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MFDA Notice of Hearing

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HomeCurrent Hearings201633 - Paul Moroz › NOH201633

201633

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

Paul Moroz

NOTICE OF HEARING

NOTICE is hereby given that a first appearance will take place by teleconference before a hearing panel of the Central Regional Council (“Hearing Panel”) of the Mutual Fund Dealers Association of Canada (“MFDA”) in the hearing room at the MFDA offices, located at 121 King Street West, Suite 1000, Toronto, Ontario on February 15, 2018 at 9:30 a.m. (Eastern), or as soon thereafter as the hearing can be held, concerning a disciplinary proceeding commenced by the MFDA against Paul Moroz (“Respondent”).

DATED: Dec 15, 2017

"Sarah Rickard"

Sarah Rickard

Director of Regional Councils

Mutual Fund Dealers Association of Canada
121 King St. West, Suite 1000
Toronto, ON M5H 3T9
Telephone: 416-945-5143
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 July 2008 and October 2013, the Respondent failed to ensure that the investment recommendations he made to clients A and B were suitable for them, contrary to the Member’s policies and procedures, and MFDA Rules 1.1.2, 2.2.1, 2.5.1, and 2.1.1.

Allegation #2: Between November 24, 2010 and June 23, 2011, the Respondent obtained, and used to facilitate transactions, at least 5 blank pre-signed Know-Your-Client update forms in respect of accounts held by clients A and B, contrary to MFDA Rule 2.1.1.

Allegation #3: Between January 2011 and June 2011, the Respondent failed to update material changes to client information on Know-Your-Client update forms when clients A and B informed the Respondent of the changes, contrary to MFDA Rules 2.2.4 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. Since January 8, 1980, the Respondent has been registered in Ontario as a mutual fund salesperson (now known as a dealing representative) with Investors Group Financial Services Inc. (“Investors Group”), a Member of the MFDA.
  1. At all material times the Respondent carried on business in St. Catharines, Ontario.

Background

  1. Clients A and B are spouses.
  1. On January 9, 2008, clients A and B first met the Respondent. At that time, the clients were both 60 years old, possessed limited assets, and had limited investment knowledge and experience. The clients did not previously have a financial advisor. The clients had recently inherited approximately $250,000 and wanted the Respondent’s advice with respect to investing a substantial portion of the inheritance monies to prepare the clients for retirement.
  1. During the initial meeting with the Respondent, clients A and B advised the Respondent that they were relying upon the inheritance monies to sustain them for the rest of their lives, as neither client had other retirement savings or income. The clients also informed the Respondent that they did not want to lose any of the monies they were investing.
  1. The Respondent arranged for clients A and B to complete a Personal Financial Review (“PFR”) and Investment Profile Questionnaire (“IPQ”) at the initial meeting. The PFR and IPQ are tools developed by Investors Group to gather KYC information and serve as a guide to Approved Persons when recommending a suitable investment portfolio mix.
  1. The PFR completed by clients A and B identified that, among other things:
    1. client A earned $45,000 per year;
    2. client B earned $31,500 per year;
    3. the clients held investments of $140,000, most of which consisted of a Guaranteed Investment Certificate;
    4. the clients owned a home with an estimated value of $159,000 and an outstanding mortgage of $48,000;
    5. the clients had a net worth of approximately $299,000; and
    6. the clients did not have pensions or other sources of retirement income beyond their investments.
  1. The IPQ completed by the clients identified that a “moderate aggressive to aggressive” investment portfolio profile was appropriate for them. However, Investors Group’s policies and procedures stated that a “client may select a more conservative profile” than the one identified by the IPQ.
  1. Between July and August 2008, the Respondent prepared account applications for clients A and B to sign in order to open accounts at Investors Group and invest approximately $187,973 of the monies they had inherited into the accounts[1]. The account applications included the following information regarding the clients’ risk tolerance and the investment portfolio profile selected for each account:

Date of Account Application

Account Holder

Account

Risk Tolerance

Investment Portfolio Profile Selected

July 23, 2008

Clients A and B

Joint non-registered # 88****39

Medium

Moderate conservative to moderate

August 1, 2008

Client B

RRSP  #88****70[2]

Medium

Moderate conservative to moderate

August 1, 2008

Client A

RRSP # 88****98

High

Moderate aggressive to aggressive

August 20, 2008

Client B

LIRA #88****81[3]

High

Moderate aggressive to aggressive

August 20, 2008

Client A

LIRA #88****16

Medium

Moderate conservative to moderate

  1. Investors Group’s policies and procedures permitted:
    1. a “moderate conservative to moderate” investment portfolio to hold up to 35% of its value in high risk funds; and
    2. a “moderate aggressive to aggressive” investment portfolio to hold up to 60% of its value in high risk funds.
  1. Based upon the Respondent’s recommendations, clients A and B invested $187,973 of their inheritance monies as follows:

Account Holder

Account

Fund Purchased

Fund Risk

Amount Invested

Account % [4]

Clients A and B

Joint non-registered

IG Mackenzie Global Precious Metals Fund

Investors Canadian Natural Resources Fund

Investors Global Natural Resources Fund

Investors Real Property Fund

High

Medium

Medium

Low

$30,010

$15,000

$15,000

$90,000

20

10

10

60

       

$150,010

100

Client B

RRSP

IG Mackenzie Global Precious Metals Fund

Investors Real Property Fund

High

Low

$10,810

$10,000

52

48

       

$20,810

100

Client A

RRSP

IG Mackenzie Global Precious Metals Fund

High

$5,052

100

Client B

LIRA

Investors Global Natural Resources Fund

Medium

$2,220

100

Client A

LIRA

IG Mackenzie Global Precious Metals Fund

Investors Global Natural Resources Fund

Investors Real Property Fund

High

Medium

Low

$2,440

$2,441

$5,000

25

25

50

       

$9,881

100

  1. The Respondent’s initial recommendations with respect to client B’s RRSP were not suitable because they resulted in the client holding 52% of the investments in high risk funds in an account with a “moderate conservative to moderate” investment portfolio profile. As stated above, Investors Group did not permit its Approved Persons to recommend that clients hold more than 35% of their investments in high risk funds in a “moderate conservative to moderate” account.
  1. Similarly, the Respondent’s initial recommendations with respect to the client A’s RRSP were not suitable because they resulted in the client holding 100% of the investments in a single high risk fund in an account with a “moderate aggressive to aggressive” investment portfolio profile. As stated above, Investors Group did not permit its Approved Persons to recommend that clients hold more than 60% of their investments in high risk funds in a “moderate aggressive to aggressive” account.
  1. Between August 2008 and November 2010, client B contributed $100 per month to her RRSP account. Based upon the Respondent’s recommendation, these monies were invested in the IG Mackenzie Global Precious Metals Fund which was a high risk fund.  This further increased the client’s holdings of high risk sector funds in contravention of Investors Group’s policies and procedures for accounts with a “moderate conservative to moderate” investment portfolio profile.
  1. On November 23, 2010, client B contacted the Respondent and advised that the clients wanted to receive additional income from their investment accounts. In response, the Respondent recommended that clients A and B increase their holdings of high risk precious metals and natural resources sector funds. This recommendation was not suitable for the clients because it did not achieve the investment objective of producing additional income.
  1. On November 24, 2010, the Respondent requested that clients A and B sign three (3) blank Know-Your-Client (“KYC”) update forms. The Respondent advised the clients that he would complete the information on the KYC update forms. The clients signed the blank KYC update forms and returned them to the Respondent as requested.
  1. On December 31, 2010, the Respondent recommended switches in the clients’ joint non-registered account from the Investors Real Property Fund (a low risk fund) to the IG Mackenzie Global Precious Metals funds (a high risk fund) and Investors Canadian High Yield Income Fund (a medium risk fund). As stated above, the clients’ joint non-registered account had a “moderate conservative to moderate” investment portfolio profile which was permitted to hold up to 35% of its value in high risk funds. The switches processed by the Respondent were unsuitable because they increased the clients’ concentration in high risk precious metals sector funds from about 20% to 49% of the investments held in the account.
  1. In January 2011, client B ceased working due to illness. The Respondent did not update the clients’ KYC information when he became aware of this information, nor did he take adequate steps to assess and rebalance the clients’ investment portfolios to ensure that they remained suitable for the clients in light of this material change in circumstances.
  1. On March 15, 2011, the Respondent used a blank pre-signed KYC update form in the clients’ joint non-registered account to change the clients’:
    1. risk tolerance from “medium” to “high”; and
    2. investment portfolio profile from “moderate conservative to moderate” to “moderate aggressive to aggressive”.
  1. On or about the same date, the Respondent used a blank pre-signed KYC update form in client B’s RRSP account to change her:
    1. risk tolerance from “medium” to “very high”; and
    2. investment portfolio profile from “moderate conservative to moderate” to “very aggressive”.
  1. On June 22, 2011, client B advised the Respondent that client A had lost his job. Client B requested that the Respondent review their investment portfolios in the event the clients required additional income from their investments. The Respondent did not update the clients’ KYC information when he became aware of this information, nor did he take adequate steps to assess and rebalance the clients’ investment portfolios to ensure that they remained suitable for the clients in light of this material change in circumstances.
  1. Later on June 22, 2011, the Respondent recommended and processed a switch in client B’s LIRA account of approximately $2,171 from the Investors Global Natural Resources Fund (a medium risk fund at the time the Respondent recommended it[5]) to the IG MacKenzie Global Precious Metals Fund (a high risk fund). As stated above, the client B’s LIRA account had a “moderate aggressive to aggressive” investment portfolio profile which permitted it to hold up to 60% of its value in high risk funds. The switch processed by the Respondent resulted in client B holding 100% of the investments in a single high risk precious metals sector fund.
  1. Also on June 22, 2011, the Respondent recommended and processed a switch in client A and B’s non-registered joint account of approximately $19,000 from the Investors Canadian Natural Resources Fund (a medium risk fund at the time the Respondent recommended it[6]) to the IG MacKenzie Global Precious Metals Fund (a high risk fund). The switch processed by the Respondent increased the clients’ holdings of high risk sector funds to 60% of the investments held in the account.
  1. These transactions processed on June 22, 2011 described above again increased the clients’ concentration in high risk sector funds and were not suitable for the clients having regard to, among other things, the clients’ relevant KYC information (including that the clients had unexpectedly ceased working due to illness and job loss), Investors Group’s policies and procedures, and concentration in high risk sector funds.
  1. On June 23, 2011, the Respondent, once again, requested that clients A and B sign blank KYC update forms. The clients signed the blank KYC update forms and returned them to the Respondent as requested.
  1. On July 2, 2011, the Respondent used a blank pre-signed KYC update form in client B’s LIRA to change her:
    1. risk tolerance from “high” to “very high”; and
    2. investment portfolio profile from “moderate aggressive to aggressive” to “very aggressive”.
  1. On July 7, 2011 (only four months after the Respondent had previously increased the clients’ risk tolerance and investment portfolio profile in the account), the Respondent used a blank pre-signed KYC update form in the clients’ joint non-registered account to change the clients’:
    1. risk tolerance from “high” to “very high”; and
    2. investment portfolio profile from “moderate aggressive to aggressive” to “very aggressive”.
  1. On January 16, 2012, the Respondent used a blank pre-signed KYC update form in client A’s RRSP to change the client’s:
    1. risk tolerance from “high” to “very high”; and
    2. investment portfolio profile from “moderate aggressive to aggressive” to “very aggressive”.
  1. On the same date, the Respondent used a blank pre-signed KYC update form[7] in client A’s LIRA to change the client’s:
    1. risk tolerance from “medium” to “very high”; and
    2. investment portfolio profile from “moderate conservative to moderate” to “very aggressive”.
  1. By January 16, 2012, the Respondent had increased the clients’ risk tolerance and investment portfolio profile in every account that the clients held at Investors Group, as summarized below:

Account Holder

Account

Initial Risk Tolerance

Updated Risk Tolerance

Initial Investment Portfolio Profile

Updated Investment Portfolio Profile

Client A and B

Joint non-registered

Medium

Very High

Moderate conservative to moderate

Very Aggressive

Client B

RRSP

Medium

Very High

Moderate conservative to moderate

Very Aggressive

Client A

RRSP

High

Very High

Moderate aggressive to aggressive

Very Aggressive

Client B

LIRA

High

Very High

Moderate aggressive to aggressive

Very Aggressive

Client A

LIRA

Medium

Very High

Moderate conservative to moderate

Very Aggressive

  1. At all material times, the Respondent knew or ought to have known that the clients did not have “very high” risk tolerances and were not “very aggressive” investors.
  1. At the time the Respondent increased the clients’ risk tolerance and investment portfolio profiles in each of their accounts, the Respondent did not arrange for the clients to complete a new PFR or IPQ.
  1. Since January 9, 2008 when the Respondent first met the clients, the clients’ other KYC information had not changed in a way which indicated they could tolerate greater risk or more aggressive investments. To the contrary, the Respondent knew or ought to have known that the clients’ had a reduced capacity to withstand the risks associated with the high risk sector funds he had recommended as both of the clients had unexpectedly ceased working and required additional income from their investments.
  1. Rather than adjusting the clients’ risk tolerance and investment portfolio profiles to match changes in their KYC information, the Respondent processed the changes to the clients’ risk tolerance and investment portfolio profiles in order to match the risk profile of the investments that the Respondent had recommended to them. By engaging in this conduct, the Respondent made the investments appear to be suitable for the clients when they were not.
  1. On or about January 23, 2012, client B transferred in-kind the holdings in her LIRA to her RRSP account. On the same date, client A transferred in-kind the holdings in his LIRA to his RRSP account.
  1. By March 31, 2012, clients A and B held approximately $183,518 in their accounts which were invested, based upon the Respondent’s recommendations, as follows:

Account Holder

Account

Fund Purchased

Fund Risk

Amount Invested

Account %[8]

Clients A and B

Joint non-registered

IG Mackenzie Global Precious Metals Fund

Investors Canadian High Yield Income Fund

High

Medium

$74,579

$60,979

55

45

       

$135,548

100

Client B

RRSP

IG Mackenzie Global Precious Metals Fund

Investors Canadian High Yield Income Fund

High

Medium

$20,433

$10,148

67

33

       

$30,581

100

Client A

RRSP

IG Mackenzie Global Precious Metals Fund

Investors Canadian High Yield Income Fund

High

Medium

$10,281

$7,108

59

41

       

$17,389

100

  1. As a result of the Respondent’s investment recommendations, the clients’ investment holdings were concentrated in a single high risk precious metals sector fund.
  1. The Respondent did not recommend that clients A and B diversify their investment holdings.
  1. The Respondent’s investment recommendations were not suitable for the clients.
  1. Commencing in about early 2013, the high risk precious metals sector funds recommended by the Respondent began to decline in value. By late 2013, clients A and B had experienced investment losses of approximately $36,000.
  1. On November 20, 2013, clients A and B filed a written complaint with Investors Group regarding the Respondent’s handling of their accounts and the investment losses they had experienced. In February 2014, clients A and B commenced a civil lawsuit against the Respondent and Investors Group, which was subsequently settled.

Allegation #1 – Unsuitable Investment Recommendations

  1. By engaging in the conduct described above, the Respondent failed to ensure that the investment recommendations he made to clients A and B were suitable for them having regard to, among other things:
    1. relevant KYC criteria, including the clients’ age, employment status, investment objectives, risk tolerance, ability to withstand investment losses, and investment knowledge and experience;
    2. Investors Group’s policies and procedures, including the investment portfolio profile recommended by the IPQ completed for the clients; and
    3. concentration in high risk funds in a single sector;

    contrary to MFDA Rules 1.1.2, 2.2.1, 2.5.1, and 2.1.1.

Allegation #2 – Blank Pre-Signed KYC Update Forms

  1. By engaging in the conduct described in paragraphs 16, 19-20 and 25-29 above, the Respondent obtained, and used to facilitate transactions, at least 5 blank pre-signed KYC update forms in respect of accounts held by clients A and B, contrary to MFDA Rule 2.1.1.
  1. At all material times, the Respondent used these KYC update forms to change the clients’ risk tolerance and investment portfolio profiles to match the risks of the investments he had recommended to them, which made the investments appear to be suitable.

Allegation #3 – Failure to Update Material Changes to KYC Information

  1. By engaging in the conduct described in paragraphs 18 and 21 above, the Respondent failed to update material changes to client information, including the loss of employment by clients A and B, on KYC update forms when the clients informed the Respondent of the changes, contrary to MFDA Rules 2.2.4 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;
  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: Maria L. Abate
Fax: (416) 361-9073
Email: mabate@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. transmitting one (1) copy of the Reply to the Office of 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 Director of Regional Councils 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. [1] At the time the Respondent prepared the account applications, there had been no material changes in the clients’ KYC information since the clients first met the Respondent on January 9, 2008.
  2. [2] “RRSP” means Registered Retirement Savings Plan.
  3. [3] “LIRA” means Locked-In Retirement Account.
  4. [4] This represents the percentage of the total amount invested in the client account.
  5. [5] The Investors Global Natural Resources Fund was rated as medium risk at the time clients A and B initially purchased the fund in July and August 2008. In about July 2010, Investors Group changed its risk rating of the Investors Global Natural Resources Fund from medium risk to high risk.
  6. [6] The Investors Canadian Natural Resources Fund was rated as medium risk at the time clients A and B initially purchased the fund in July and August 2008. In about July 2010, Investors Group changed its risk rating of the Investors Canadian Natural Resources Fund from medium risk to high risk.
  7. [7] The Respondent used a single blank pre-signed KYC update form to process the account changes described in paragraphs 28 and 29.
  8. [8] This represents the percentage of the total amount invested in the client account.

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