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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: Scott Charles Nichols

NOTICE OF HEARING

NOTICE is hereby given that a first appearance will take place by teleconference before a hearing panel of the Atlantic Regional Council (“Hearing Panel”) of the Mutual Fund Dealers Association of Canada (“MFDA”) on February 23, 2021 at 10:00 a.m. (Atlantic), or as soon thereafter as the appearance can be held, concerning a disciplinary proceeding commenced by the MFDA against Scott Charles Nichols (“Respondent”). Members of the public who would like to listen to the teleconference should contact hearings@mfda.ca to obtain particulars. The Hearing on the Merits will take place in Halifax, Nova Scotia.

  • Bernadette Devine
    Bernadette Devine
    Assistant Corporate Secretary

    Mutual Fund Dealers Association of Canada
    121 King St. West, Suite 1000
    Toronto, ON M5H 3T9
    Telephone: 416-943-7436
    E-mail: corporatesecretary@mfda.ca

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 2013 and April 2014, the Respondent allowed an unregistered individual to open new accounts at the Member and make investment recommendations for clients who the Respondent had not met, thereby facilitating stealth advising by the unregistered individual and failing to perform the necessary due diligence to learn the essential facts relative to the clients, contrary to MFDA Rules 2.2.1 and 2.1.1.

Allegation #2: Between April 2014 and September 2014, the Respondent signed and submitted account forms to process switches and redemptions in the investment accounts of a client who the Respondent had not met, based on instructions received from a third party who did not have trading authorization on the accounts without confirming the trading instructions with the client, thereby engaging in unauthorized trading in the client’s accounts, contrary to MFDA Rules 2.3.1(a) [now MFDA Rule 2.3.1(b)][1], 2.1.1, 2.5.1 and 1.1.2.

Allegation #3: In April 2014, in response to a supervisory query from the Member, the Respondent falsely stated to the Member that he had spoken with a client to update her Know-Your-Client (“KYC”) information when he had not spoken with her, and signed and submitted a KYC update form as the Approved Person responsible for servicing the account when he had not communicated with the client to obtain instructions concerning the KYC update, thereby misleading the Member and undermining its trade supervision process, contrary to MFDA Rule 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. Since January 2, 2004, the Respondent has been registered in Nova Scotia as a dealing representative with Quadrus Investment Services Ltd. (“Quadrus”), a Member of the MFDA.
  2. From January 2, 2012 to December 29, 2015, the Respondent was also registered in New Brunswick as a dealing representative with Quadrus.
  3. From June 14, 2012 to May 5, 2015, and from December 18, 2015 to May 8, 2017, the Respondent was also designated as a branch manager with Quadrus.
  4. At all material times, the Respondent was also licensed to sell insurance and was authorized to process his insurance and mutual fund commissions through his personal business corporation Nichols Wealth Management Inc. (“NWM”)[2].
  5. At all material times, the Respondent carried on business in Kentville, Nova Scotia.

Background

  1. From in or about 2011 to 2013, KK was registered as a dealing representative with Investors Group Financial Services Inc. (“Investors Group”), a Member of the MFDA.
  2. While KK was registered with Investors Group, he serviced the Investors Group accounts of his spouse, client #1.
  3. At no time was KK a joint account holder with client #1, nor was he ever granted power of attorney or any other form of trading authority over client #1’s investment accounts at Investors Group.
  4. Unbeknownst to client #1 at the time, KK processed redemptions from client #1’s investment accounts at Investors Group totaling $87,657 that client #1 did not request or authorize.
  5. In or about 2013, KK and the Respondent, who had known each other previously, discussed working together at the Quadrus branch from which the Respondent conducted his business (the “Branch”).
  6. KK resigned from Investors Group but he was not able to immediately transfer his registration as a dealing representative to become an Approved Person at Quadrus.
  7. From September 2013 until April 23, 2014 (when KK became an Approved Person of Quadrus), KK worked at the Branch in an unregistered support role and was paid by NWM directly.
  8. In October 2013, with client #1’s knowledge and authorization, KK facilitated the transfer of client #1’s mutual fund accounts from Investors Group to Quadrus. At the time of the transfer, client #1 was not aware that the value of the remaining investments in her accounts amounted to only approximately $83,538, less than half of the value of the account prior to the processing of the unauthorized redemptions at Investors Group.
  9. At no time was KK a joint account holder with client #1, nor was he ever granted power of attorney or any other form of trading authority over client #1’s investment accounts at Quadrus.
  10. On April 24, 2014, approximately six months after KK began working at the Branch in an unregistered capacity, KK became registered as a dealing representative with Quadrus.
  11. As set out in more detail below, unbeknownst to the Respondent or Quadrus, starting in September 2014, KK facilitated the processing of unauthorized redemptions from client #1’s accounts at Quadrus and engaged in additional misconduct.
  12. On April 17, 2018, KK committed suicide, and subsequently, the misconduct described herein was discovered.

Allegation #1 – Respondent Engaged in Stealth Advising and Failed to Know the Clients

Quadrus’ Policies and Procedures
  1. At all material times, Quadrus’ policies and procedures prohibited unregistered individuals from, among other things:
    • opening new client accounts at Quadrus or collecting and recording KYC information for client accounts; and
    • engaging in securities related business by recommending or facilitating investment transactions in client accounts.
The Opening of New Accounts at Quadrus for Five Clients
  1. Between September 2013 and April 2014, while KK was not yet registered as a dealing representative at Quadrus, the Respondent allowed KK to facilitate the transfer of accounts from Investors Group to Quadrus of client #1[3], clients #2 and #3 (spouses), client #4, and client #5. KK had been the Approved Person responsible for servicing the accounts of all five clients at Investors Group prior to his resignation. KK met with the clients to complete the documentation necessary to process the account transfers from Investors Group to Quadrus without the Respondent in attendance to receive and execute the clients’ instructions.
  2. The Respondent did not meet with any of the five clients or otherwise participate in the process of:
    1. obtaining KYC information from the clients and recording it on account documentation to open their new accounts at Quadrus;
    2. recommending and facilitating the purchase of investments in 10 instances in the new accounts that were opened for the clients at Quadrus; or
    3. setting up Pre-Authorized Contribution plans (“PACs”) for the clients in nine instances so that regular contributions and purchases could be processed in their accounts at Quadrus.
  3. The Respondent signed the new account application forms and trade documentation as the Approved Person responsible for servicing the accounts of the five clients, thereby making it appear as though he had met with the clients and provided the advice and recommendations to facilitate the opening of their accounts and the processing of their investment transactions at Quadrus.
  4. The Respondent did not ensure that the clients’ KYC information was accurate, the transactions were authorized by the clients, or that the clients were aware that the Respondent was the Approved Person responsible for servicing their new accounts at Quadrus.
Trading Activity
  1. Between September 2013 and April 2014, while KK was not yet registered as a dealing representative at Quadrus, the Respondent allowed KK to facilitate the processing of approximately 20 transactions in the new accounts of clients #2, #3, #4, and #5 at Quadrus to make some initial investment purchases in their accounts. In some cases, PACs were set up for the clients at Quadrus.
  2. The Respondent did not make the investment recommendations or obtain client instructions concerning the transactions that were processed in the accounts of clients #2, #3, #4, and #5 at Quadrus.
  3. At the time that their accounts were transferred to Quadrus, clients #2, #3, #4, and #5 believed that KK (rather than the Respondent) was the Approved Person of Quadrus responsible for servicing their accounts.  The clients did not know that KK was not registered.
  4. By allowing an unregistered individual to open new accounts at the Member and make investment recommendations for clients that the Respondent had not met, the Respondent facilitated stealth advising by the unregistered individual, and failed to perform the necessary due diligence to learn the essential facts relative to the clients, contrary to MFDA Rules 2.2.1 and 2.1.1.

Allegation #2 –  Respondent Engaged in Unauthorized Trading

Quadrus’ Policies and Procedures
  1. At all material times, Quadrus required its Approved Persons to obtain client instructions for every transaction and maintain evidence of the client’s instructions when using a Limited Trading Authorization (“LTA”) form. The LTA authorizes Approved Persons to accept verbal trade instructions from a client without requiring the Approved Person to obtain the client’s signature on trading forms prior to processing transactions in the client’s accounts. The Member used a form known as a Record of Verbal Instructions that was required to be completed to document instructions received pursuant to an LTA.
Limited Trading Authorization Forms for Client #1
  1. On or about October 30, 2013, the Respondent received a completed LTA for client #1 from KK that appeared to be signed by client #1.
  2. Client #1 was not aware that an LTA had been submitted in respect of her account and unbeknownst to the Respondent, client #1 had not signed the LTA that KK provided to the Respondent.
  3. Although the Respondent had not spoken with client #1 about the LTA and had not received it from her directly, the Respondent signed the LTA as the Approved Person responsible for servicing the account, and as the witness to client #1’s  signature on the form, thereby making it appear as though he had explained the provisions and implications of the LTA to client #1 and witnessed her signature on the form.
  4. The LTA was subsequently relied upon to process switches in the accounts of client #1 without her knowledge or authorization, as is set out in further detail below.
Switches in Client #1’s  accounts – April 2014
  1. On or about April 14, 2014, KK prepared switch forms to process 10% free switch transactions[4] in two of client #1’s Client #1 had no knowledge of and had not authorized the switches.
  2. Although the Respondent had not spoken with client #1 about the switches, he signed the transaction documents (switch forms and Records of Verbal Instructions) as the Approved Person responsible for servicing the account. The switches were processed using the LTA that KK had provided to the Respondent containing the falsified signature of client #1.
  3. The Record of Verbal Instructions included a statement by the Respondent falsely indicating that:
    • he had spoken with client #1 on the telephone; and
    • client #1 had requested a transfer of her free units to front end load funds.
Redemption in Client #1’s  account – September 2014
  1. As noted above, by September 2014, KK was registered as a dealing representative at Quadrus; however, the Respondent remained the Approved Person of record for client #1’s accounts until approximately February 2015.
  2. In or about mid-September 2014, KK advised the Respondent (via the Respondent’s assistant) that client #1 wished to make a redemption totaling approximately $40,041 gross from client #1’s LIRA account.
  3. Due to the large amount of the redemption request, the Respondent instructed KK to obtain client #1’s signature on the trade tickets, rather than relying on the LTA to process the redemptions.
  4. On or about September 22, 2014, KK produced two completed trade tickets to the Respondent, bearing what appeared to be the signature of client #1 in order to process the redemptions.
  5. Unbeknownst to the Respondent, client #1 had not signed the trade tickets and she had no knowledge of and had not authorized any redemptions from her LIRA account.
  6. The Respondent signed the two trade tickets as the Approved Person responsible for servicing client #1’s accounts and the redemptions recorded on the trade tickets were processed.
  7. Unbeknownst to the Respondent and client #1 at the time, KK arranged for the proceeds from the redemptions to be deposited into a bank account that KK could access without the knowledge, authorization, or approval of client #1.
  8. Beginning in or around February 2015, when KK became the representative of record for client #1’s accounts at Quadrus, KK facilitated redemptions of the remaining balance of client #1’s accounts, without client #1’s knowledge or authorization.
  9. As described above, the Respondent signed and submitted account documents to process switches and redemptions in client #1’s investment accounts on the basis of trading instructions received from KK who did not have trading authorization on the accounts without confirming those instructions with client #1, thereby engaging in unauthorized trading in the client’s accounts, contrary to MFDA Rules 2.3.1(a) [now MFDA Rule 2.3.1(b)], 2.1.1, 2.5.1, and 1.1.2.

Allegation #3 – Respondent Misled the Member

  1. The risk tolerance recorded on the KYC form for client #1’s LIRA account was “medium”.  After the switch transactions were processed in client #1’s  LIRA account on or about April 14, 2014 (as set out in paragraph 33 above), Quadrus trade supervision staff observed that the investments in client #1’s  account were inconsistent with her documented risk tolerance and, therefore, potentially unsuitable.
  2. On or about April 15, 2014, Quadrus trade supervision staff queried the suitability of client #1’s account. As the Respondent was the Approved Person responsible for servicing client #1’s accounts, the trade query was directed to him.
  3. Quadrus requested that the Respondent verify the risk tolerance for client #1’s LIRA account and contact the client to discuss rebalancing if necessary.
  4. On April 16, 2014, the Respondent responded to the supervisory query by email and agreed to address the suitability concern that had been raised regarding client #1.
  5. Contrary to the Respondent’s statement in his email dated April 16, 2014, the Respondent did not speak with client #1 about the suitability concerns with her account that had been raised by Quadrus.
  6. Instead, the Respondent told KK that he had received a trade query from Quadrus and required a KYC update from client #1. A few days later, KK provided a KYC update form to the Respondent that appeared to be signed by client #1.
  7. On or about April 27, 2014, the Respondent signed the KYC update form as the Approved Person responsible for servicing client #1’s account, and submitted the KYC update form to Quadrus to update the KYC information on file for client #1’s account, thereby addressing the trade supervision query to the satisfaction of Quadrus’ compliance staff.
  8. Unbeknownst to the Respondent, the KYC update form that KK had provided to increase client #1’s risk tolerance from “medium” to “high” had been provided without her knowledge or authorization and had not been signed or initialed by her.
  9. On or about April 28, 2014, based on the representations in the KYC update form, Quadrus closed the suitability query concerning client #1’s account.
  10. By falsely advising Quadrus that he had spoken with client #1 to discuss her KYC information, and by signing the KYC update form as the Approved Person responsible for servicing her account when he had not communicated with client #1 about the updates, the Respondent misled Quadrus and undermined its trade supervision process, contrary to MFDA Rule 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; 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: Lyla Simon
Email: lsimon@mfda.ca

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 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] Effective January 19, 2017, MFDA Rule 2.3.1, the Rule prohibiting discretionary trading in client accounts, was amended and the prohibition on discretionary trading was moved from Rule 2.3.1(a) to Rule 2.3.1(b).
[2]Previously NWM was called Harvest Wealth Management Inc.
[3] As noted above, client #1 was KK’s spouse. 
[4] In order to transfer units out of deferred sales charge “DSC”) versions of funds and into front end versions of those funds so that a client would not have to pay DSC fees on those units in the event of a future redemption.

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