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201415

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

Michael Andrew Harrigan

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 10:00 a.m. (Atlantic) concerning a disciplinary proceeding commenced by the MFDA against Michael Andrew Harrigan (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 Halifax, Nova Scotia at a time and venue to be announced.

DATED: May 12, 2014

"Rohit Kumar"

Rohit Kumar

Director of Regional Councils

Mutual Fund Dealers Association of Canada
121 King St. West, Suite 1000
Toronto, ON M5H 3T9
Telephone: 416-945-5136
Fax: 416-361-9781
E-mail: corporatesecretary@mfda.ca



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

Allegation #1: Between 2005 and 2008, the Respondent misrepresented the know-your-client (“KYC”) information on the account opening and loan application documents of 7 clients, thereby engaging in conduct unbecoming an Approved Person and failing to observe high standards of ethics and practice in the conduct of business, contrary to MFDA Rules 2.2.1 and 2.1.1.

Allegation #2:Between 2005 and 2008, the Respondent misrepresented, failed to fully and adequately explain, or omitted to explain, the risks, benefits, material assumptions, costs and features of a leveraged investment strategy that he recommended and implemented in the accounts of 7 clients, including the risks that:

  1. the underlying investments might decline in value such that the clients might incur investment losses and would be unable to rely on the sale proceeds of the investments to pay back their investment loans; and
  2. the underlying investments might reduce, suspend or cancel altogether the distributions paid to investors upon which the clients were relying to make the payments on their investment loans,

thereby failing to ensure that the leveraged investment strategy was suitable and appropriate for the clients and in keeping with their investment objectives, contrary to MFDA Rules 2.2.1 and 2.1.1.

Allegation #3: Between 2005 and 2008, the Respondent recommended and facilitated the implementation of a leveraged investment strategy in the accounts of 7 clients without performing the necessary due diligence to learn the essential facts relative to the clients and without ensuring that the leveraged investment strategy was suitable for the clients and in keeping with their investment objectives, 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 March 20, 2007 to November 14, 2011, when he was terminated, the Respondent was registered as a mutual fund salesperson in Alberta, New Brunswick, and Nova Scotia with Keybase Financial Group Inc. (“Keybase”), a Member of the MFDA.
  1. At the material times giving rise to the events described in this Notice of Hearing, the Respondent carried on business from Dartmouth, Nova Scotia.
  1. From April 2006 to March 2007, the Respondent was registered as a mutual fund salesperson in Alberta, New Brunswick, and Nova Scotia with Global Maxfin Investments Inc. (“Global Maxfin”), a Member of the MFDA.
  1. From December 2002 to April 2006, the Respondent was registered as a mutual fund salesperson with Manulife Securities Investment Services Inc. (“Manulife”), a Member of the MFDA.
  1. The Respondent was also licensed to sell insurance during the material times at issue in these proceedings.
  1. The Respondent is not currently registered in the securities industry in any capacity.

Overview

  1. This proceeding concerns allegations that the Respondent recommended and implemented a leveraged investment strategy in the accounts of 7 clients that was unsuitable for the clients having regard to their personal and financial circumstances, including their lower investment risk tolerance, limited investment knowledge, and inability to make the payments on their investment loans without using their own monies, in the event the leveraged investment strategy did not perform as the Respondent represented it would.
  1. The leveraged investment strategy recommended by the Respondent was based on the premise that the investments purchased by the clients using their investment loans would generate sufficient returns to pay the clients’ borrowing costs, as well as provide them with the ability to pay down their mortgages more quickly and/or generate excess discretionary income, such that the clients would not have to incur any out-of-pocket expenses to sustain the strategy. The Respondent did not adequately explain to the clients the risks inherent in using borrowed monies to invest generally, or the risks specific to the leveraged investment strategy he recommended.
  1. Relying on the Respondent’s recommendation, the clients borrowed far 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”).  
  1. The Respondent misrepresented aspects of the clients’ know-your-client information on their account opening documents and loan applications in order to increase the likelihood that the lenders would approve the clients’ investment loans and the Members would approve the implementation of the leveraged investment strategy in the clients’ accounts.
  1. By late 2008 or early 2009, the unit values of the ROC mutual funds purchased by the clients had declined and the distributions paid by the ROC mutual funds to investors were reduced. In all cases, the clients’ portfolios significantly declined in value.  The investment losses the clients incurred and the reduced distributions they received from the ROC mutual funds jeopardized the financial security of the clients and caused them significant financial hardship. 

The Leveraged Investment Strategy

  1. In or about late 2005, while registered with Manulife, the Respondent started to recommend a leveraged investment strategy to his clients.[1] He continued to do so with his clients at Global Maxfin, and later at Keybase, all of which involved the following steps:
    1. the Respondent would either:
      1. refer a client (or prospective client) to a mortgage broker or lender for the purposes of determining how much the lender was willing to lend the client and establishing a mortgage or a line of credit (“LOC”) for the client in that amount[2];
      2. have a client (or prospective client) referred to him from a mortgage broker, who had already established a mortgage or a LOC for the client (or prospective client); or
      3. recommend a “wealth accumulation” program for the client whereby he recommended that the client obtain an investment loan and invest the proceeds in ROC funds.[3] In this case, the Respondent directed the client to use the distributions to make the monthly payments on their investment loan.
    2. in each of the scenarios set out in para. 12(a), the Respondent did not make an assessment of the amount the clients should borrow having regard to, among other considerations, their ability to service the borrowed monies or withstand the loss of some or all of their investments;
    3. relying upon the Respondent’s recommendation, the client used the proceeds from the mortgage, LOC, or investment loan[4] to purchase investments for the client’s account;
    4. the Respondent recommended that the client’s investment loan be structured as an interest only loan (as opposed to a principal plus interest loan) in order to reduce the client’s monthly payment obligations. The Respondent generally recommended that the clients apply for “no margin” loans[5];
    5. the Respondent recommended that the clients invest all of the borrowed monies in ROC mutual funds, based on his opinion that they paid investors a regular income stream while also offering favorable tax treatment for the client; and
    6. the Respondent arranged for the distributions paid by the ROC mutual funds to be deposited in the client’s bank account. The Respondent advised the client to use the distributions to make the monthly payments on their mortgage, LOC, or investment loan, and, in some cases, to also make an accelerated (i.e. additional) payment on their mortgage. 

Allegation #1 – Misrepresentation of Client Information

  1. Between 2005 and 2008, the Respondent misrepresented the know-your-client information recorded on the account opening and loan application documents of 7 clients by, among other things:
    1. misrepresenting the client’s risk tolerance and investment knowledge;
    2. overstating the client’s income and assets; and
    3. understating the client’s liabilities.
a) Misrepresenting Risk Tolerance and Investment Knowledge
  1. The Respondent generally viewed the leveraged investment strategy as suitable for nearly every prospective client he met with. As a result, the Respondent failed to learn the essential facts relative to each prospective client which would enable him to make suitable investment recommendations to the client.  The Respondent presented the leveraged investment strategy to prospective clients at the very outset and if the client agreed to proceed with the leveraged investment strategy, the Respondent populated the client’s account opening and loan application documents with KYC information that would make it more likely that lenders would approve the clients’ investment loans and the Members would approve the implementation of the leveraged investment strategy in the clients’ accounts. 
  1. The Respondent “matched” 7 clients to the leveraged investment strategy he recommended and implemented in their accounts by populating identical risk tolerances and investment knowledge levels on their account opening documents. These risk tolerances and investment knowledge levels did not accurately reflect the clients’ personal and financial circumstances.  The account opening documents for the 7 clients all read as follows: 

#

Client

Risk Tolerance

Investment Knowledge

1

CB

Medium High

Good

2

MB

Medium High

Good

3 & 4

VC & MC

Medium High

Good

5

GC

Medium High

Good

6

LE

Medium High

Good

7

FH

Medium High

Good

  1. At the time the Respondent recorded the information on the clients’ account opening and investment loan documents, he knew or ought reasonably to have known that none of the 7 clients had a “medium-high” risk tolerance. All 7 clients had lower risk tolerances, ranging from very low to medium.  Relying on the Respondent’s misrepresentations concerning the leveraged investment strategy (described in greater detail in Allegation #2 below), the 7 clients believed that the leveraged investment strategy was low risk and secure. 
  1. At the time the Respondent recorded the information on the clients’ account opening and loan documents, he also knew or ought reasonably to have known that none of the 7 clients had “good” investment knowledge. Most of the clients were unsophisticated investors with limited or no investment knowledge, notwithstanding the Respondent’s assertion that after meeting with him and hearing his presentation, the clients were possessed of “good” investment knowledge.
b) Overstating Income
  1. The Respondent overstated the income on the account opening and loan application documents of 5 clients who implemented the leveraged investment strategy in their accounts, as follows:

#

Client

Date & Type of Form

Income Recorded

Actual Income

1

CB

Investment Loan Application – April 16, 2007

$40,131 income & $8,000 other income =

Total: $48,131

$40,131

2

MB

NAAF – April 16, 2007

$75,000-$99,999

$41,247

 

MB

Investment Loan Application – April 16, 2007

$41,347 income & $31,400 other income =

Total: $72,747

 

3

GC

Investment Loan Application – January 25, 2007

$97,400

$30,000[6]

 

GC

KYC – January 31, 2007 

$75,000-$99,999

 
 

GC

NAAF – September 5, 2008

$75,000-$99,999

 
 

GC

Investment Loan Application – September 5, 2008

$69,407 income & $1,900 other income =

Total: $71,307

 

4

LE

Investment Loan Application –June 7, 2007

$47,573 income & $31,560 other income =

Total: $79,133

$63,353

5

FH

KYC – December 7, 2006

$140,000

$200,000+[7]

$131,500

 

FH

Investment Loan Application – December 7, 2006

$140,500 income & $18,000 other income = $158,500

 
 

FH

Investment Loan Application – December 14, 2006

$140,000 income & $18,000 other income = $158,000

 
  1. The Respondent recorded the inflated income information on the account opening and loan application documents for the 5 clients when he knew or ought reasonably to have known that their actual incomes were materially less.
c) Overstating Assets and Understating Liabilities
  1. The Respondent overstated the assets and understated the liabilities (including in some instances omitting to record liabilities altogether) on the account opening and loan application documents of 6 clients who implemented the leveraged investment strategy in their accounts, as follows:

#

Client

Date & Type of Form

Assets / Liabilities /Net Worth

1

CB

NAAF – April 16, 2007

  • Net worth was recorded as $100,000-$200,000, but was actually less than $20,000.
 

CB

Investment Loan Application – April 16, 2007

  • Residence value was recorded as $340,000, but was actually $230,000.
  • Cash/liquid assets were recorded as $30,000, but did not exist.

2

MB

NAAF – April 16, 2007

  • Net worth was recorded as $100,000-$200,000, but student loans were omitted and otherwise would have had negative net worth.
 

MB

Investment Loan Application – April 16, 2007

  • Residence value was recorded as $340,000, but was actually $230,000.
  • Other investments were recorded as $30,000, but did not exist.
  • Liabilities of student loans ($30,000 outstanding) and car loan ($450/month) not recorded.

3 & 4

VC & MC

NAAF – July 19, 2007

  • Residence value was recorded as $280,000, but was actually $120,000.
  • Net worth was recorded as $100,000-$200,000, but was actually less than $39,000.
 

VC & MC

Investment Loan Application – July 19, 2007

  • Net worth was recorded as $124,000, but was actually less than $39,000.

5

GC

Investment Loan Application – September 5, 2008

  • Liability of rent payments not recorded.
  • Value of business overstated by $180,000.

6

LE

NAAF – March 30, 2007

  • Net worth was recorded as $200,000+, but was actually $63,663.
 

LE

Investment Loan Application – June 7, 2007

  • Residence value was recorded as $226,000, but was actually $150,000.
  • Rental property value was recorded as $197,500, but was actually $98,750.
  • Under “other investments”, the value of the client’s pension was stated as $292,580 when it was approximately $220,000.
  1. The Respondent misrepresented the clients’ assets and liabilities on their account opening and loan application documents when he knew or ought reasonably to have known that their actual assets and liabilities were materially different.
  1. The Respondent failed to perform the necessary due diligence to learn the essential facts relative to each client or, if he did perform the necessary due diligence, he chose to disregard, or failed to properly record, the information on the client’s account opening and loan application documents.
  1. The clients signed the account opening and loan application documents either prior to the Respondent populating the relevant know-your-client information on the documents or, if the clients signed the documents after the Respondent had populated the information on the documents, they did so relying on the Respondent’s representations, express or implied, that he had populated the documents in a manner consistent with the information the clients had provided to him.
  1. The Respondent did not review or explain the concepts (e.g. risk tolerance) and information required to be filled in on the account opening and loan application documents with the clients sufficiently or at all in order to ensure the clients understood the concepts and information, the importance of recording it accurately, and its relevance to determining whether the leveraged investment strategy was suitable for them.
  1. By misrepresenting the know-your-client information on the account opening and loan application documents of the clients as described above, the Respondent presented a more favourable depiction of the clients’ personal and financial circumstances to the Members and to the investment loan providers in a manner which increased the likelihood that the Members would not query or reject the leveraged investment strategies recommended by the Respondent to the clients, and the lenders would approve the clients’ investment loan applications.

Summary of Allegation #1

  1. By engaging in the conduct described in paragraphs 13 to 25 above, the Respondent misrepresented the know-your-client information of 7 clients on their account opening and loan application documents thereby engaging in conduct unbecoming an Approved Person and failing to observe high standards of ethics and practice in the conduct of business, contrary to MFDA Rules 2.2.1 and 2.1.1.

Allegation #2 – Failure to Explain Leveraged Investment Strategy

  1. From 2005 to 2008, 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 and its underlying investments that he recommended and implemented in the accounts of 7 clients. In particular, the Respondent, at various times, misrepresented, failed to fully and adequately explain, or omitted to explain:
    1. the nature of the distributions that the ROC mutual funds paid to investors. In discussions with the clients, the Respondent omitted to explain to the clients that a substantial portion of the distributions paid to investors may consist of a return of the investors’ own capital;
    2. the risk that the ROC mutual funds might decline in value over time, particularly if the clients used the distributions paid to them by the ROC mutual funds to pay their investment loans, mortgages or LOC or for discretionary expenses instead of reinvesting the distributions;
    3. the risk that if the ROC mutual funds declined in value, the clients may not be able to sell the ROC mutual funds to pay back the entirety of their investment loans or cover investment losses;
    4. the risk that the ROC mutual funds might reduce, suspend or cancel altogether the distributions paid to investors due to declining market conditions, poor investment performance or other factors, such that the clients would be forced to incur out-of-pocket expenses to make the payments on their investment loans and sustain the leveraged investment strategy; and
    5. that the tax benefits relating to the distributions paid by the ROC mutual funds to investors may be subject to change by CRA and may not be realized by a given client due to the client’s income or other factors.
  1. 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.
  1. During the course of recommending the leveraged investment strategy to some or all of the clients, the Respondent presented and relied on PowerPoint presentations which showed only positive financial outcomes, and contained no substantial information regarding possible risks or downsides of the leveraged investment strategy, such as investment losses, and/or the possibility that the clients might be paid distributions by the ROC mutual funds that would be insufficient to cover the costs of servicing their investment loans.
  1. During the course of recommending the leveraged investment strategy to the clients, the Respondent also prepared and relied on personalized spreadsheets (“Spreadsheets”) for some or all the clients that showed only positive financial outcomes, and did not contain information regarding possible risks or downsides of the leveraged investment strategy, including investment losses, and/or the possibility that the clients might be paid distributions by the ROC mutual funds that would be insufficient to cover the costs of servicing their investment loans.
  1. Specifically, the Spreadsheets used illustrations and calculations which:
    1. assumed an interest rate of 6% for an investment loan and 7% for a line of credit. There were no disclosures alerting the client to the possibility of changing interest rates, and the possibility that increases in interest rates may negatively impact the strategy.  Similarly, there were no illustrations showing the negative effects of higher interest rates;
    2. assumed the ROC mutual fund would pay investors a monthly distribution of $0.08 per unit. This was the distribution being paid by the ROC mutual fund recommended by the Respondent at the time he was promoting the strategy to the clients; however, there were no disclosures to alert the client of the potential risk (and negative impact) of the distributions being reduced or cancelled altogether; and
    3. did not take into account any decreases in the value of the units of the ROC mutual funds which would reasonably be expected to occur as a result of high or unsustainable distribution payments to investors.
  1. The Respondent did not present the leveraged investment strategy in the Spreadsheets he provided to the clients in a fair and balanced manner. The Respondent failed to include performance projections based on more 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.
  1. As a result of the Respondent’s misrepresentations and omissions, including the Spreadsheets he prepared and provided to the clients, and the PowerPoint presentation he showed to clients, the clients believed  that:
    1. the leveraged investments they purchased would increase in value significantly while also generating a continuous monthly cash flow;
    2. the leveraged investment strategy was low risk and their investments were secure; and
    3. they would not have to incur any out-of-pocket expenses in order to implement and sustain the leveraged investment strategy in their accounts.
  1. By misrepresenting, failing to fully and adequately explain, or omitting to explain the risks, benefits, material assumptions, features and costs of the leveraged investment strategy to 7 clients as described above, the Respondent failed to ensure that the leveraged investment strategy was suitable for the clients and in keeping with their investment objectives, contrary to MFDA Rules 2.2.1 and 2.1.1.

Allegation #3 – Unsuitable Leveraging Recommendations

  1. From 2005 to 2008, the leveraged investment strategy that the Respondent recommended and implemented in the accounts of 7 clients was not suitable and appropriate for the clients having regard to the clients’ “know-your-client” information and financial circumstances including, in particular:
    1. the ability of the clients to afford the costs associated with the investment loans, regardless of the performance of the investments and without relying on anticipated income or gains from the investments;
    2. the ability of the clients to withstand investment losses without jeopardizing their financial security if the leverage investment strategy did not perform as represented; and
    3. the clients’:
      1. low tolerance for risk;
      2. limited or no investment knowledge;
      3. net worth; and
      4. in some cases, employment status and health issues.
  1. The 7 clients borrowed between $125,000 and $300,000+, resulting in excessive loan-to-net-worth ratios[8]. After receiving the investment loans, the 7 clients had loan-to-net-worth ratios ranging from approximately 43% to  96%, as follows:

#

Client

Est. Age at Time of Loan

Date of Loan

Amount Borrowed

Loan to Net Worth Ratio

1 & 2

CB & MB

27/28

April 2007

$150,000

87%

3 & 4

VC & MC

40/41

July 2007

$100,000

81%

5

GC

49

January 2007

$125,000

69%

6

LE

44

June 2007[9]

Est $300,00 - $350,000

96%[10]

7

FH

51

December 2006

$275,000

43%

  1. The Respondent knew, or ought to have known, that the investment loans were excessive having regard to the resulting debt servicing obligations that would be imposed on the clients and the potential for the client’s obligation to repay the investment loans to erode a substantial portion, and potentially all, of the clients’ net worth in the event the strategy did not perform as the Respondent represented it would.
  1. All 7 of the clients who implemented the leveraged investment strategy were relying entirely upon the distributions generated by the ROC mutual funds to pay all of the costs of servicing their investment loans. Two of the clients were in poor health such that they had limited capacity to earn income, and limited to no opportunity to re-enter the work force should it be necessary to earn additional employment income.  Many, if not all, of the clients did not have the means to cover the costs of servicing the investment loans in the event the leveraged investment strategy did not perform as the Respondent represented it would.
  1. As described in Allegation #1, most of the clients had limited or no investment knowledge, such that they were incapable of understanding and appreciating the potential risks of the leveraged investment strategy before agreeing to implement it in their accounts. As discussed in Allegation #2 above, the Respondent exacerbated the effect of the clients’ limited investment knowledge by leading the clients to believe, through his representations and omissions, that the leveraged investment strategy was a safe and secure manner of investing.
  1. As described in Allegation #1, most of the clients had investment risk tolerances ranging from very low to (at best) medium, such that the leveraged investment strategy generally exceeded the level of risk that the clients were willing to assume, notwithstanding that the Respondent recorded all the clients as having a risk tolerance of “medium high”. Moreover, based on the Respondent’ representations, the clients understood that the leveraged investment strategy was low risk and secure.
  1. As a result of implementing the leveraged investment strategy, almost all of the clients incurred significant investment losses attributable to both a decline in the value of the ROC mutual funds they purchased and a reduction in the distributions paid by the ROC mutual funds to investors (which required the clients to draw on other sources of assets or income to sustain the leveraged investment strategy). Particulars of the clients’ investment losses will be provided prior to the hearing on the merits. These investment losses have jeopardized the financial security of the clients and caused significant financial hardship for them.
  1. By engaging in the conduct described above, the Respondent failed to perform the necessary due diligence to learn the essential facts relative to the clients to ensure the leveraged investment strategy 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:

  1. a reprimand;
  2. a fine not exceeding the greater of:
    1. $5,000,000.00 per offence; and
    2. an amount equal to three times the profit obtained or loss avoided by such person as a result of committing the violation;
  3. 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;
  4. revocation of the authority of such person to conduct securities related business;
  5. prohibition of the authority of the person to conduct securities related business in any capacity for any period of time; and
  6. 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 Office of 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, ON M5H 3T9
Attention: Lyla Simon, Enforcement Counsel
Fax: 416-361-9073
Email: lsimon@mfda.ca

A Reply shall be filed by:

  1. providing four (4) copies of the Reply to the Office of the Corporate Secretary by personal delivery, mail or courier to:
    1. The Mutual Fund Dealers Association of Canada
      121 King Street West
      Suite 1000
      Toronto, ON M5H 3T9
      Attention: Office of the Corporate Secretary; or
  2. (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
  3. transmitting one (1) electronic copy of the Reply to the Office of the Corporate Secretary by e-mail at CorporateSecretary@mfda.ca.

A Reply may either:

  1. 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
  2. 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:

  1. to serve and file a Reply; or
  2. attend at the hearing specified in the Notice of Hearing, notwithstanding that a Reply may have been served,

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.

[1] When dealing with clients, the Respondent referred to the strategy as the “Smith Manoeuvre”.
[2] In the event a client did not have a mortgage (which is typically said to be required for the Smith Manoeuvre), the Respondent would recommend the use of the strategy for “wealth accumulation” purposes.
[3] Notwithstanding that neither a mortgage nor LOC component was included in the “wealth accumulation” program for these clients, the Respondent still referred to it as the “Smith Manoeuvre”.
[4] In some cases, the Respondent recommended that the clients use a portion of their LOC to fund a portion of their 2:1 investment loan.  With a 2:1 investment loan, a lending institution agrees to lend two dollars to a borrower for investment purposes for every one dollar the borrower contributes to the investment.  For example, with a 2:1 loan, the client contributes $50,000 and the lending institution contributes $100,000. 
[5] A margin loan is a loan where the client is required to provide and maintain a specified amount of collateral, or “margin” in the account holding the investments.  In the case of client GC, he held margin loans, and was subject to margin calls. 
[6] $100,000 represented GC’s gross revenue before business expenses were deducted, resulting in an income of approximately $30,000 per year.
[7] The Respondent recorded two different incomes on the KYC form.
[8] The loan to net worth ratios are excessive based on the clients’ net worth calculated using the information recorded on the clients’ KYC’s.  However, if the clients’ loan to net worth ratios are calculated based on their actual net worth (as reported by the clients), the loan to net worth ratios are generally even higher, making the leveraged investment strategy even  more unsuitable.
[9] GC had multiple loans; January 2007 is the date one of the loans.  Particulars of GC’s other loans will be provided prior to the hearing on the merits.
[10] Based upon total borrowing of $300,000.

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