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MFDA Notice of Hearing

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HomeCurrent Hearings201825 - Patrick Hugh Lumbers › NOH201825

201825

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

Patrick Hugh Lumbers

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 April 25, 2018 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 Patrick Hugh Lumbers (“Respondent”).

DATED: Jan 30, 2018

"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 May 2013 and March 2014, the Respondent failed to learn, or update material changes to, the essential Know-Your-Client information for a 92 year old client’s accounts, contrary to MFDA Rules 2.2.1, 2.2.4, and 2.1.1.

Allegation #2: In May 2013, the Respondent recommended for the account of a 92 year old client the purchase of approximately $340,000 of mutual funds which were subject to a seven year deferred sales charge schedule, without ensuring that the recommendation was suitable having regard to the essential Know-Your-Client factors relevant to the client, including the client’s age, health condition, investment time horizon, and 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. Since May 30, 1988, the Respondent has been registered as a mutual fund salesperson (now known as a dealing representative) with Investors Group Financial Services Inc. (“Investors Group”). The Respondent is currently registered in British Columbia, Alberta, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia and Yukon.
  1. At all material times, the Respondent conducted business in Toronto, Ontario.

Background

  1. From January 2007 to December 31, 2014 when she passed away at age 93, client MC was a client of Investors Group. At all times, client MC’s investment accounts at Investors Group were serviced by the Respondent.
  1. Client MC held the following accounts at Investors Group: (1) a non-registered account opened on January 31, 1997 (the “Non-Registered account”); (2) a Registered Retirement Investment Funds (“RRIF”) account opened on December 12, 1997; and (3) a Tax Free Savings Account (“TFSA”) opened on August 31, 2011.
  1. At all material times, client MC was a vulnerable client by virtue of her age, employment status (she was retired), and her lack of investment knowledge and experience.
  1. Between 1997 and May 2013, client MC’s income consisted of a modest pension including survivor benefits from her deceased husband’s pension, Canada Pension Plan benefits and Government of Canada Old Age Benefits, and automated monthly withdrawals from her RRIF account. By the end of 2012, client MC’s pension income was approximately $37,000 per year and total annual withdrawals from her RRIF account were approximately $2,400.
  1. Between about December 2012 and February 2013, client MC advised the Respondent that she was considering selling her condominium and moving into a retirement residence. Client MC informed the Respondent that she required the proceeds of the sale of the condominium to pay the monthly costs of the retirement residence.
  1. In April 2013, client MC sold her condominium for approximately $410,402 (the “Condominium Sale Proceeds”) and moved into a retirement residence. At the time of sale, the Condominium Sale Proceeds represented a significant portion of client MC’s net worth.[1]
  1. On or about May 1, 2013, client MC met with the Respondent and agreed to transfer $380,000 of the Condominium Sale Proceeds into the Non-Registered account (the “Transferred Funds”). At that time, the Respondent recommended that client MC invest the Transferred Funds as follows:
    1. $200,000 in the Investors Dividend B Fund (No Load), which would later be invested in a Guaranteed Income Fund (“GIF Investment”);
    2. $140,000 in the Investors Premium Money Market Fund (DSC);
    3. $25,000 in the Investors U.S. Large Cap Value B Fund (No Load); and
    4. $15,000 in the Investors Inter. Small Cap B Fund (No Load).
  1. The Respondent further recommended that client MC make monthly withdrawals of $2,500 from her Non-Registered account to help pay the $4,115 monthly fees of her retirement residence.
  1. The Respondent prepared a Know-Your Client (“KYC”) update form for client MC stating, among other things, that she was 92 years old, had a time horizon 10+ years, had a medium risk tolerance, and had an investment objective to “leave an estate”. The Respondent did not, however, submit this KYC update form to Investors Group. The only change from prior KYC information on file with Investors Group was a change of the Respondent’s risk tolerance from high to medium.
  1. The Respondent knew or ought to have known that client MC did not have an investment time horizon of 10+ years given that she was 92 years old, and her investment objective should have reflected that she required income to fund her stay in a retirement residence.
  1. Prior to processing the trades described in paragraph 9 above, the Respondent was informed by his branch manager that the contemplated GIF Investment was not permitted given that client MC was more than 90 years old, and therefore too old to qualify for such a product. The Respondent then suggested to the branch manager that the $200,000 instead be invested in the Investors Dividend A Fund (DSC) rather than the Investors Dividend B Fund (No Load). In response, the branch manager advised the Respondent that such an investment, or any other DSC mutual fund, was not appropriate for client MC.
  1. Notwithstanding the branch manager’s advice, the Respondent processed the following trades in client MC’s Non-Registered account on May 1, 2013:
    1. $200,000 in the Investors Dividend A Fund (DSC);
    2. $140,000 in the Investors Premium Money Market Fund (DSC);
    3. $25,000 in the Investors U.S. Large Cap Value B Fund (no load); and
    4. $15,000 in the Investors International Small Cap B Fund (no load).
  1. At the time of the trades described above or some point thereafter, the Respondent prepared, and arranged for client MC to sign, a document titled “Summary of Investors Group Sales Fees” stating that MC was aware that a 7 year DSC schedule applied to purchases of “Investors “A” units”. The document was not fully completed by either client MC or the Respondent, and it was not approved for use by Investors Group.
  1. On May 15, 2013, the Respondent switched the $140,000 investment in the Investors Premium Money Market Fund (DSC) described in subparagraph 14(b) to the Investors Real Property Fund A (DSC).
  1. Both the Investors Dividend A Fund and the Investors Real Property Fund A were subject to 7 year DSC redemption schedules.
  1. The Respondent processed the trades described in paragraphs 14 and 16 above using a Limited Trading Authorization.
  1. The trades recommended and processed by the Respondent as described in paragraphs 14 and 16 above were not suitable for client MC having regard to the essential Know-Your-Client factors relevant to the client, including the client’s age, health condition, investment time horizon, and investment objectives.
  1. The Respondent earned approximately $12,920 in respect of the purchase of the DSC mutual funds described in paragraphs 14 and 16 above.
  1. In late 2013 or early 2014, client MC’s mental health deteriorated. As a result, client MC moved into an assisted living facility. The monthly cost of the assisted living facility was approximately $5,115.
  1. The Respondent was aware that client MC’s health had deteriorated and her living arrangements had changed as a result.
  1. On March 4, 2014, the Respondent sent an email to client MC’s son, RC[2], which stated:
    1. [client MC’s] portfolio has increased over the year $427,725.00 to $448,958.00 to Dec 2013 and now is currently at $447,584.32 with a risk tolerance as before allowing equity being High on the grid but her true profile is moderate/conservative and her risk is medium even if her time horizon is 3-6 years. I have always used 10 years for [client MC] [sic]… [emphasis added]
  1. Even though the Respondent was aware of client MC’s health condition, change in living arrangements, and that her investment time horizon was 3-6 years, the Respondent took no steps to update client MC’s KYC information or reassess the suitability of her investments.
  1. On August 28, 2014, as a result of further deterioration of her health, client MC moved into a long term care facility.
  1. On December 31, 2014, client MC passed away. At that time, the investments held in her Investors Group accounts would have triggered $18,195 in DSCs had they been redeemed.
  1. In August 2015, RC, acting in his capacity as executor of client MC’s estate, submitted a complaint to Investors Group requesting that any DSCs triggered by the redemption of client MC’s investments be waived on the basis that those investments were unsuitable and should never have been recommended to client MC given her age and living arrangements.
  1. In response to the complaint, Investors Group agreed to reimburse client MC’s estate for any DSCs incurred on the redemption of MC’s investments. On June 6, 2016, all of the DSC investments held by client MC’s estate at Investors Group were redeemed and Investors Group reimbursed client MC’s estate for these fees.[3]

Allegation #1: Failure to Learn or Update KYC Information

  1. By engaging in the conduct described above, including the conduct described at paragraphs 11, 12, and 21 - 24, the Respondent failed to learn, or update material changes to, the essential Know-Your-Client information for client MC’s accounts, contrary to MFDA Rules 2.2.1, 2.2.4, and 2.1.1.

Allegation #2: Unsuitable Investment Recommendation

  1. By engaging in the conduct described above, the Respondent recommended that client MC purchase approximately $340,000 of mutual funds which were subject to a 7 year deferred sales charge schedule, without ensuring that the recommendation was suitable having regard to the essential Know-Your-Client factors relevant to the client, including the client’s age, health condition, investment time horizon, and 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;
  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: Francis Roy
Fax: (416) 361-9073
Email: froy@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) 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] On April 30, 2013, in addition to the Condominium Sale Proceeds, client MC held mutual investments totaling approximately $47,700, which included mutual fund investments of approximately $12,000 in her RRIF account, $21,400 in her TFSA account and $14,300 in her Non-Registered account.
  2. [2] RC was, along with client MC’s niece, MC’s joint power of attorney for property and personal care.
  3. [3] All DSCs, totaling $10,180.96, were reimbursed.

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