Notice of Hearing

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 is registered as a mutual fund dealer and an exempt market dealer in all jurisdictions in Canada (except Nunavut). The Respondent has been a Member of the MFDA since June 7, 2002.

Overview

2. On December 15, 2011, the Respondent entered into a Settlement Agreement with MFDA Staff pursuant to which the Member admitted that, among other things, between August 2003 and July 2010, it failed to adequately supervise the outside business activities of certain Approved Persons, contrary to MFDA Rules 1.2.1(d) (now MFDA Rule 1.3), 2.4.2, 2.5, and 2.9.

3. This proceeding relates to the Respondent’s continued failure to effectively discharge its supervisory obligations with respect to outside business activities under the Rules, Policies and By-law of the MFDA, including its failure to: (a) adequately review outside business activities conducted by its Approved Persons prior to approving such activities; (b) conduct reasonable supervisory investigations regarding the activities of its Approved Persons; and (c) deal fairly with client complaints made in respect of its Approved Persons.

Allegations #1 to #4 – The Respondent Failed to Supervise Outside Business Activities of Approved Persons

Bemelekot Tewahade

4. From May 6, 2005 to June 18, 2012, Tewahade was registered in Ontario as a mutual fund salesperson (now known as a dealing representative) with the Respondent.

5. In September 2006, Tewahade became a registered representative of a Financial Industry Regulatory Authority (“FINRA”) Member firm, Sunset Financial Services, Inc. (“Sunset Financial”), carrying on business from an office in Englewood, Colorado. Sunset Financial is a full service brokerage firm headquartered in Kansas City, Missouri and an affiliate of the Kansas City Life Insurance Company. Sunset Financial provides investment, advisory and brokerage services to clients in the United States. Tewahade did not disclose his involvement with Sunset Financial to the Respondent.

6. In July 2011, the Respondent learned that Tewahade was registered with Sunset Financial when Sunset Financial contacted the Respondent as a result of its own investigation into Tewahade’s undisclosed business activities including his registration as a mutual fund salesperson with the Respondent. Sunset Financial informed the Respondent that, among other things, Tewahade had been a registered with Sunset Financial in multiple jurisdictions in the United States since September 2006 and that Tewahade was the registered representative responsible for servicing over 850 mutual fund, variable annuity and variable universal life client accounts at Sunset Financial.

7. On August 8, 2011, after learning that Tewahade was a registered representative of Sunset Financial, the Respondent conducted an emergency audit of Tewahade’s sub-branch in Mississauga, Ontario. Tewahade was not present in person for this on-site examination but another individual working at the location advised the Respondent that Tewahade resided in the United States and only visited the sub-branch office approximately once per month to service his local clients.

8. During the audit, the Respondent contacted Tewahade by telephone. Tewahade confirmed that he had maintained his permanent residence in the United States since 1993 and that he purportedly spent approximately 15 to 20 hours a week servicing his Canadian clients.  Tewahade stated that he set up a 1-800 number with a forward feature to his phone in the United States so Canadian mutual fund and insurance clients could contact him should they require assistance.

9. On August 10, 2011, Sunset Financial advised the Respondent that it was terminating Tewahade immediately for failing to disclose his association with the Respondent.

10. In September 2011, Tewahade became a registered representative of FINRA Member firm Ridgeway & Conger Inc., carrying on business in Englewood, Colorado. Tewahade did not disclose his registration with Ridgeway & Conger Inc. to the Respondent.

11. Following the audit of Tewehade’s sub-branch, the Respondent did not take any further action with respect to Tewehade’s outside business activities until June 18, 2012 (approximately 11 months after it first became aware of them) when it terminated him.

12. By virtue of the foregoing, the Respondent failed to adequately supervise Tewahade‘s outside business activities, contrary to MFDA Rules 2.1(d) (now MFDA Rule 1.3), 2.4.2, 2.5, 2.9 and 2.10.

Russell Chang

13. From June 30, 2008 to August 1, 2012, Chang was registered in British Columbia as a mutual fund salesperson with the Respondent. Chang was also registered in Alberta as a mutual fund salesperson from February 16, 2009 to August 1, 2012.

14. In or about May 2012, Chang accepted an offer of employment, effective June 1, 2012, from Providence Preferred Financial Corp. (“Providence Preferred”). Providence Preferred is a company incorporated in British Columbia which, according to its website, is part of “a group of Diversified Holdings, strategically placed across a select group of industry verticals, with an emphasis on financial services.”

15. On May 31, 2012 (the day before Chang’s employment with Providence Preferred commenced), the Respondent contacted his Branch Manager at Investia to inquire about the process for obtaining the Respondent’s approval to engage in an outside business activity.  Chang did not disclose his involvement with Providence Preferred to the Branch Manager. The Branch Manager instructed Chang to complete and submit an Investia Outside Business Activity/Volunteer Activity Approval Form (“OBA Approval Form”).

16. On June 14, 2012, Chang submitted a completed OBA Approval Form to the Respondent by email, wherein he disclosed the following details of his involvement with Providence:
    • Name of Employer/Business: Providence Preferred Financial Corp.
    • Start Date: June 1, 2012
    • Nature/Type of Business: Trade Finance
    • Your Title/Position: Canadian Director
    • of Hours per Week: 35
    • Is this Activity Held during Normal Business Hours: Yes
    • Annual Salary: $72,000.00
    • Categories: Other – International Trade Finance
    • Details of Activities Conducted: Helping Providence Preferred raise capital for company’s own use to expand their business in Emerging Markets. Raising capital in Hong Kong, Singapore and Suzhou, China; and
    • Is there any potential conflict of interest between your duties as Investia Mutual Fund Representative and your OBA of to your clients? – No

[Bold added.]

17. By the time Chang submitted the OBA Approval Form to Investia, he had already sold $550,000 of an investment product offered by Providence Preferred called Series I-A Notes (the “Notes”) to client AC, client JL, and one other individual (the “Investors”).

18. Chang had facilitated client AC’s purchase of the Notes by processing mutual fund redemptions on June 6, 2012 totaling $51,597.26 from the client’s accounts held with the Respondent.

19. The Notes were not an investment product known to or approved by the Respondent for sale by its Approved Persons.

20. After receiving Chang’s OBA Approval Form which disclosed that he was working as a fulltime salaried employee of Providence helping it “raise capital”, the Respondent did not take adequate steps to review Chang’s involvement with Providence until July 23, 2012 when MFDA Staff informed the Respondent of a referral it had received from Staff of the British Columbia Securities Commission relating to Chang’s activities with Providence. By that time, Chang had resigned from the Respondent (the resignation was effective August 1, 2012).

21. By virtue of the foregoing, the Respondent failed to adequately supervise Chang’s outside business activities, contrary to MFDA Rules 1.1.1(a) 1.2.1(d) (now MFDA Rule 1.3), 2.4.2, 2.5, 2.9 and 2.10.

ST

22. From November 11, 2003 to December 12, 2014, ST was registered in Ontario as a mutual fund salesperson with the Respondent.

23. On December 22, 2006, November 26, 2008, May 15, 2009, May 12, 2010 and October 18, 2010, ST completed the Respondent’s annual OBA questionnaires on which he disclosed, among other things, that he provided financial planning and consulting services for clients pursuant to which he charged fees calculated as a percentage of the clients’ total assets or an annual minimum fee of $125 (“Financial Planning Services”).

24. Until October 2010, the Respondent relied solely on the declarations made by ST on his annual questionnaires and permitted ST to conduct the Financial Planning Services without approving such activities and performing the necessary due diligence to ensure ST was not accepting remuneration from clients for Member business that was payable to the Member only.

25. After receiving ST’s October 18, 2010 completed annual OBA questionnaire, the Respondent questioned ST with respect to the Financial Planning Services he was providing to clients. The Respondent informed ST that his request for approval of the Financial Planning Services was “under review” and requested that ST provide the Respondent with additional information regarding the Financial Planning Services to assist it in its review.  Between October 20, 2010 and March 2011, ST did not provide the Respondent with the information it had requested of him.  The Respondent did not, at any time, instruct ST to cease providing Financial Planning Services until its review was complete and the activities had been approved.

26. In January 2014, the Respondent conducted an audit of ST’s branch office and found that he continued to provide Financial Planning Services to clients. On March 4, 2014, ST sent a written request to the Respondent for approval of his Financial Planning Services following which the Respondent requested and received further information from ST relevant to making its determination.

27. In June 2014, the Respondent informed ST, both verbally and in writing, that he was not permitted to provide Financial Planning Services to clients. Subsequently, the Respondent contacted all of the clients whose accounts were serviced by ST to inform them that the Financial Planning Services conducted by ST were not approved or supervised by the Respondent. The Respondent also conducted a review of those client files to ensure that all trading activity in those accounts were executed according to client instructions.

28. Had the Respondent adequately supervised ST’s Financial Planning Services prior to June 2014, it is likely that the Respondent would have discovered that ST had, among other things:
    1. received fees from clients for advice on mutual fund portfolios held outside of the Respondent; and
    2. received fees (in addition to normal commissions and fees he received for trading and advising on mutual funds) from clients outside the facilities of the Member for investment advice in respect of Member business.

29. By virtue of the foregoing, the Respondent failed to adequately supervise the outside business activities of ST, contrary to MFDA Rules 2.1(d) (now MFDA Rule 1.3), 2.4.2, 2.5, 2.9 and 2.10.

Charles Albert Martin

30. From November 4, 2003 to September 20, 2013, Martin was registered in Ontario and British Columbia as a mutual fund salesperson with the Respondent.

31. At all material times, Martin conducted business from the Respondent’s branch located in Kitchener, Ontario (the “MWM Branch”) operating under the trade name, Martin Wealth Management Ltd. (“MWM”). The Respondent paid all commissions and fees to Martin through MWM.

32. During a visit to the MWM Branch in February 2004, the Respondent became aware that Martin owned and operated another corporation known as MWM Financial Counsel Inc. (“MWM Financial Counsel”).

33. In October 2004, Martin provided the Respondent with a letter of engagement he supplied to clients in relation to MWM Financial Counsel which indicated, among other things, that Martin was charging annual service fees to clients through MWM Financial Counsel. Martin calculated the service fees based on a percentage of the assets held in the clients’ mutual fund accounts.

34. The service fees charged by Martin pursuant to the letter of engagement included fees for Member business which were payable to the Respondent only, such as:
    1. providing advice and making recommendations with respect to securities;
    2. processing trades in securities;
    3. monitoring, reviewing and analyzing the client’s securities portfolio;
    4. providing clients with portfolio summaries relating, in part, to securities held in Member accounts, thereby communicating with the client in relation to Member business; and
    5. communicating with the client, including meeting with the client and returning client phone calls.

35. Prior to permitting Martin to engage in the outside business activities described above, the Respondent failed to conduct adequate due diligence relating to Martin, MWM and MWM Financial Counsel when it became aware of Martin’s fee for service activities in 2004, to determine, among other things, whether those activities involved Member business and were permissible having regard to its policies and procedures and the Rules, Policies and By-law of the MFDA.

36. In 2009, the Respondent received a client complaint alleging that Martin had misrepresented the nature of his compensation to the client and charged the client excessive fees for services provided to the client by Martin. Aside from obtaining a statement from Martin as to the merits of the complaint, the Respondent did not make any further inquiries into Martin’s outside business activities to determine, among other things, whether those activities involved Member business and were permissible having regard to its policies and procedures and the Rules, Policies and By-law of the MFDA. 

37. Between Fall 2012 and May 2014, the Respondent received eight (8) additional client complaints alleging, among other things, that Martin misrepresented the nature of his compensation to them and had charged the clients excessive fees for services provided to them by Martin.

38. Following receipt of these client complaints, the Respondent took steps to determine the nature and extent of Martin’s outside business activities. As a result of these findings, on February 6, 2013, and again on April 18, 2013, the Respondent issued cease and desist letters to Martin relating to his fee for service activities.

39. On September 20, 2013, Martin resigned from the Respondent.

40. As described above, the Respondent failed to conduct adequate due diligence with respect to Martin’s outside business activities. At all material times, the Respondent knew or ought to have known that:
    1. Martin had offered financial services for approximately 120 clients on a fee for service basis through MWM Financial Counsel and its successor companies;
    2. the service fees Martin charged to clients outside the Member included remuneration for Member business payable to the Member only;
    3. Martin continued to receive commissions, trailer fees and other remuneration from the Member for the same activities for which he charged the service fees to clients (i.e., a practice sometimes referred to as “double-dipping”); and
    4. the service fees charged to a number of clients may have been excessive.

41. By virtue of the foregoing, the Respondent failed to adequately supervise the outside business activities of Martin, contrary to MFDA Rules 1.2.1(d) (now MFDA Rule 1.3), 2.4.2, 2.5, and 2.9.

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: [email protected]

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) 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
3. transmitting one (1) electronic copy of the Reply to the Office of the Corporate Secretary by e-mail at [email protected].

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.