Notice of Hearing

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

Allegation #1: Between about November 5, 2004 and January 31, 2013, the Respondent recommended to at least 679 clients that the clients concentrate all or a substantial portion of their investment holdings in precious metals sector funds, without using adequate due diligence to assess the suitability of his investment recommendations on a client-by-client basis having regard to the essential Know-Your-Client (“KYC”) factors relevant to each individual client, including the client’s risk tolerance, investment objectives and investment knowledge, contrary to MFDA Rules 2.2.1[1] and 2.1.1.

Allegation #2: Between about November 5, 2004 and January 31, 2013, the Respondent recorded on account forms in respect of least 679 clients that the clients had, among other things, “100% high” risk tolerance, “100% aggressive growth” investment objectives, and “good” or better investment knowledge, in order to ensure that the clients’ KYC information matched his investment recommendations to concentrate all or a substantial portion of the clients’ investment holdings in precious metals sector funds, contrary to MFDA Rules 2.2.1 and 2.1.1.

Allegation #3: Between about November 5, 2004 and January 31, 2013, the Respondent misrepresented, failed to fully and adequately explain, or omitted to explain the risks and benefits of investing in precious metals sector funds, thereby failing to ensure that his recommendations were suitable for the clients and in keeping with their investment objectives, contrary to MFDA Rules 2.2.1 and 2.1.1.

Allegation #4: Between about November 5, 2004 and January 31, 2013, the Respondent failed, in his capacity as a Branch Manager, to adequately supervise the activities of an Approved Person, SW, who recommended that clients concentrate all or a substantial portion of the clients’ investment holdings in precious metals sector funds, contrary to MFDA Rules 2.5.5, 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. The Respondent became registered in the mutual fund industry in June 1993.

2. From December 18, 2001 to May 20, 2014, the Respondent was registered in Saskatchewan, Alberta and British Columbia as a mutual fund salesperson (now known as a dealing representative) with HollisWealth Advisory Services Inc. (“HollisWealth”), a Member of the MFDA.

3. From May 27, 2014 to December 31, 2015, the Respondent was registered in Ontario, Saskatchewan, Alberta and British Columbia as a mutual fund salesperson with Sterling Mutuals Inc. (“Sterling”), a Member of the MFDA.

4. The Respondent is not currently registered in the securities industry in any capacity.

5. At all material times, the Respondent conducted business in the North Battleford, Saskatchewan area. 

The Gold Strategy     

6. Between November 5, 2004 and at least January 31, 2013, the Respondent recommended an investment strategy to all of his clients whereby the clients would purchase precious metals (predominantly, gold) sector mutual funds (the “Gold Strategy”).

7. In the course of recommending the Gold Strategy to clients, the Respondent represented that, among other things:
   1. the price of gold and other precious metals was poised to increase dramatically as a result of government monetary and debt policies in Canada and the United States; and
   2. investing in precious metals sector funds was a low risk investment strategy.

8. The Gold Strategy resulted in the clients holding investments which were highly concentrated in precious metals sector funds. As of December 31, 2013:
   1. approximately 57% of the Respondent’s clients held more than 50% of their portfolios in precious metals sector funds.
   2. approximately 28% of the Respondent’s clients held 20% to 50% of their portfolios in precious metals sector funds; and
   3. only approximately 15% of the Respondent’s clients held less than 20% of their portfolios in precious metals sector funds.

9. The Respondent did not recommend that clients diversify their investment holdings.

10. In order to implement the Gold Strategy, the Respondent engaged in a practice of recording the following uniform KYC information for each of his clients:
    1. a risk tolerance of 100% “high risk”;
    2. an investment objective of 100% “aggressive growth”; and
    3. investment knowledge of “good”.

11. As described in greater detail below, the Respondent recorded the KYC information described in paragraph 10 above, regardless of whether the client genuinely had a high risk tolerance, an aggressive growth investment objective and good investment knowledge. The Respondent engaged in this practice in order to ensure that the clients’ KYC information matched his investment recommendations to concentrate all or a substantial portion of the clients’ investment holdings in precious metals sector funds. 

Allegation #1 – The Respondent Failed to Assess Suitability on a Client-by-Client Basis

12. The Respondent failed to consider, adequately or at all, whether his recommendations to engage in the Gold Strategy were suitable on a client-by-client basis, having regard to the essential KYC factors relevant to each individual client, prior to making the recommendations to the clients.

13. The Respondent engaged in a standard practice of recommending that clients concentrate their investment holdings in precious metals sector funds, without regard to each client’s KYC information, based upon his views as to how these funds would perform.

14. The Respondent failed to consider, adequately or at all, whether it was suitable for each client to hold non-diversified investments.

15. By recommending to at least 679 clients that the clients concentrate all, or a substantial portion, of their investment holdings in precious metals sector funds, without using adequate due diligence to assess the suitability of his investment recommendations on a client-by-client basis having regard to the essential KYC information relevant to each individual client, the Respondent engaged in misconduct contrary to MFDA Rules 2.2.1 and 2.1.1. 

Allegation #2 – The Respondent Recorded Uniform KYC Information for all Clients

16. The Respondent recorded on account forms in respect of least 679 clients that the clients had, among other things, “100% high” risk tolerance, “100% aggressive growth” investment objectives, and “good” or better investment knowledge.

17. The Respondent recorded the KYC information regardless of whether the client genuinely had a high risk tolerance, an aggressive growth investment objective and good investment knowledge.

18. The Respondent engaged in this practice in order to ensure that the clients’ KYC information matched his investment recommendations to concentrate all or a substantial portion of the clients’ investment holdings in precious metals sector funds.

19. By recording on account forms in respect of least 679 clients that the clients had, among other things, “100% high” risk tolerance, “100% aggressive growth” investment objectives, and “good” or better investment knowledge, in order to ensure that the clients’ KYC information matched his investment recommendations to concentrate all or a substantial portion of the clients’ investment holdings in precious metals sector funds, the Respondent engaged in conduct contrary to MFDA Rules 2.2.1 and 2.1.1. 

Allegation #3 – The Respondent Misrepresented the Risks of the Gold Strategy

20. As described above, in the course of recommending the Gold Strategy to clients, the Respondent represented that, among other things, the price of gold and other precious metals were poised to increase dramatically, and investing in precious metals sector funds was a low risk investment strategy.

21. The Respondent misrepresented, or failed to fully and adequately explain, the risks and benefits of investing in precious metals sector funds, including the risk of holding non-diversified investments and the risk that Gold Strategy would not perform as he represented it would.

22. To the extent that the Respondent explained some of the risks of investing in precious metals sector funds, he failed to provide a balanced presentation of the risks and minimized the risks when he described the funds.

23. By virtue of the foregoing, the Respondent misrepresented, failed to fully and adequately explain, or omitted to explain the risks and benefits of investing in precious metals sector funds, thereby failing to ensure that his recommendations were suitable for the clients and in keeping with their investment objectives, contrary to MFDA Rules 2.2.1 and 2.1.1. 

Allegation #4 – Failure to Fulfill Branch Manager Duties

24. At all materials times, the Respondent was a Branch Manager who supervised another Approved Person, SW. The Respondent and SW conducted business at the same branch location.

25. Between about November 5, 2004 and January 31, 2013, SW engaged in the same conduct as the Respondent regarding the Gold Strategy as described above. Among other things, SW:
    1. recommended the Gold Strategy without ensuring that her recommendation was suitable on a client-by-client basis, having regard to the essential KYC factors relevant to each individual client, prior to making the recommendations to the clients;
    2. recorded on account forms that her clients had, among other things, “100% high” risk tolerance, “100% aggressive growth” investment objectives, and “good” or better investment knowledge, in order to ensure that the clients’ KYC information matched his investment recommendations to concentrate all or a substantial portion of the clients’ investment holdings in precious metals sector funds; and
    3. misrepresented, failed to fully and adequately explain, or omitted to explain the risks and benefits of investing in the Gold Strategy when making the recommendation to her clients.

26. At all material times, the Respondent knew or ought to have known that SW engaged in the conduct described above regarding the Gold Strategy.

27. The Respondent failed in his capacity as Branch Manager to adequately supervise:
    1. SW’s activities to ensure that SW complied with the By-laws, Rules and Policies of the MFDA and applicable securities legislation; and
    2. the opening of new accounts by SW and her trading activities at the branch.

28. By virtue of the foregoing, the Respondent failed in his capacity as a Branch Manager to adequately supervise the activities of an Approved Person, SW, who recommended that clients concentrate all or a substantial portion of the clients’ investment holdings in precious metals sector funds, contrary to MFDA Rules 2.5.5, 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: David Babin

            Fax:  416-361-9073

            Email: dbabin@mfda.ca

A Reply shall be filed by:

a. providing four (4) copies of the Reply to the Office of the Corporate Secretary by personal delivery, mail or courier to:

The Mutual Fund Dealers Association of Canada

121 King Street West, Suite 1000

Toronto, ON M5H 3T9

Attention: Office of the Corporate Secretary; or

b. 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

c. 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]MFDA Rule 2.2.1 was amended in December 2010 and in February 2013.  In this Notice of Hearing, all references to the MFDA Rule 2.2.1 concern the version of the Rule that was in force prior to December 2010.