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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: John David Elwood

NOTICE OF HEARING

NOTICE is hereby given that a first appearance will take place by teleconference before a hearing panel of the Central Regional Council (“Hearing Panel”) of the Mutual Fund Dealers Association of Canada (“MFDA”) in the hearing room at the MFDA offices, 121 King Street West, Suite 1000, Toronto, Ontario on July 9, 2019 at 10:00 a.m. (Eastern), or as soon thereafter as the hearing can be held, concerning a disciplinary proceeding commenced by the MFDA against John David Elwood (“Respondent”).

  • Michelle Pong
    Michelle Pong
    Director, Regional Councils

    Mutual Fund Dealers Association of Canada
    121 King St. West, Suite 1000
    Toronto, ON M5H 3T9
    Telephone: 416-945-5134
    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 September 2012 and April 2017, the Respondent borrowed $16,000 from a client thereby engaging in personal financial dealings with the client that gave rise to an actual or potential conflict of interest that the Respondent failed to disclose to the Member or to the client in writing and failed to 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, 2.5.1, 1.1.2, and 2.1.1.

Allegation #2: Between September 2013 and January 2017, the Respondent misled the Member by providing false responses to Member questionnaires, thereby interfering with the Member’s ability to supervise the Respondent, contrary to MFDA Rules 2.1.1, 2.5.1 and 1.1.2.

Allegation #3: Between about February 2016 and April 2017, the Respondent failed to report that he had been named a defendant in a civil claim related to borrowing money from a client, contrary to MFDA Rules 1.4(b) and 2.1.1 and section 4 of MFDA Policy No. 6.

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 was first registered in the mutual fund industry in Canada in October 2000.
  2. Between October 2000 and September 2013, the Respondent was registered in Ontario as a mutual fund salesperson (now known as a dealing representative)[1] with FundEX Investments Inc. (“FundEX”), a Member of the MFDA. Between August 2004 and December 2010, the Respondent was also registered with FundEX in New Brunswick.
  3. Between September 2013 and April 2017, the Respondent was registered as a dealing representative with Queensbury Strategies Inc. (“Queensbury”), a Member of the MFDA.
  4. On April 4, 2017, the Respondent was terminated by Queensbury. The Respondent is not currently registered in the securities industry in any capacity.
  5. At all material times, the Respondent conducted business from a branch office located in the Toronto area.

Allegation #1 – Personal Financial Dealings

  1. At all material times, the policies and procedures of FundEX:
    1. prohibited Approved Persons from borrowing from a client for any reason; and
    2. required Approved Persons to:
      1. avoid any activity, interest or association which might interfere with the independent exercise of their judgment in the best interests of the Member, its clients or the public;
      2. contact all affected individuals where a conflict of interest exists between the Approved Person and that individual; and
      3. notify the Member where a conflict of interest or potential conflict of interest is identified.
  2. On May 24, 2008, client RW became a client of FundEX. The Respondent was the Approved Person who serviced client RW’s investment accounts at FundEX.
  3. In or about September 2012, while the Respondent was registered with FundEX, the Respondent solicited and accepted a loan from client RW in the amount of $16,000 (the “Loan”). Client RW advanced the Loan in 8 increments of $2,000 on the following dates:

DATE

LOAN AMOUNT

September 27, 2012

$2,000

September 28, 2012

$2,000

October 1, 2012

$2,000

October 23, 2012

$2,000

October 24, 2012

$2,000

October 25, 2012

$2,000

December 14, 2012

$2,000

December 17, 2012

$2,000

  1. According to client RW, at the time of the loan agreement, the Respondent agreed to begin repayment of the Loan within “a couple of months.” As it turned out, the Respondent did not repay the Loan except to the extent described below.
  2. The Respondent did not provide client RW with any collateral to secure repayment of the Loan nor did the Respondent offer or agree to pay any interest on the Loan.
  3. On September 12, 2013, the Respondent signed a promissory note that documented the outstanding Loan. The promissory note stated that the Respondent agreed to repay the Loan to client RW upon demand. The promissory note also stated that no interest was payable on the Loan. Thereafter, the Respondent made no payments on the Loan except as described below.
  4. The Respondent did not disclose the existence of the Loan to FundEX.
  5. On September 30, 2013, the Respondent transferred his registration to Queensbury.
  6. When the Respondent transferred his registration to Queensbury, client RW transferred his investment accounts to Queensbury, and the Respondent serviced client RW’s investment accounts at Queensbury until the Respondent’s registration was terminated.
  7. At all material times, the policies and procedures of Queensbury:
    1. prohibited Approved Persons from borrowing from clients for any reason; and
    2. required Approved Persons to notify the Member and the client when a potential conflict of interest was identified, and support the Member in taking the appropriate action to ensure the conflict was addressed in the best interests of the client.
  8. The Respondent did not disclose to Queensbury that he had borrowed money from client RW.
  9. Sometime between June 2015 and February 2016, client RW commenced legal proceedings against the Respondent to compel the Respondent to repay the Loan. On February 10, 2016, the Respondent and client RW agreed through Minutes of Settlement that the Respondent would repay client RW $500 per month until the Loan was repaid in full.
  10. The Respondent did not disclose to Queensbury that a legal proceeding had been commenced against him by client RW or that he had entered into the Minutes of Settlement to settle the legal proceeding.
  11. The Respondent made three payments of $500 to client RW on March 1, 2016, April 3, 2016 and May 4, 2016. After May 2016, the Respondent ceased making payments to client RW.
  12. The Respondent subsequently told client RW that he would repay the Loan from proceeds from the sale of his residence. However, the Respondent did not sell his residence, nor did the Respondent make further instalment payments to repay the Loan.
  13. On February 28, 2017, client RW obtained a Notice of Garnishment against the Respondent to compel repayment of the Loan. According to the Notice of Garnishment, client RW was entitled to recover $14,976.67 from the Respondent. However, client RW was unable to recover any further amounts from the Respondent after the Notice of Garnishment was issued.
  14. On November 2, 2017, client RW passed away. The Executor of client RW’s estate continues to seek recovery of the outstanding Loan.
  15. By soliciting and accepting a loan from a client, the Respondent engaged in personal financial dealings with a client that gave rise to a conflict of interest.
  16. The Respondent did not disclose the Loan, or the resulting conflict of interest, to FundEX, Queensbury or the client.
  17. The Respondent failed to take steps to ensure that the conflict of interest arising from the Loan was addressed by the exercise of responsible business judgment influenced only by the best interests of client RW.
  18. By failing to inform FundEX or Queensbury of the Loan or the conflict of interest, the Respondent contravened the policies and procedures of FundEX and Queensbury that are described in paragraphs 6 and 15 above.
  19. By engaging in the conduct described above, the Respondent engaged in personal financial dealings with a client that gave rise to an actual or potential conflict of interest that he failed to disclose to FundEX, Queensbury or the client and failed to take other steps to ensure that the conflict was addressed 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, 2.5.1, 1.1.2, and 2.1.1.

Allegation #2 – Misleading the Member

  1. As noted above, on September 30, 2013, the Respondent transferred his registration from FundEX to Queensbury.
  2. As part of the transfer process to Queensbury, the Respondent completed a mandatory questionnaire concerning his business practices that was necessary to facilitate Queensbury’s due diligence process (the “Due Diligence Questionnaire”). The Due Diligence Questionnaire required the Respondent to answer the following question: “Do you or have you lent or borrowed money to/from clients?”
  3. The Respondent falsely answered “NO” to this question. The Respondent did not disclose to Queensbury that he had borrowed money from client RW in 2012 that remained outstanding and he did not inform Queensbury that he had signed a promissory note on September 12, 2013 confirming the amount that he owed to client RW. The Respondent did disclose to Queensbury that he had personally loaned money to a client (not client RW) 15 years prior.
  4. Between September 2013 and April 2017, while he was registered with Queensbury, the Respondent was required to complete Annual Questionnaires in respect of his business practices. The Respondent completed these questionnaires on December 30, 2013, December 9, 2014, December 30, 2015 and January 23, 2017.
  5. Each of the Annual Questionnaires that the Respondent completed and submitted to Queensbury required the Respondent to answer the following question: “Have you borrowed from or lent money to a client?” The Respondent falsely answered “NO” to this question in each of the Annual Questionnaires. The Respondent did not disclose to Queensbury in his responses to the Annual Questionnaires (or otherwise) that he had obtained the 2012 Loan from client RW and signed a promissory note dated September 12, 2013 acknowledging that the Loan remained outstanding.
  6. By engaging in the conduct described in paragraphs 28-32 above, the Respondent provided false statements on Member questionnaires, thereby misleading Queensbury and interfering with the Member’s ability to supervise the Respondent and ensure his compliance with the policies and procedures of the Member and regulatory requirements, contrary to MFDA Rules 2.1.1, 2.5.1 and 1.1.2.

Allegation #3 – Failure to Report a Civil Proceeding

  1. As stated above, sometime between June 2015 and February 2016, client RW commenced legal proceedings against the Respondent to compel the Respondent to repay the Loan. On February 10, 2016, the Respondent and client RW agreed through Minutes of Settlement that the Respondent would repay client RW $500 per month until the Loan was repaid in full.
  2. After May 2016, the Respondent ceased making payments to client RW.
  3. On February 28, 2017, client RW obtained a Notice of Garnishment against the Respondent to compel repayment of the Loan.
  4. Queensbury first became aware of the civil action against the Respondent once served with the Notice of Garnishment against the Respondent on or about February 28, 2017.
  5. Between approximately February 2016 and February 2017, the Respondent was aware of the civil action but did not report this event to Queensbury.
  6. By failing to report the civil claim related to borrowing from a client to Queensbury, the Respondent failed to fulfill his reporting obligations to a Member, contrary to MFDA Rules 1.4(b) and 2.1.1 and section 4 of MFDA Policy No. 6.

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; and
  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: Brendan Forbes
Email: [email protected]

A Reply shall be filed by:

  1. providing four 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 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.

[1] In September 2009, the registration category mutual fund salesperson was changed to “dealing representative” when National Instrument 31-103 came into force.

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