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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: Rhys William Douglas Martell

NOTICE OF HEARING

NOTICE is hereby given that a first appearance will take place by teleconference before a hearing panel of the Pacific Regional Council (“Hearing Panel”) of the Mutual Fund Dealers Association of Canada (“MFDA”) in the hearing room at the MFDA offices, located at 650 West Georgia Street, Suite 1220, Vancouver, British Columbia on October 19, 2017 at 10:00 a.m. (Pacific), or as soon thereafter as the hearing can be held, concerning a disciplinary proceeding commenced by the MFDA against Rhys William Douglas Martell (“Respondent”).

  • Sarah Rickard
    Sarah Rickard
    Director of Regional Councils

    Mutual Fund Dealers Association of Canada
    121 King St. West, Suite 1000
    Toronto, ON M5H 3T9
    Telephone: 416-945-5143
    Fax: 416-361-9781
    E-mail: [email protected]

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

Allegation #1: Between August 2012 and April 2015, the Respondent processed at least 352 transactions in the accounts of at least 78 clients, without obtaining client instructions in respect of the amount of the transaction, the mutual fund being purchase or sold, or timing of the transactions, thereby engaging in discretionary trading, contrary to MFDA Rules 2.3.1 and 2.1.1.

Allegation #2: Between July 23, 2015 and July 25, 2015, the Respondent failed to record and maintain evidence of client trade instructions with respect to at least 20 transactions in 20 client accounts, contrary to the Member’s policies and procedures, and MFDA Rules 1.1.2, 2.5.1., 2.1.1, and 5.1(b).

 

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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

  1. The Respondent has been registered in the securities industry since 2008.
  1. Since August 5, 2015, the Respondent has been registered as a mutual fund salesperson (now known as a dealing representative) in British Columbia and Alberta with Worldsource Financial Management Inc. (“Worldsource”), a Member of the MFDA.
  1. Between January 22, 2008 and July 28, 2015, the Respondent was registered as a mutual fund salesperson in British Columbia and Alberta with Investors Group Financial Services Inc. (“IG”), a Member of the MFDA.
  1. At all material times, the Respondent carried on business in the Abbotsford, British Columbia area.

Background

  1. At all material times, it was the Respondent’s practice to have clients invest in IG’s Symphony Portfolios, which are portfolios of IG mutual funds with asset allocations based on clients’ Know-Your-Client information.
  1. The Respondent would complete a yearly rebalancing of client accounts, which consisted of the Respondent making switches among IG mutual funds represented in the Symphony Portfolios. As described in more detail below, the Respondent rebalanced client portfolios at his discretion each year based on his view of market trends.
  1. Prior to the rebalancing, the Respondent sent clients individual emails, informing them that he intended to rebalance their accounts, but he did not provide the details of the proposed rebalancing, including: the amount, the fund selection, and the timing of when each switch was to be processed. In his email to clients, the Respondent sought authorization to proceed with rebalancing, and if the clients replied to his email and approved of the rebalancing, the Respondent proceeded to process switches to change the asset allocation in the client’s Symphony Portfolio.

Allegation #1- Discretionary Trading

Discretionary Trading in August 2012
  1. At all material times, IG had a policy and procedure in place that prohibited its Approved Persons from engaging in discretionary trading.
  1. On August 1, 2012, the Respondent sent an email to 18 clients seeking instructions to rebalance their portfolios. The email to the clients did not provide the details of the rebalancing including the amount, fund selection, and timing of when each switch was to occur.
  1. The Respondent states that based on client responses to his email, on August 9, 2012, he processed 274 switches in 18 client accounts to rebalance the clients’ portfolios.
  1. The Respondent exercised his discretion to determine the amount, fund selection and timing when each switch in the clients’ accounts was submitted to IG for processing, without discussing these elements of the transactions with the clients in each instance or maintaining record of client authorization.
  1. In November 2012, IG conducted a branch audit of the Respondent’s client files and identified that the Respondent processed 274 trades in 18 client accounts without any evidence of client authorization.
  1. On February 5, 2013, the Respondent’s branch manager and the Divisional Director at IG advised the Respondent that he should not engage in discretionary trading and he should not accept email instructions to process transactions. IG required that the Respondent add a message to the signature of his emails that states:
    1. “Please note trade instructions received by email, fax, or text may not be processed until I’ve had the opportunity to review your file and discuss the transaction request. Consequently no pricing is guaranteed by leaving the message.”
  1. The Respondent exercised his discretion to determine the amount, fund selection and timing when each switch was submitted to IG for processing, without discussing these elements of the transactions with the clients in each instance or maintaining record of client authorization.
Discretionary Trading in March 2015
  1. On March 20, 2015, the Respondent sent an email as described above at paragraph 7, to 86 clients advising them that he intended to rebalance their portfolios, and requested their authorization to do so. The email to the clients did not provide the details of the rebalancing including the amount, fund selection, and timing of when each switch was to occur (the “Rebalancing Email”).
  1. In April 2015, the Respondent received responses to his email and processed switches in 78 of the 86 client accounts, for clients who gave authorization to proceed.
  1. The Respondent exercised his discretion to determine the amount, fund selection and timing when each switch was submitted to IG for processing, without discussing these elements of the transactions with the clients in each instance or maintaining record of client authorization.
  1. By virtue of the forgoing, the Respondent processed at least 352 transactions in the accounts of at least 78 clients, without obtaining client instructions in respect of the amount of the transaction, the mutual fund being purchased or sold, or timing of the transactions, thereby engaging in discretionary trading, contrary to MFDA Rules 2.3.1 and 2.1.1.

Allegation# 2- Failure to Maintain Adequate Records of Client Discussions

  1. On April 9, 2015 IG conducted a branch audit and identified the conduct described above at paragraphs 15 and 16.
  1. On May 1, 2015, IG placed the Respondent under close supervision for a 6 month period as they investigated the discretionary trading.
  1. At all material times, IG had a policy and procedure that required its Approved Persons to maintain documentation or electronic notes in a client file when accepting trading instructions from a client. Approved Persons are required to include in their written record or electronic notes the following:
    1. documenting the client’s verbal instructions;
    2. the date and time of the discussion;
    3. the details of any trade instructions;
    4. whether it was solicited or unsolicited; and
    5. evidence that a discussion about no-load vs. DSC took place.
  1. Between July 23, 2015 and July 25, 2015, while the Respondent was under close supervision, the Respondent processed changes to the Pre-Authorized Contributions (“PAC”) in 20 client accounts from DSC to a No Load fee structure, without maintaining written record of the clients’ instructions.
  1. By virtue of the above described conduct, the Respondent failed to record and maintain evidence of client trade instructions with respect to at least 20 transactions in 20 client accounts, contrary to the Member’s policies and procedures, and MFDA Rules 1.1.2, 2.5.1., 2.1.1, and 5.1(b).

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 Respondents 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
650 West Georgia Street, Suite 1220
Vancouver, B.C. V6B 4N9
Attention: Christopher Corsetti
Fax: 604-683-6577
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 Director of Regional Councils 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.