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MFDA Notice of Hearing

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HomeCompleted Hearings201725 - Byron Daues › NOH201725

201725

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

Byron Heinz Daues

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 May 23, 2017 at 10:30 a.m. (Eastern), or as soon thereafter as the hearing can be held, concerning a disciplinary proceeding commenced by the MFDA against Byron Heinz Daues (“Respondent”).

DATED: Mar 24, 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: 416-943-5143
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 August 21, 2014 and March 1, 2015, the Respondent engaged in securities related business in respect of three clients when he was not registered to engage in these activities, contrary to MFDA Rule 2.1.1.

Allegation #2: On or about March 2, 2015, the Respondent submitted account forms to the Member to process transactions in respect of three clients which concealed that the Respondent had engaged in securities related business when he was not registered to engage in these activities, contrary to MFDA Rule 2.1.1.

Allegation #3: In August 2012, the Respondent failed to ensure that investment recommendations he made to client AR were suitable for her having regard to the client’s relevant “Know-Your-Client” factors, including the client’s age, time horizon and investment objectives, contrary to MFDA Rules 2.2.1 and 2.1.1.

Allegation #4: Commencing on May 10, 2015, the Respondent misled Staff of the MFDA during an investigation into his conduct, thereby failing to cooperate with the investigation, contrary to section 22 of MFDA By-law No. 1 and MFDA Rule 2.1.1.


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. The Respondent had been registered in the mutual fund industry since April 2000.
  1. From March 22, 2007 to July 22, 2011, the Respondent was registered in Ontario as a mutual fund salesperson (now known as a dealing representative) with IPC Investment Corporation (“IPC”), a Member of the MFDA. From June 21, 2007 to December 31, 2009, the Respondent was also registered in British Columbia as a mutual fund salesperson with IPC.
  1. From September 8, 2011 to August 21, 2014, and from March 2 to March 6, 2015, the Respondent was registered in Ontario as a mutual fund salesperson with Keybase Financial Group Inc. (“Keybase”), a Member of the MFDA. Keybase terminated the Respondent on March 6, 2016 as a result of the events described below.
  1. At all material times, the Respondent conducted business in the Courtice, Ontario area.

The Respondent Settles a Proceeding with the MFDA

  1. On August 19, 2014, the Respondent entered into a Settlement Agreement (the “Settlement Agreement”) with Staff of the MFDA (“Staff”) which including the following admissions of misconduct:
    1. commencing in July 2011, the Respondent engaged in personal financial dealings with a client when he borrowed $40,000 from client AS which he failed to repay, thereby giving rise to a conflict or potential conflict of interest which the Respondent failed to address by the exercise of responsible business judgment influenced only by the best interests of the client, contrary to MFDA Rules 2.1.4 and 2.1.1; and
    2. the Respondent failed to report the following events, each of which constituted a complaint in respect of personal financial dealings with a client, to the Member within 2 business days or at all:
      1. client AS’s verbal complaint to the Respondent in each of September, October, November and December 2011 in respect of the Respondent’s failure to make payments on account of the monies he borrowed from client AS;
      2. client AS’s written complaint to the Respondent, dated January 18, 2012, in respect of the Respondent’s failure to make payments on account of the monies he borrowed from client AS; and
      3. client AS’s civil action commenced against the Respondent in March 2012 claiming damages of $40,000 plus costs and interest, in respect of the monies he borrowed from client AS;
      contrary to MFDA Policy No. 6, subsection 4.1(b)(v).
  1. On August 21, 2014, a Hearing Panel of the MFDA accepted the Settlement Agreement and issued an Order (the “Settlement Order”) which included, in accordance with the agreed terms of the Settlement Agreement, the following terms:
    1. a two (2) month suspension from conducting securities related business while in the employ of or associated with any MFDA Member, pursuant to s. 24.1.1(e) of MFDA By-law No. 1;
    2. a fine in the amount of $10,000 pursuant to s. 24.1.1(b) of MFDA By-law No. 1;
    3. costs in the amount of $5,000 pursuant to s. 24.2 of MFDA By-law No. 1; and
    4. the Respondent shall in the future comply with MFDA Rules 2.1.4 and 2.1.1.
  1. Between August 21, 2014 and October 21, 2014, the Respondent was suspended from engaging in securities related business pursuant to the terms of the Settlement Order.
  1. As a result of the Settlement Order, the Respondent’s registration in Ontario as a mutual fund salesperson was suspended commencing August 21, 2014.
  1. Following the expiry of the period of suspension under the Settlement Order, the Respondent applied to the Ontario Securities Commission to reactivate his registration in Ontario as a mutual fund salesperson. The Respondent’s registration as a mutual fund salesperson was reactivated on March 2, 2015.

Client MH

  1. Commencing February 11, 2015 (before his registration as a mutual fund salesperson was reactivated), the Respondent had telephone conversations and exchanged emails with client MH and her spouse regarding, among other things, a $5,000 contribution to the clients’ RRSP account.
  1. On February 18, 2015, the Respondent emailed an Order Request Form to client MH and instructed the client to sign the form without dating it. The Respondent also instructed client MH to return the signed Order Request Form to the Respondent with a cheque for the $5,000 investment in the clients’ RRSP account.
  1. On February 23, 2015, the Respondent emailed client MH’s spouse to confirm receipt of a cheque dated February 28, 2015 in the amount of $5,000 for an investment in the clients’ RRSP account.  On the same day, client MH’s spouse replied to the Respondent by email to confirm that the Order Request Form had been signed and would be mailed to the Respondent shortly.
  1. On or about March 2, 2015 (the day his registration as a mutual fund salesperson was reactivated), the Respondent recorded the date on the Order Request Form as March 2, 2015 so that it appeared as though the form had been signed on that date, and submitted the form to Keybase to process the purchase in the clients’ RRSP account. The Respondent also submitted the clients’ cheque to Keybase to provide the funds to process the transaction. 

Client RB

  1. On February 16, 2015 (before his registration as a mutual fund salesperson was reactivated), the Respondent met with client RB and received instructions from the client to process a $5,000 purchase of mutual funds in the client’s Registered Retirement Savings Plan (“RRSP”) account.
  1. In addition, the Respondent arranged for client RB to sign an Order Request Form to process the purchase of mutual funds and received a cheque from RB dated February 26, 2015 for the amount of the transaction.
  1. On or about March 2, 2015 (the day his registration as a mutual fund salesperson was reactivated), the Respondent recorded the date on the Order Request Form as March 2, 2015 so that it appeared as though the form had been signed on that date, and submitted the form to Keybase to process the purchase in the client RB’s RRSP account. The Respondent also submitted the client’s cheque to Keybase to provide the funds to process the transaction.

Client BF

  1. In February 2015 (before his registration as a mutual fund salesperson was reactivated), the Respondent received instructions from client BF to make a contribution to the client’s Tax Free Savings Account (“TFSA”).
  1. The Respondent mailed an Order Request Form to client BF, and instructed the client to complete the form and to return it to him with a cheque for the amount of the contribution to the TFSA.
  1. In February 2015, client BF signed the Order Request Form and returned it to the Respondent by mail, with a cheque in the amount of $5,500 dated February 28, 2014.
  1. On or about March 5, 2015 (three days after his registration as a mutual fund salesperson was reactivated), the Respondent recorded the date on the Order Request Form as March 3, 2015 so that it appeared as though the form had been signed on that date, and submitted the form to Keybase to process the purchase in the client BF’s TFSA. The Respondent also submitted the client’s $5,500 cheque to Keybase to process the transaction. 

Allegation #1 – Engaging in Securities Related Business While Not Registered

  1. By virtue of the above-referenced conduct, the Respondent engaged in securities related business in respect of three clients when he was not registered to engage in these activities, contrary to MFDA Rule 2.1.1.

Allegation #2 – Submitting Account Forms Which Concealed Unregistered Activities

  1. By virtue of the above-referenced conduct, the Respondent submitted account forms to the Member to process transactions in respect of three clients which concealed that the Respondent had engaged in securities related business when he was not registered to engage in these activities, contrary to MFDA Rule 2.1.1. 

Allegation #3 – Unsuitable Investment Recommendations

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

 Spousal RRIF

 

 

 

Amount Invested

Date Invested

Date of 1st SWP

Monthly SWP Amount

$31,935

October 11, 2012

November 15, 2012

$1,000

RRIF

     

Amount Invested

Date Invested

Date of 1st SWP

Monthly SWP Amount

$56,193

August 22, 2012

October 15, 2012

$1,800[1]

LIF

     

Amount Invested

Date Invested

Date of 1st SWP

Monthly SWP Amount

$80,289

October 5, 2012

December 17, 2012

$1,048

 

  1. The SWPs set-up by the Respondent in client AR’s accounts exhausted the 10% available without the client incurring DSCs (as described in paragraph 26 above) approximately three months after RRIF and Spousal RIF accounts were opened, and approximately eight months the LIF was opened.
  1. As a result of the Respondent’s investment recommendations, client AR began incurring DSCs shortly after she invested.
  1. The Respondent’s investment recommendations with respect to client AR’s RRIF, Spousal RRIF and LIF were unsuitable for the client having regard to the client’s relevant “Know-Your-Client” factors, including the client’s age, time horizon and investment objectives, contrary to MFDA Rule 2.2.1 and MFDA Rule 2.1.1.

Allegation #4 – Misleading MFDA Staff

  1. In February 2015, Staff of the MFDA commenced a review into the Respondent’s conduct with respect to client AR, as described above. Among other things, the review considered whether the Respondent had discussed with client AR the DSCs that applied to her investments.
  1. On May 10, 2015, Staff of the MFDA requested that the Respondent provide evidence that he had discussed DSCs with client AR.
  1. In response the request from Staff of the MFDA, the Respondent provided copies of notes from his meetings with client AR on December 19, 2012 and August 2, 2013.
  1. Prior to submitting copies of his notes from his meeting with client AR, the Respondent altered the notes of his meetings with the client to, among other things, include the content underlined below:
    1. I did review the three sales charge options with [client AR], being FE, Low Load and DSC and she did not wish to pay any upfront fees and did not anticipate withdrawing monies from her open account for a number of years. She agreed that the DSC option made [sic] most sense at this time.”; and
    2. “We reviewed the three types of sales charges, including DSC, to choose from and the positive and negative aspects of each, pending the length of time she plans on holding on the various funds and under what circumstances.”
  1. The Respondent falsely represented to Staff of the MFDA that the content of the notes had been made of the time of his meetings with the client.
  1. By engaging the conduct described above, the Respondent mislead Staff of the MFDA and thereby failed to cooperate with its investigation, thereby engaging in conduct contrary to section 22 of MFDA By-law No. 1 and MFDA Rule 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:

a. providing four (4) copies of the Reply to the Office of the Corporate Secretary by personal delivery, mail or courier to:

The Mutual Fund Dealers Association of Canada
121 King Street West, Suite 1000
Toronto, ON M5H 3T9
Attention: Office of the Corporate Secretary; or

b. 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 Office of the Corporate Secretary permits otherwise; or

c. 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] The monthly SWIP increased to $3,600 commencing December 15, 2012

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