Decision and Reasons

I. INTRODUCTION

1. This was a hearing pursuant to sections 20 and 24 of By-Law No.1 of the Mutual Fund Dealers Association of Canada (the “MFDA”) to determine liability, the appropriate sanctions, and costs, if any, to be imposed upon Kimberley Mary Krahl (the “Respondent”).
2. An Agreed Statement of Facts signed by Staff and the Respondent on August 26, 2021 (the “ASF”) was filed for our consideration. In the ASF, the Respondent admitted to engaging in the following misconduct:
   1. between July 2014 and 2016, she failed to disclose or obtain approval with respect to all material aspects of an outside activity, contrary to the Member’s policies and procedures and MFDA Rules 1.2.1(c) (now Rule 1.3.2), 2.1.1, 2.5.1 and 1.1.2; and
   2. between 2014 and 2016, she engaged in personal financial dealings with a client which gave rise to a conflict or potential conflict of interest which the Respondent failed to disclose to the Member or otherwise address by the exercise of responsible business judgment influenced only by the best interests of the client, contrary to the Member’s policies and procedures and MFDA Rules 2.1.4, 2.1.1, 2.5.1, and 1.1.2.
3. After reading the ASF and hearing submissions from Staff and Counsel for the Respondent, the Hearing Panel found that the Respondent breached the Member’s policies and procedures and MFDA Rules 1.2.1(c) (now Rule 1.3.2), 2.1.1, 2.1.4, 2.5.1 and 1.1.2 as set out above in the contraventions.
4. We then heard further submissions from Staff and the Respondent regarding the appropriate sanctions. The Respondent also publicly apologized and expressed remorse. The Respondent did not oppose the imposition of a six-month prohibition of her authority to conduct securities related business as a mutual fund salesperson (now known as a dealing representative). Staff and the Respondent disagreed on the amount of fine and costs, if any.
5. We reserved our decision.
6. The Hearing Panel carefully reviewed Staff’s written submissions and considered the submissions made by the parties at the hearing. We decided the appropriate sanctions are:
   1. A six-month prohibition of the Respondent’s authority to conduct securities related business in any capacity while in the employ of or associated with a Member of the MFDA, pursuant to section 24.1.1(e) MFDA By-law No. 1;
   2. A fine in the amount of $10,000 pursuant to section 24.1.1(b) of MFDA By-law No. 1.; and
   3. Costs in the amount of $5,000, pursuant to section 24.2 of MFDA By-law No. 1.
7. These are the reasons for our decision.

II. AGREED FACTS

8. The facts are set out in the ASF attached to these reasons as Schedule “1”. The key facts are that while the Respondent was an Approved Person of a Member of the MFDA (“Approved Person”), the Respondent disclosed to the Member that on May 9, 2014, shortly after her brother’s business became insolvent, the Respondent became the sole director of and opened a bank account for her brother’s successor company carrying on the same business. She did so to help her brother who was unable to do these things because of the insolvency of the first business and the conditions imposed by his lenders. The Respondent also disclosed to the Member that in July 2014 she became a 25% owner of the Business.
9. The Respondent provided misleading responses on the “Outside business activity approval worksheet and checklist” that she submitted to the Member to seek approval to participate in the Business. She did not disclose Client LL’s involvement.
10. The Member approved the outside activity noting: “Very limited hours, family company (brother is owner), minority ownership.”
11. In May 2014, the Respondent’s Client LL who knew both the Respondent and the Respondent’s brother began providing accounting services to the Business for which Client LL was paid $250 per week.
12. Client LL held a Bachelor of Arts degree and a Bachelor of Commerce degree. Until 2014, Client LL worked for RBC Dexia in its US Tax Audit Department. Client LL had knowledge and experience in corporate finance, bookkeeping, accounting, and tax preparation.
13. In 2014, Client LL left her employment at RBC Dexia and opened her own company, which offered corporate and personal tax preparation, bookkeeping and accounting services. At that time, the Respondent proposed to Client LL that she begin providing accounting services to the Business. Client LL continued to provide accounting services and was paid for doing so until early 2016.
14. Client LL also loaned approximately $15,000 to the Business in cash or by using her personal credit card to purchase for supplies and to make deposits on vehicles for the use and benefit of the Business.
15. The Respondent did not disclose to the Member that Client LL was providing accounting services to the Business and earning compensation from the Business for those services or that Client LL had paid for expenses and provided loans to the Business. The Respondent also did not disclose that she regularly signed and provided cheques on behalf of the Business to compensate Client LL for her services and to repay amounts owed to her.
16. The Respondent states that she also informed Client LL that she was a director of the Business and had a 25% share ownership in the Business. However, the Respondent did not disclose her directorship or share ownership in the Business to Client LL in writing. In August 2020, Client LL died leaving the Hearing Panel without the benefit of her testimony.
17. In 2016, the Respondent’s brother began experiencing personal financial difficulties again. He attempted to refinance his home but was unable to receive financing unless he ceased to have an ownership interest in the Business.
18. The Respondent agreed to increase her ownership in the Business from 25% of the shares to 100% of the shares of the Business. The Respondent did not update the Member when her share ownership increased from 25% to 100%.

III. ANALYSIS

The Hearing Panel’s Jurisdiction on a Sanctions Hearing is Limited

19. Settlements including ASFs play an important and necessary role in facilitating the MFDA’s principal goal of protecting the investing public. An administrative tribunal cannot adjudicate every matter that comes before it. Settlements provide an efficient and effective way for the MFDA to proscribe conduct that is harmful to the public, while providing a flexible remedy that can be tailored to address the interests of Staff and respondents:
    1. But the power to settle, I find, is necessary if the Commission is going to carry out its purpose under s. 4(2) and its enforcement mandate under ss. 161 and 162 in an effective and efficient manner. Administrative tribunals do not and cannot adjudicate on every matter that commences before them.
    2. Settlements assist the Commission to ensure that its overriding objective, the protection of the public, is met. Settlements proscribe activities that are harmful to the public. In so doing, they are effective in accomplishing the purposes of the statute. They provide means of reaching a flexible remedy that is tailored to address the interests of both the Commission and the person under investigation. Enforcement is rarely a concern because the settlement is voluntary. A person who is the subject of an investigation retains the option of refusing to settle and proceeding to a hearing. Settlements are also efficient. Both parties can forego the time and expense of a hearing.
       1. British Columbia (Securities Commission) v. Seifert, 2006 BCSC 174 (BCSC) at paras. 48-49, aff’d, 2007 BCCA 484 at para. 31.
20. Where the parties agree on the facts and sign an ASF but cannot agree on penalty, our role is to determine the correct penalty having regard only to the facts and contraventions contained in the ASF. As the Ontario Securities Commission stated in Vickers (Re), 2015 ONSEC 13 at para. 58:
    1. In my view, the case law is clear. As stated by the Ontario Superior Court of Justice in McGarrigle, when parties to a disciplinary proceeding have entered into an agreed statement of facts, those are the only facts regarding the alleged improper conduct of the respondent that the panel is allowed to consider. This is entirely appropriate as respondents must know the case they have to meet. Hearing panels, including the Panel, are bound by, and limited to the facts set out in agreed statements of facts which are intended to substantially simplify proceedings by obviating the need for additional evidence.
21. In determining the appropriate sanctions to impose upon the Respondent we considered the primary purpose of securities regulation which is the protection of investors, including ensuring efficient capital markets and public confidence in the industry. In exercising our discretion, we also considered the protection of the governing body’s membership and the protection of the integrity of the governing body’s enforcement processes.
    1. Re Parkinson, [2005] MFDA Case No. 200501

Factors to be Considered to Determine the Appropriate Sanctions

22. We then considered the following factors listed in the MFDA Sanction Guidelines together with the circumstances of this case to determine the appropriate sanctions to be imposed against the Respondent:

a) General and specific deterrence

23. The principles of general and specific deterrence are the foundation of sanctions which are reasonable and proportionate to the misconduct in issue and all the circumstances.

b) Public confidence

24. The securities industry is based upon public confidence in the trustworthiness and honesty of the individuals and dealers who handle people’s savings and are responsible for their financial investments.
    1. The penalty must re-affirm public confidence in the system, and to do this it must be seen to act as a general deterrent. Every member acts for highly susceptible investors, and the penalty must be sufficiently severe as to dissuade other members from any temptation to follow the predatory practices engaged in by [the respondent]. Moreover, the public is entitled to be protected from any further predatory activities by him.
       1. Re Brown-John, 2005 CanLii 77709 at p. 5

c) The seriousness of the allegations proved against the Respondent

25. The contraventions admitted to by the Respondent are serious.

Failure to Disclose or Obtain Approval of All Material Aspects of an Outside Activity

26. MFDA Rule 1.3.2 (formerly 1.2.1(c)) required that the Respondent provide notice to the Member and seek approval of an outside activity.
27. The Respondent disclosed to the Member that she was the sole director of the Business and a minority shareholder but provided misleading responses on the “Outside business activity approval worksheet and checklist” that she submitted to the Member to seek approval to participate in the Business. She did not disclose that Client LL was providing accounting services to the Business and receiving compensation from the Business.
28. The Member approved the outside activity noting: “Very limited hours, family company (brother is owner), minority ownership.” While the Member approved the outside activity, it is unknown whether the Member would have done so if it had been fully informed.
29. The Respondent also failed to update the Member when her share ownership increased from 25% to 100%. From the notes set out above, the minority ownership appears to have been a factor that the Member considered. This information may have informed the Member’s decision whether to continue to approve the Respondent’s increased involvement in the outside activity. The Hearing Panel is concerned that the Respondent failed to disclose to the Member the extent to which she had involved Client LL in the Business and the extent of her own involvement in the Business. The Respondent’s failure to disclose all material aspects of her involvement in the outside activity is serious misconduct.
30. The rationale for the outside activity rule is to enable the Member to properly supervise their employee to ensure that the real or potential conflicts of interest are addressed and the activities of the AP do not compromise the regulation of the securities industry or expose the Member to litigation.
    1. The need for a Member to know what other occupations and businesses its employee might be engaged in is obvious. There are many reasons why a Member must know what its employees are doing. We will mention only two of what seem to us to be the most important reasons. The first is that a failure to know about an employee’s other commercial activities impinges upon the Member’s ability to properly supervise its employee. The second reason is that the Member could be exposed to litigation alleging that the Approved Person’s activity was within the scope of his/her employment with the Member.
       1. Vitch (Re), [2011] Hearing Panel of the Central Regional Council, MFDA File No. 201103, Panel Decision dated September 22, 2011, at para. 53.
       2. Sarang (Re), [2016] Hearing Panel of the Pacific Regional Council, MFDA File No. 201535, Panel Decision dated March 21, 2016, at para. 12
31. By not keeping the Member fully informed, the Respondent deprived the Member of its obligation to supervise her. Fortunately, the Member was not exposed to litigation nonetheless the Respondent’s misconduct is serious.

Personal Financial Dealings

32. When an Approved Person engages in personal financial dealings with a client, the Approved Person breaches the MFDA standard of conduct and creates a conflict of interest. Borrowing or obtaining monies from clients is also prohibited by the Member’s Policies and Procedures.
33. The Respondent engaged in personal financial dealings with Client LL and created a conflict of interest by permitting Client LL to loan approximately $15,000 to the Business in cash or by using her personal credit card to purchase for supplies and to make deposits on vehicles for the use and benefit of the Business.
34. In Nunweiler (Re) the Hearing Panel explained that the conflict of interest created by borrowing money from a client in most if not all cases will be impossible to resolve in favour of the client because it is inherently not the exercise of responsible business judgment:
    1. As can be seen, the conflict-of-interest rule requires an Approved Person, like the Respondent, to be alert to the creation of potential or actual conflicts of interest arising in connection with their business, and if such a potential or actual conflict of interest arises, it must immediately be disclosed in writing to the client in advance of the transaction. The Approved Person is required to have the potential or actual conflict of interest addressed by the exercise of reasonable judgment influenced only by the best interests of the client.
    2. Where an Approved Person borrows money from a client or arranges investments by clients in companies in which the Approved Person has a personal interest, such conduct immediately raises a significant actual conflict of interest, a conflict that in most if not all cases will be impossible to resolve in favour of the client. It is patently obvious that facilitating investments by a client in your company or borrowing money from a client is not the exercise of responsible business judgment in the best interests of the client. [emphasis added]
       1. Nunweiler (Re), [2012] Hearing Panel of the Pacific Regional Council, MFDA File No. 201030, Panel Decision dated May 28, 2012, at para. 17.
35. Borrowing money from a client is most serious when it is solicited by the Approved Person and the funds are used for the Approved Person’s own benefit. In this case, the Respondent did not solicit the loans and the funds were used to support the Business. Nonetheless it is serious misconduct.
36. By permitting Client LL to loan money to the Business, the Respondent exposed Client LL to the potential risk that Client LL could lose that money she lent to the Business. It also exposed Client LL to the potential risk that the Respondent’s judgment and advice to Client LL about her investments could be clouded by the fact that Client LL was helping the Respondent’s brother’s failing business. Fortunately, there is no evidence that these risks were realized.
37. Staff asked us to find that an aggravating factor in this case is that the Business was in a precarious financial condition. The Hearing Panel disagrees. The Hearing Panel finds that Client LL had full knowledge at all times of the risk she assumed. Paragraph 44 of the ASF states that:
    1. As a service provider providing accounting and bookkeeping services to the Business, Client LL was aware that the Business was not profitable.  Notwithstanding the Business’ precarious financial situation, Client LL agreed to provide services to the Business and to loan money to the Business…
38. While Client LL’s investments were not used to loan money to the Business and the Respondent/Business repaid Client LL, the Respondent’s misconduct is serious for the reasons set out above.

d) Whether the Respondent recognizes the seriousness of the misconduct.

39. The Respondent accepted responsibility for her actions. She admitted her misconduct and the facts in the ASF saving the MFDA the time and expense of a hearing on the merits. The Respondent also did not contest a six-month prohibition. The Respondent also publicly apologized and expressed remorse at the hearing.

e) The benefits received by the Respondent because of the misconduct

1. The Respondent did not financially benefit because of the misconduct. The $15,000 injection by Client LL over a period of almost two years appeared to merely keep the Business on life support. Significantly none of the funds advanced by Client LL were obtained from her investments managed by the Respondent.

f) The harm suffered by investors because of the Respondent’s misconduct.

41. The Respondent signed Business cheques and paid Client LL $250.00 per week for her services. In addition, the Respondent signed Business cheques and repaid the $15,000 advanced to the Business by Client LL.

g) The Respondent’s past conduct, including prior sanctions.

42. The Respondent had a long and unblemished career before this misconduct. She was aware that she must not borrow money from clients. Her relationship with her brother and her personal relationship with Client LL appears to have blurred the line between her personal and business relationships such that she did not see it. The Respondent appears to have been motivated by a desire to help her brother with his failing business and to help Client LL by referring her to the Business and providing her with some accounting work to start her nascent business. Client LL appears also to have been motivated by a desire to help the Respondent’s brother. Despite the Respondent’s motives however, she engaged in serious misconduct.
43. The Respondent has not been the subject of client complaints or any prior disciplinary actions.
44. The Respondent has not been the subject of any client complaints. The complaint in this case was lodged by a peer.

h) Previous decisions made in similar circumstances.

45. Staff provided several MFDA decisions which addressed similar misconduct. None of these cases were precisely on point, however the Alam Re case had several similarities. Alam Re is a 2020 decision. It also concerned personal financial dealings.
46. The most significant distinctions between the Alam case and the Respondent’s case are that Mr. Alam actively solicited a loan from one of his clients and advised his client to use funds from his line of credit to fund the loan. There is no evidence that the Respondent solicited funds from Client LL or even suggested that Client LL use funds from her investments managed by the Respondent.
47. Alam also engaged in a transaction with client SH (the “SH Transaction”) whereby client SH paid $17,000 to the Respondent and at approximately the same time, a third-party individual who the Respondent was acquainted with paid the equivalent of $17,000 CAD to client SH’s brother outside of Canada. This transaction was inherently deceitful.
48. Another distinction between the two cases is that the Respondent’s personal financial dealings continued undetected for approximately two years whereas Mr. Alam’s misconduct occurred in a single day.
49. Like Ms. Krahl, Mr. Alam cooperated with Staff. He represented himself and settled. Ms. Krahl was represented by counsel. She admitted the contraventions and signed an ASF to assist the MFDA in its prosecution against her. The Respondent’s counsel advocated on her behalf about the quantum of the fine and costs, arguing that in the circumstances of this case the Hearing Panel should not impose a fine or costs.
50. Alam settled the allegations against him by agreeing to a penalty of six months prohibition, a fine of $7,500 and costs of $3,750. Settlements attract lower fines than cases that proceed by an agreed statement of facts as the MFDA is still required to hold a contested case on penalty.

i) For multiple violations, the total or cumulative sanction should appropriately reflect the totality of the misconduct

51. Based on a review of these cases and taking into consideration the factors discussed above, we are satisfied the sanctions that we have determined fall within a reasonable range of appropriateness.
52. The Respondent admitted to two contraventions. The Hearing Panel is satisfied that the total sanctions appropriately reflect the totality of the misconduct.

j) Ability to pay is a consideration when imposing an appropriate monetary sanction.

1. The parties filed Supplementary evidence about the Respondent’s financial circumstances. We were unable to give this evidence much weight because it did not provide a complete picture of the Respondent’s financial circumstances.
2. The MFDA Sanction Guidelines explicitly state that: The burden is on the Respondent to raise the issue and to provide evidence of inability to pay, such as tax returns or audited financial statements (emphasis added). The Respondent did not provide her 2020 tax return to corroborate her income. At the hearing the Respondent advised us that her accountant is in the process of filing the Respondent’s tax return. We note that the tax return was due approximately five months ago.
3. In addition, the Respondent relied on evidence of household assets and liabilities but did not provide evidence of her husband’s income. She stated that her husband is 80 years old and is on a fixed income.
4. Without a tax return to corroborate the Respondent’s income or disclosure of her household income, we were unable to determine whether the Respondent has a bona fide inability to pay.

k) Whether the Respondent made voluntary acts of compensation, restitution, or disgorgement to remedy the misconduct

57. The Respondent voluntarily signed cheques on behalf of the Business which repaid the $15,000 that Client LL advanced to the Business.

l) The Respondent’s proactive and exceptional assistance to the MFDA

58. As discussed above, the Respondent cooperated with the MFDA. She admitted her misconduct and the facts against her and signed an ASF. Her cooperation after her misconduct was discovered cannot negate the need for substantial sanctions which reflect the gravity of her misconduct.
    1. MFDA Sanction Guidelines

Costs

59. The costs award is appropriate and consistent with previous MFDA disciplinary proceedings that proceeded by way of an ASF.

IV. CONCLUSION

60. We are of the view that the sanctions, including a six-month prohibition of the Respondent’s authority to conduct securities related business in any capacity while in the employ of or associated with a Member of the MFDA, the $10,000 fine and $5,000 in costs will serve as a specific deterrence to the Respondent, Ms. Krahl, and as general deterrence to others in the industry who may contemplate engaging in personal financial dealings with clients in the