Notice of Hearing

Notice of Hearing
File No. 201129

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

Re: Hugh Blair Smilestone




NOTICE OF HEARING

NOTICE is hereby given that a first appearance will take place by teleconference before a
hearing panel (the “Hearing Panel”) of the Atlantic Regional Council of the Mutual Fund Dealers
Association of Canada (the “MFDA”) on August 17, 2012 at 10:00 a.m. (Atlantic) concerning a
disciplinary proceeding commenced by the MFDA against Hugh Blair Smilestone (the
“Respondent”). Members of the public who want to listen to the teleconference should contact
Marco Wynnyckyj, MFDA Hearings Coordinator, at 416-945-5146 or mwynnyckyj@mfda.ca to
obtain particulars. The Hearing on the Merits will take place in Halifax, Nova Scotia at a time
and venue to be announced.

DATED this 29th day of June, 2012.

“Jason D. Bennett”

Jason D. Bennett

Corporate Secretary

Mutual Fund Dealers Association of Canada
121 King Street West, Suite 1000
Toronto, Ontario, M5H 3T9
Telephone: 416-943-7431
Facsimile: 416-361-9781
Email: corporatesecretary@mfda.ca

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NOTICE is further given that the MFDA alleges the following violations of the By-laws, Rules
or Policies of the MFDA:

Allegation #1: Between June 1, 2004 and March 10, 2010, the Respondent falsified client
signatures and initials on account documents and falsified the content of certain other documents
in order to:

(a) complete new client application forms (“NCAFs”);
(b) update Know-Your-Client (“KYC”) and banking information;
(c) implement changes to pre-authorized contributions (“PACs”) and systematic
withdrawal plans (“SWiPs”); and
(d) execute trades in client accounts;

contrary to MFDA Rule 2.1.1(b) and (c).

Allegation #2: Between January 2008 and March 10, 2010, the Respondent engaged in
authorized and unauthorized discretionary trading by determining one or more of the following
elements of trades that were executed in client accounts:

(a) the timing of the trade;
(b) the amount of the trade; and
(c) in some cases the securities to be traded,

contrary to MFDA Rules 2.3.1(a) and 2.1.1 (b) and (c).

Allegation #3: In November 2009, the Respondent falsely provided signature guarantees on
trade tickets processed for the account of client MH after he had falsified the signature of client
MH on the trade tickets, contrary to MFDA Rule 2.1.1(b).

Allegation #4: Between January 2007 and March 10, 2010, the Respondent failed to comply
with conditions imposed on him by the Member with respect to the approval of his outside
business activity, contrary to former MFDA Rule 1.2.1(d) (iii), (iv) and (vi)1 and MFDA Rule
2.1.1(b).

1 On December 3, 2010, amendments to the numbering and wording of certain MFDA rules came into effect as a
consequence of which, former MFDA Rule 1.2.1(d) was renumbered as MFDA Rule 1.2.1(c).
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Allegation #5: On December 17 and 18, 2009, the Respondent provided false responses to the
Member’s compliance staff during the course of a branch review, contrary to MFDA Rule
2.1.1(b) and (c).

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.
From June 1, 2004 until March 10, 2010, the material time giving rise to these
allegations, the Respondent was registered in Nova Scotia and Ontario as a mutual fund
salesperson with Dundee Private Investors Inc. (“Dundee”), a Member of the MFDA. The
Respondent conducted business from a sub-branch located in Halifax, Nova Scotia.

2.
In total, the Respondent was registered as a mutual fund salesperson in Nova Scotia and
Ontario from January 5, 1996 to March 10, 2010 and in New Brunswick from March 2002 to
June 2004.

3.
Dundee terminated the Respondent on March 10, 2010 as a result of the events described
herein.

4.
In accordance with Dundee’s policies and procedures, the Respondent was required to
obtain a client’s signature and/or initials on the following types of documents:

a) NCAFs containing a client’s KYC information collected for the purpose of opening
new accounts;

b) KYC update forms, which Dundee required Approved Persons to obtain from clients
in the following circumstances:

(i) in the event of a material change to a client’s KYC information at any time;
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(ii) if a client account became active after more than a year of inactivity and a review
with the client revealed changes in the client’s financial resources or investment
objectives; and
(iii) if a client account had been inactive for more than 2 years; and

c) Documents used for processing a trade in a client’s account unless the trade was
being processed using a limited trading authorization.2

5.
Between June 1, 2004 and March 10, 2010, the Respondent falsified client signatures and
initials on account documents and falsified the content of certain other documents as described
below:

a) he traced, or by other means imitated the client’s signature on account documents that
had not been signed by the client;

b) he reused trade documents that had previously been signed by a client by applying
correction fluid to change the date and trade directions and then resubmitting a copy
or a fax of the altered document in order to process a new transaction in the client’s
account; and

c) he used correction fluid to alter photocopies of cheques that had previously been used
to purchase investments in a client’s account and then resubmitted the altered
photocopies as ‘void’ cheques to mutual fund companies to make changes to PACs
and SWiPs in the client’s account.

6.
The Respondent states that he falsified client signatures and initials in the following
circumstances:

a) when clients did not respond to his requests for updated NCAFs or KYC information;

b) he feared he would be perceived by clients as bothersome if he contacted them to
request that they complete and sign the required documentation;

2 The Respondent acknowledged that he had obtained a limited trading authorization from only one of approximately
126 clients whose mutual fund accounts he serviced for Dundee.
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c) he was concerned he would be criticized for delays in taking action; and

d) the client was unavailable to meet with him to sign required documentation.

7.
The Respondent also falsified client signatures on trade documents and KYC update
documents in circumstances where the holdings in a client’s account did not match the risk
tolerance stated in the client’s documented KYC information. According to the Respondent, he
engaged in this conduct to avoid or reverse the application of trade restrictions placed on the
account by Dundee compliance staff arising from concerns about the suitability of the client’s
portfolio.

8.
During the Respondent’s first meeting with a new client, it was his practice to describe
what he referred to as the “annual migration”, a practice followed by the Respondent whereby
the Respondent would exercise the client’s right to transfer annually without charge or penalty
10% of any units of a mutual fund purchased on a deferred sales charge (“DSC”) basis to a non-
DSC mutual fund within the same mutual fund family, which was usually the non-DSC version
of the same mutual fund in which the client had initially invested.3

9.
In some instances, if the Respondent was unable to contact a client or if a client was
unable to meet with the Respondent for the purpose of signing the documentation required for
the processing of trades to carry out the annual migration, the Respondent falsified the client’s
signature and/or initials on the trade processing documentation.

Branch review and detection

10.
During the fall of 2009, the Respondent’s branch manager became suspicious that client
signatures and initials had been falsified on account documents filed in respect of six clients.
After confirming with one client that the client had not filled out the net worth information

3 The right of a client to transfer these “10% free” units without charge or penalty from a DSC mutual fund to a non-
DSC mutual fund within the same mutual fund family is provided for in the simplified prospectus for the mutual
fund family and is not itself a prohibited practice. The Respondent states that he explained the annual migration
program to clients during his initial meeting with them and if the clients did not object to it, then the Respondent
believed that the clients had implicitly granted him authority to exercise the right on their behalf without seeking the
clients’ instructions whenever DSC free units were available.
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recorded on the NCAF and had not signed the NCAF that had been submitted by the Respondent
on the client’s behalf, the branch manager reported her concerns to Dundee’s compliance
department.

11.
In December 2009, Dundee compliance staff conducted a review of the Respondent’s
sub-branch (the “December 2009 review”). On December 17-18, 2009, Dundee compliance staff
reviewed 126 files of clients whose accounts were serviced by the Respondent and observed
suspicious signatures that may have been falsified in approximately 83% of the files. The
Respondent was immediately suspended pending further investigation by Dundee. Dundee
subsequently terminated the Respondent in March 2010.

12.
During the course of a subsequent MFDA investigation of the Respondent’s conduct, the
Respondent admitted that he had engaged in the practice of falsifying client signatures on
documents when he thought it was necessary to do so to facilitate transactions or update KYC
information. The Respondent estimated that in one third of the cases in which he falsified client
signatures on documents, the clients were aware that he intended to do so. In the other two thirds
of the cases, the Respondent admitted that he falsified client signatures on documents without the
knowledge or authorization of the clients.

13.
By falsifying client signatures and initials on account documents and falsifying the
content of certain other documents as described above, the Respondent engaged in conduct
contrary to MFDA Rule 2.1.1.

Allegation #2 – Discretionary Trading

14.
From time to time, the Respondent processed authorized and unauthorized discretionary
trades in client accounts in circumstances where he states he was unable to reach clients or he did
not want to bother clients to obtain their instructions to process trades that he believed the clients
would want him to execute in their accounts. The trades constituted discretionary trades because
the Respondent determined one or more of the following elements of the trades without adequate
instructions from the client:

a) the timing of the trade;
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b) the amount of the trade; and

c) in some cases, the securities to be traded.

15.
The Respondent processed these discretionary trades in client accounts in the following
situations, among others:

a) As part of the Respondent’s annual migration practice (as described in paragraph 8
above), the Respondent processed:

(i) switches of DSC-free units to a non-DSC version of the same mutual fund
without obtaining instructions from the client with respect to the amount of the
DSC free units to be switched (if any) and the timing of the switch;

(ii) switches of DSC-free units to a non-DSC mutual fund with a composition and
management style similar to the initially purchased DSC mutual fund if a non-
DSC version of the same mutual fund did not exist. The Respondent sometimes
processed such trades without obtaining instructions from the client with respect
to the amount of DSC free units to be switched (if any), the selection of the non-
DSC mutual fund, and the timing of the switch.

b) In order to resolve suitability concerns raised by Dundee compliance staff and to
avoid or reverse the application of trade restrictions imposed by Dundee on a client’s
account as a consequence of discrepancies between the risk levels of the mutual funds
held in the client’s account and the client’s documented risk tolerance, the
Respondent sometimes processed trades in the client’s account to rebalance the
client’s holdings without obtaining adequate instructions from the client with respect
to all elements of the trade. By processing these trades, the Respondent avoided or
minimized supervisory review of potentially unsuitable trades in client accounts.

16.
By processing switches and other trades in client accounts without obtaining adequate
instructions from the clients with respect to one or more of the elements of the trade, the
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Respondent engaged in authorized and unauthorized discretionary trading contrary to MFDA
Rules 2.3.1(a) and 2.1.1(b) and (c).

17.
On November 16, 2009, the Respondent falsified the signature of client MH on the trade
tickets required to process the sale of one mutual fund and the purchase of two other mutual
funds in client MH’s account. The Respondent then provided his signature guarantee on each of
the documents, thereby falsely representing to anyone reviewing or processing the trade tickets
that the signature of client MH on the document was authentic.

18.
By falsifying the signature of client MH on the trade tickets and then falsely providing
signature guarantees of client MH’s signature, the Respondent contravened Dundee’s policies
and procedures designed to address the risk of unauthorized trades being processed in a client’s
account and failed to observe high standards of ethics and conduct in the transaction of business,
contrary to MFDA Rule 2.1.1(b).

Allegation #4 – Contravention of Policies Concerning Outside Business Activities

19.
In accordance with its regulatory obligations pursuant to (then) MFDA Rule 1.2.1(d)4,
Dundee established policies and procedures governing the approval and conduct of outside
business activities engaged in by Approved Persons.

20.
Dundee approved the Respondent’s participation in an outside business activity providing
tax return preparation services to clients, subject to the following conditions:

a) The Respondent was required to provide each customer of the outside business
activity with a disclosure and acknowledgement form indicating that the outside
business activity was not part of the business or responsibility of the Member; and

b) The Respondent was required to maintain documentation associated with the outside
business activity separate and apart from and not integrated with Dundee client files.

4 Since re-numbered as MFDA Rule 1.2.1(c).
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21.
The Respondent’s failure to comply with these conditions was identified as a deficiency
in his business practices following a review of his sub-branch conducted by Dundee in 2007. At
that time, Dundee reminded the Respondent of the conditions for approval of his outside
business activity and directed him to rectify the deficiencies in the future.

22.
During the December 2009 Branch Review, Dundee compliance staff determined that the
Respondent failed to obtain signed outside business activity acknowledgement forms from many
of the customers to whom the Respondent provided tax preparation services. Dundee
compliance staff also found documents for customers of the tax preparation service comingled
with documents in their Dundee client files.

23.
In response to questioning by MFDA Staff investigators, the Respondent acknowledged
that he did not always adhere to the conditions imposed on him by Dundee with respect to the
approval of his outside business activity.

24.
By failing to adhere to the conditions of Dundee’s approval of his outside business
activity, the Respondent contravened (former) MFDA Rule 1.2.1(d)(iii), (iv) and (vi) and MFDA
Rule 2.1.1(b).

Allegation #5 – Providing False Responses To Dundee Compliance Staff

25.
During the December 2009 review, Dundee compliance staff conducted an interview with
the Respondent during which they asked him about some of his business practices. The
Respondent provided false responses to many of the questions that were asked by Dundee
compliance staff when he:

a) denied that he had falsified client signatures on documents;

b) denied that he had ever altered client documents including NCAFs or signed/initialed
documents on behalf of clients; and

c) stated that he never used correction fluid to alter client documents.

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26.
The results of the December 2009 review raised doubts about the accuracy of the
Respondent’s answers.

27.
During the course of the MFDA’s investigation of the Respondent, the Respondent
admitted that some of the statements that he provided to Dundee compliance staff were not
truthful.

28.
By providing false responses to Dundee compliance staff investigating his conduct, the
Respondent attempted to mislead or deceive the Member and undermined the ability of the
Member to supervise the Respondent’s activities, contrary to MFDA Rules 2.1.1(b) and (c).

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:

(a) has failed to carry out any agreement with the MFDA;
(b) 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;
(c) has failed to comply with the provisions of any By-law, Rule or Policy of the
MFDA;
(d) has engaged in any business conduct or practice which such Regional Council in its
discretion considers unbecoming or not in the public interest; or
(e) 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:

a) a reprimand;

b) a fine not exceeding the greater of:

i. $5,000,000.00 per offence; and

ii. an amount equal to three times the profit obtained or loss avoided by such
person as a result of committing the violation.
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c) 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;

d) 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;

e) revocation of the authority of such person to conduct securities related business;

f) prohibition of the authority of the person to conduct securities related business in any
capacity for any period of time;

g) 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 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, Ontario
M5H 3T9
Attention: Shelly Feld, Senior Enforcement Counsel
Facsimile: 416-361-9073
Email: sfeld@mfda.ca

A Reply shall be filed by:
a) providing 4 copies of the Reply to the Corporate Secretary by personal delivery, mail
or courier to:

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

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b) transmitting 1 copy of the Reply to 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 Corporate Secretary permits otherwise; or

c) transmitting 1 electronic copy of the Reply to the Corporate Secretary by e-mail at
CorporateSecretary@mfda.ca.

A Reply may either:

i.) 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

ii.) 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:

a) to serve and file a Reply; or
b) 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.

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