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Decision and Reasons

Re:

Decision and Reasons


File No. 200713

IN THE MATTER OF A SETTLEMENT HEARING
PURSUANT TO SECTION 24.4 OF BY-LAW NO. 1 OF THE
MUTUAL FUND DEALERS ASSOCIATION OF CANADA

RE: IQON FINANCIAL INC.

SETTLEMENT HEARING

Hearing: May 24, 2007

Decision: May 24, 2007
DECISION AND REASONS

Hearing Panel of the Pacific Regional Council:
Hon. Roger Kerans FCIArb, C Arb
Chair
David Webb

Industry Representative
Tina Coulson

Industry Representative

Appearances:

Jason D. Bennett, Esq.

)
For the Mutual Fund Dealers Association of

)
Canada

Michael J. Roland, Esq.

)
IQON Financial Inc

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By Notice of Settlement Hearing, the Mutual Fund Dealers Association of Canada (“MFDA” or
“the Association”), announced that it proposed to hold a hearing to consider whether, pursuant to
section 24.4 of MFDA By-law No. 1, a Hearing Panel of the Pacific Regional Council should
accept the Agreement entered into by MFDA staff and IQON Financial Inc (“the Respondent”).
This hearing was held in Vancouver, B.C., on May 24, 2007, at the conclusion of which, the
Panel accepted the Agreement, subject to the submissions made at the hearing. What follows are
the Panel’s reasons.

The facts, as agreed by the parties, are as follows:

Registration History

6.
The Respondent has been registered as a mutual fund dealer in the province of
British Columbia since March 10, 1998. The Respondent is also registered as a mutual
fund dealer in Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Prince
Edward Island, Nova Scotia, Newfoundland, Yukon, Northwest Territories and Nunavut.
The Respondent has been a Member of the MFDA since May 10, 2002.

7.
Between May 28, 1998 and October 16, 2006, Patrick Dennis Sul ivan
(“Sul ivan”) was an Approved Person of the Respondent. Sul ivan was first registered as
a mutual fund salesperson in British Columbia on July 21, 1997.

All Island Equity Mortgage Investment Corp.

8.
On or about February 27, 1997, Sul ivan established Al Island Equity Mortgage
Investment Corp. (“AIEMIC”), a mortgage investment corporation registered with the
Financial Institutions Commission of British Columbia. Sul ivan and Wil iam Walker
were the original Class A shareholders of AIEMIC.

9.
In addition to the Class A shares, AIEMIC also issued Class B non-voting
preferred shares (the “Shares”). By May 1998, AIEMIC had raised approximately $1.1
mil ion from 22 investors in the Shares. Investors in the Shares were entitled to receive a
quarterly dividend based on the performance of AIEMIC.

10.
On April 22, 1998, Sul ivan entered into a Representative Commission
Agreement with the Respondent, at which time he disclosed to the Respondent his
interest and involvement in AIEMIC.

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11.
Fol owing discussions between the Respondent and the British Columbia
Securities Commission (the “BCSC”) concerning Sul ivan’s involvement with AIEMIC,
the BCSC al owed the transfer of Sul ivan’s registration as a mutual fund salesperson to
the Respondent only after Sul ivan agreed to restrict his involvement with AIEMIC to
acting as a director and member of its management committee. On May 28, 1998,
Sul ivan was granted registration as a mutual fund salesperson with the Respondent on
that basis. To give effect to this arrangement, on or about May 29, 1998, Sul ivan signed
an undertaking (the “Sul ivan Undertaking”) in which he stated that he “wil not
participate in or initiate any activities relative to the sale, promotion or solicitation of
business or investments in or on behalf of [AIEMIC].”

12.
In May 2002, the Respondent had an internal policy in place, section 8.4.2 of
which stated that its Approved Persons in British Columbia were not authorized to trade
in exempt securities, with the exception of British Columbia labour sponsored funds and
certain government bonds and debentures (the “Internal Policy”).

13.
Outside of a routine audit, between May 1998 and February 2003, the Respondent
did not take any additional steps to supervise Sul ivan’s compliance with the terms of the
Sul ivan Undertaking.

14.
In or around February 2003, Sul ivan asked the Respondent to approve certain
radio advertisements relating to AIEMIC. As a result, the Respondent became aware that
Sul ivan may not have been complying with the terms of the Sul ivan Undertaking and
ought to have been aware that Sul ivan may not have been complying with the Internal
Policy.

15.
Between February and July 2003, the Respondent conducted a review of
Sul ivan’s activities involving AIEMIC (the “review”). Fol owing the review, the
Respondent concluded that Sul ivan was not complying with the terms of the Sul ivan
Undertaking and was therefore engaging in activity that was contrary to the basis on
which the BCSC had approved the transfer of his registration to the Respondent.

16.
The Respondent notified Sul ivan of the outcome of the review shortly after its
completion. Between August 5, 2003 and October 21, 2003, Sul ivan and senior staff of
the Respondent entered into discussions on how to bring Sul ivan into compliance with
the Sul ivan Undertaking and the Respondent into compliance with its obligations to the
BCSC.

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17.
Between October 2003 and January 2006, despite having concluded that Sul ivan
was not in compliance with the terms of the Sul ivan Undertaking, the Respondent did
not take any action to ensure that Sul ivan complied with the Sul ivan Undertaking, the
Internal Policy, MFDA Rule 1.1.1(a) or the requirements of the Securities Act (British
Columbia)
.

18.
After being contacted by the MFDA in January 2006 about Sul ivan’s
involvement with AIEMIC, the Respondent commenced another investigation of
Sul ivan’s involvement with AIEMIC, which ultimately led to the Respondent placing
Sul ivan under close supervision in May 2006.

19.
Sul ivan resigned from the Respondent effective October 16, 2006.

20.
By virtue of Sul ivan’s non-compliance with the Sul ivan Undertaking, the
Respondent was not in compliance with its obligations to the BCSC.

21.
From inception to June 2006, AIEMIC represents that it raised approximately
$10,842,750 from over 120 investors. Of this amount, approximately $5,527,362 was
invested between May 28, 1998, when Sul ivan joined the Respondent, and July 2003,
when the Respondent concluded the review. An additional amount of approximately
$4,066,130 was raised between the conclusion of the review and June 2006.

22.
Approximately 60% of the investors in AIEMIC were clients of the Respondent
(the “clients”). Between 1997 and 2006, AIEMIC represents that the clients invested
$3,703,280, col ectively, in AIEMIC. Of this amount, $2,349,320 was invested after the
Respondent joined the MFDA. Sul ivan provided the clients with portfolio statements on
the Respondent’s letterhead which showed their investments in AIEMIC alongside other
securities held with the Respondent. In total, the clients redeemed approximately
$547,440 of their mutual fund holdings with the Respondent to invest in AIEMIC.

23.
To date, neither the Respondent nor the MFDA have received any complaints in
respect of AIEMIC or Sul ivan’s involvement with AIEMIC. AIEMIC reports that
between March 31, 1998 and December 31, 2005 the average annual yield paid to
investors was 10%.

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Breach of Agreement and Undertaking
(i) Compliance Deficiencies Detected

24.
In March 2005, MFDA Compliance Staff conducted a routine compliance
examination of the Respondent’s sales policies, procedures and practices, the findings of
which were reported to the Respondent on July 14, 2005. This was the first MFDA
examination of the Respondent’s sales policies, procedures and practices.

25.
A number of deficiencies were identified, including in particular:

(a)
inadequate, incomplete or undocumented trade review and supervision at both

the head office and branch office levels;

(b)
lack of evidence of client trading instructions; and

(c)
untimely or undocumented new account approval practices.

26.
The deficiencies were of such a nature that MFDA Compliance Staff referred the
results of the examination to MFDA Enforcement Staff for possible disciplinary action.

27.
In December 2005, in consideration of the MFDA foregoing disciplinary
proceedings in respect of the deficiencies, the Respondent signed an Agreement and
Undertaking with the MFDA pursuant to which the Respondent agreed to resolve the
deficiencies (the “Agreement and Undertaking”). Under the terms of the Agreement and
Undertaking, the Respondent agreed to: (a) to develop and implement a plan to remedy
the deficiencies; and (b) retain an independent consultant to determine whether the
deficiencies had been rectified, identify any new or continuing deficiencies, and report its
findings to the MFDA.

28.
On August 21, 2006, MFDA Staff approved the plan developed by the
Respondent to remedy the deficiencies.

29.
In September 2006, the Respondent retained KPMG LLP (“KPMG”) as an
independent consultant to test the implementation of the Respondent’s plan. KPMG
completed its testing in February 2007 and reported its findings to MFDA Staff on March
30, 2007.

(ii) Repeat Compliance Deficiencies Identified

30.
KPMG’s testing confirmed that the Respondent had resolved a large number of
the deficiencies in accordance with the terms of the Agreement and Undertaking.
However, despite improvements having been made to the Respondent’s sales policies,
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procedures and practices, the testing also revealed that certain deficiencies remained
unresolved, meaning that the Respondent had failed to ful y carry out the terms of the
Agreement and Undertaking.

31.
KPMG’s testing revealed, among other deficiencies, three principal ongoing
deficiencies (the “Deficiencies”):

(a)
inadequate, untimely or undocumented trade review and supervision at the

head office level and untimely trade review and supervision at the branch

office level;

(b)
incomplete or untimely review of new accounts; and

(c)
inadequate controls to ensure the documenting of client trading instructions.

32.
MFDA Compliance Staff referred the Respondent’s failure to ful y carry out the
terms of the Agreement and Undertaking to MFDA Enforcement Staff for possible
disciplinary action.

33.
Since KPMG reported its findings on March 30, 2007, the Respondent has started
to take steps to address the ongoing deficiencies identified by KPMG. The ongoing
deficiencies, other than the Deficiencies, are to be resolved between MFDA Compliance
Staff and the Respondent without the assistance of the monitor referred to in paragraph
37(c) below.

The Respondent also acknowledged and admitted guilt, in these words:

Conduct Contrary to the Public Interest

34.
The Respondent admits that, contrary to MFDA Rule 2.5.1 and MFDA Policy No.
2, it failed to establish and maintain adequate and effective procedures for the supervision
of Sul ivan to ensure that:

(a)
Sul ivan complied with the terms of the Sul ivan Undertaking; and

(b)
the Respondent complied with its own obligations to the BCSC arising

from Sul ivan’s registration with the Respondent.

35.
The Respondent admits that, by virtue of its failure to ensure that Sul ivan
complied with the terms of the Sul ivan Undertaking, the Respondent al owed Sul ivan to
engage in securities related business which was not carried on for the account of the
Respondent or through the facilities of the Respondent, contrary to MFDA Rule 1.1.1(a).

Page 6 of 10


36.
The Respondent admits that it failed to ful y carry out the terms of the Agreement
and Undertaking, thereby engaging the authority of the Hearing Panel to impose a penalty
on the Respondent pursuant to s. 24.1.2 of MFDA By-law No. 1.

Finally, the parties entered into this Agreement:

Terms of Settlement

37.
The Respondent agrees to the fol owing terms of settlement:

(a)
the Respondent shal pay a fine in the amount of $100,000 upon the

acceptance of this Settlement Agreement;

(b)
the Respondent shal pay the costs of the MFDA’s investigation and of this

proceeding in the amount of $7,500 upon the acceptance of this Settlement

Agreement; and

(c)
the Respondent shal retain an independent monitor to address the

Deficiencies in accordance with the terms set out in Schedule “B” to the

Agreement upon the acceptance of this Settlement Agreement.

38.
If this Settlement Agreement is accepted by the Hearing Panel, Staff wil not
initiate any proceeding under the By-laws of the MFDA against the Respondent or any of
its officers or directors in respect of any conduct or al eged conduct of the Respondent in
relation to the facts set out in Part IV of this Settlement Agreement, subject to the
provisions of paragraph 43 below.

In answer to questions from the Panel, the parties at the hearing made these supplementary
consensual submissions in explanation of the settlement agreement, which are also accepted by
the Panel:

1.
In response to a query what, if anything can be re-visited by MFDA in the event of a
further breach by the Respondent in the future, it was said on behalf of MFDA “. . . there are
really two halves to the facts. The first half dealing with Mr. Sullivan is a single issue and will
be, if the agreement is accepted today, a finished aspect of this hearing. The second part
concerns the monitor and compliance deficiencies as an ongoing concern, so to speak, and could
be reopened somewhere down the road if there appears to be some type of non-compliance as far

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as the action plan is concerned.” In other words, a distinction was being made between the
Sullivan affair and other non-compliance irregularities that were discovered. Mr. Roland
concurred that the matters described in paragraph 34 of the settlement agreement will be resolved
finally by an approving order at hearing.

2.
In response to a question whether the Panel should delay approval until the Action Plan is
agreed upon, the joint submission is it would be better to approve what has been agreed to so far.

3.
In response to a query whether KPMG would in fact act as suggested, the Panel was
assured that it had agreed to act.

It is the finding of the Panel that the Respondent, contrary to MFDA Rule 2.5.1 and MFDA
Policy No. 2, failed to establish and maintain adequate and effective procedures for the
supervision of Sullivan to ensure that:

(a)
Sullivan complied with the terms of the Sullivan Undertaking; and
(b)
the Respondent complied with its own obligations to the BCSC arising

from Sullivan’s registration with the Respondent;

and that, by virtue of its failure to ensure that Sullivan complied with the terms of the Sullivan
Undertaking, the Respondent allowed Sullivan to engage in securities related business which was
not carried on for the account of the Respondent or through the facilities of the Respondent,
contrary to MFDA Rule 1.1.1(a).

As to disposition, the Panel affirms the agreed penalty:

(a)
the Respondent shall pay a fine in the amount of $100,000 upon the

acceptance of this Settlement Agreement;
(b)
the Respondent shall pay the costs of the MFDA’s investigation and of

this proceeding in the amount of $7,500 upon the acceptance of this

Settlement Agreement; and
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(c)
the Respondent shall retain an independent monitor to address the

Deficiencies in accordance with the terms set out in Schedule “B” to the

Agreement upon the acceptance of this Settlement Agreement.

In coming to this conclusion, the Panel considered and applied the observations made in Re:
Investors Group Financial Services Inc.
, MFDA Case # 200401, (December 16, 2004), and Re:
Joseph Zollo
, MFDA Case # 200610, (April 16, 2007), in determining whether the Settlement
Agreement should be accepted, the Hearing Panel will consider a number of factors, including
the following:

1.
The public interest and whether the penalty imposed will protect investors.

2.
Whether the Settlement Agreement is reasonable and proportionate, having regard

to the conduct of the Respondent, as set out in the Agreement.

3.
Whether the Settlement Agreement addresses the issues of both specific and

general deterrence.

4.
Whether the proposed settlement will prevent the type of conduct described in the

Agreement from occurring again in the future.

5.
Whether the Settlement Agreement will foster confidence in the integrity of the

Canadian capital markets.

6.
Whether the Settlement Agreement will foster confidence in the integrity of the

MFDA.

7.
Finally, whether the Settlement Agreement will foster confidence in the

regulatory process itself.
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The panel is of the view that these goals are met by the agreed disposition in this case. The fine
is in the range. And particularly, we note that there have been no losses, no complaints, and that
the Respondent has been very co-operative and has made admissions and has agreed to the
actions as specified. That justifies the imposition of a minimum fine.

DATED at Vancouver, British Columbia, this 18th day of September, 2007.

“Roger P. Kerans”

The Hon. Roger P. Kerans, Chair

“Tina Coulson”

Tina Coulson, Panel Member

“David B. Webb”

David B. Webb, Panel Member

Doc #120093
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