds did not pay proceeds to investors as
represented by the Respondent.

31.
By engaging in the conduct described above, the Respondent failed to ensure that the
leveraged investment strategy he recommended and implemented in the accounts of the clients
was suitable for the clients and in keeping with their investment objectives, contrary to MFDA
Rules 2.2.1 and 2.1.1.

NOTICE is further given that the Respondent shall be entitled to appear and be heard and be
represented by counsel or agent at the hearing and to make submissions, present evidence and
call, examine and cross-examine witnesses.

NOTICE is further given that MFDA By-laws provide that if, in the opinion of the Hearing
Panel, the Respondent:

 has failed to carry out any agreement with the MFDA;

 has failed to comply with or carry out the provisions of any federal or provincial statute
relating to the business of the Member or of any regulation or policy made pursuant
thereto;

 has failed to comply with the provisions of any By-law, Rule or Policy of the MFDA;

 has engaged in any business conduct or practice which such Regional Council in its
discretion considers unbecoming or not in the public interest; or

 is otherwise not qualified whether by integrity, solvency, training or experience,

the Hearing Panel has the power to impose any one or more of the following penalties:
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(a) a reprimand;

(b) a fine not exceeding the greater of:

(i)
$5,000,000.00 per offence; and
(ii)
an amount equal to three times the profit obtained or loss avoided by such person
as a result of committing the violation;

(c) suspension of the authority of the person to conduct securities related business for such
specified period and upon such terms as the Hearing Panel may determine;

(d) revocation of the authority of such person to conduct securities related business;

(e) prohibition of the authority of the person to conduct securities related business in any
capacity for any period of time;

(f) such conditions of authority to conduct securities related business as may be considered
appropriate by the Hearing Panel;

NOTICE is further given that the Hearing Panel may, in its discretion, require that the
Respondent pay the whole or any portion of the costs of the proceedings before the Hearing
Panel and any investigation relating thereto.

NOTICE is further given that the Respondent must serve a Reply on Enforcement Counsel and
file a Reply with the Corporate Secretary within twenty (20) days from the date of service of this
Notice of Hearing.

A Reply shall be served upon Enforcement Counsel at:

Mutual Fund Dealers Association of Canada

121 King Street West, Suite 1000

Toronto, Ontario
M5H 3T9

Attention: Charles Toth, Senior Enforcement Counsel

Fax: 416-361-9073

Email: ctoth@mfda.ca

A Reply shall be filed by:
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(a) providing 4 copies of the Reply to the Corporate Secretary by personal delivery, mail or
courier to:
The Mutual Fund Dealers Association of Canada
121 King Street West, Suite 1000
Toronto, Ontario
M5H 3T9
Attention: Office of the Corporate Secretary; or

(b) transmitting 1 copy of the Reply to the Corporate Secretary by fax to fax number 416-
361-9781, provided that the Reply does not exceed 16 pages, inclusive of the covering
page, unless the Corporate Secretary permits otherwise; or

(c) transmitting 1 electronic copy of the Reply to the Corporate Secretary by e-mail at
CorporateSecretary@mfda.ca.

A Reply may either:

(i)
specifically deny (with a summary of the facts alleged and intended to be relied upon
by the Respondent, and the conclusions drawn by the Respondent based on the
alleged facts) any or all of the facts alleged or the conclusions drawn by the MFDA in
the Notice of Hearing; or

(ii)
admit the facts alleged and conclusions drawn by the MFDA in the Notice of Hearing
and plead circumstances in mitigation of any penalty to be assessed.

NOTICE is further given that the Hearing Panel may accept as having been proven any facts
alleged or conclusions drawn by the MFDA in the Notice of Hearing that are not specifically
denied in the Reply.

NOTICE is further given that if the Respondent fails:

(a) to serve and file a Reply; or

(b) attend at the hearing specified in the Notice of Hearing, notwithstanding that a Reply
may have been served,

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the Hearing Panel may proceed with the hearing of the matter on the date and the time and place
set out in the Notice of Hearing (or on any subsequent date, at any time and place), without any
further notice to and in the absence of the Respondent, and the Hearing Panel may accept the
facts alleged or the conclusions drawn by the MFDA in the Notice of Hearing as having been
proven and may impose any of the penalties described in the By-laws.

END.

DM 379193 v2

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