MFDA Notice of Hearing

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202128

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

Michelle Pong

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 (the “Hearing Panel”) of the Mutual Fund Dealers Association of Canada (the “MFDA”) on September 14, 2021 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 Antony Kin San Chau (the “Respondent”). Members of the public who would like to listen to the teleconference should contact hearings@mfda.ca to obtain particulars.

DATED: Jul 9, 2021

"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: 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 February 2016 and April 2017, the Respondent failed to fulfill his responsibilities as Ultimate Designated Person with respect to concerns that an Approved Person at the Member was not accurately recording Know-Your-Client information, contrary to MFDA Rules 2.5.2 and 2.1.1.

Allegation #2: Commencing on or about October 30, 2016, the Respondent while acting in the capacity as Ultimate Designated Person, failed to take adequate steps to ensure the Member’s compliance with the terms of an Order of a MFDA Hearing Panel dated July 8, 2014 in MFDA File No. 201406, contrary to the terms of the Order and MFDA Rules 2.5.2 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. Beginning in 1995, the Respondent was registered as a dealing representative.
  2. From September 2009 to January 29, 2021, the Respondent was the majority and controlling shareholder, officer, and sole director of TeamMax Investments Inc. (the “Member”), a Member of the MFDA.
  3. From September 2009 to March 1, 2021, the Respondent was registered as a dealing representative with the Member.
  4. From January 4, 2010 to April 17, 2014, the Respondent was registered as the Chief Compliance Officer (“CCO”) of the Member. The Respondent also served as interim CCO from January 25, 2018 to February 22, 2018 and February 21, 2019 to August 7, 2019.
  5. From January 4, 2010 to January 10, 2020, the Respondent was registered as the Ultimate Designated Person (“UDP”) of the Member.
  6. On January 27, 2021, the Respondent transferred ownership of the Member to another individual.
  7. The Respondent is not currently registered in the securities industry in any capacity.
  8. At all material times, the Respondent conducted business in the Toronto, Ontario area.
  9. At all material times, the Respondent was the UDP and the sole director of the Member.

Background

The 2014 MFDA Order
  1. In 2013, MFDA Compliance Staff conducted a compliance examination of the Member in order to assess the Member’s compliance with MFDA By-laws, Rules, and Policies during the period of March 1, 2010 to January 31, 2013 (the “2013 Examination”).
  2. During the course of the compliance examination, Staff identified a number of compliance deficiencies including that the Member failed to respond to Staff’s request for information; failed to conduct a historical leveraging review; failed to update its policies and procedures; and failed to effectively discharge its supervisory obligations, including failing to identify patterns in the client Know-Your-Client (“KYC”) information (i.e., KYC uniformity) recorded by three Approved Persons.
  3. As a result of the various concerns identified by the 2013 Examination, on July 7, 2014, Staff brought an application for interim relief against the Member pursuant to section 24.3 of MFDA By-law No. 1.
  4. On July 8, 2014, a Hearing Panel of the MFDA made an order (the “2014 Order”), which among other things, sought to address Staff’s concerns over the Member’s failure to accurately supervise its Approved Persons’ recommendations of borrowing to invest (i.e., leveraged investing) and that the Respondent held both roles of UDP and CCO. Accordingly, the 2014 Order, among other items:
    1. required the Member to conduct and provide to Staff a historical leverage review of all non-registered leveraged accounts, and take such remedial action as directed by Staff to address any concerns raised by the review;
    2. prohibited the Member from opening any new non-registered leveraged client accounts, making any new leveraged trade recommendations (i.e., borrowing to invest), or processing any leveraged trades in any existing non-registered client accounts, until such time as the Member, to the satisfaction of Staff, resolved all deficiencies identified by Staff, either previously or arising from the historical leverage review;
    3. prohibited the Respondent from becoming registered as the Member’s CCO, unless the Respondent provided Staff with at least 60 days’ notice to permit Staff to attend before a hearing panel of the MFDA to seek any terms or conditions on the Respondent’s ability to conduct securities related business Staff believed necessary;
    4. required that the Member, in the event the CCO retained in April 2014 (to replace the Respondent) was no longer willing to serve, appoint a new CCO, other than the Respondent, to perform all necessary and ongoing duties and functions of a CCO, as such duties and functions are prescribed by MFDA By-laws, Rules and Policies, including but not limited to MFDA Rule 2.5.3; and
    5. required that the Respondent, as the Member’s UDP, be responsible for ensuring that the Member comply with the terms of the 2014 Order.
The 2017 Settlement Hearing
  1. In 2015, Staff conducted a further compliance examination of the Member in order to assess the Member’s compliance with MFDA By-laws, Rules, and Policies during the period of February 1, 2013 to January 31, 2015 (the “2015 Examination”).
  2. The 2015 Examination identified a number of compliance deficiencies including, but not limited to, some of the same ongoing issues and concerns previously identified in the 2013 Examination and the 2014 Order.
  3. On January 11, 2017, the Member entered into a Settlement Agreement (the “2017 Settlement Agreement”) with Staff, concerning the various deficiencies identified in the 2013 and 2015 Examinations. In particular, the Member admitted to, among other things, the following contraventions of the MFDA’s Rules and Policies:
    1. Between August 2010 and April 2014, the Member failed to respond, or provided untimely, incomplete or inadequate responses, to requests for information and documents requested by Staff during the course of compliance examinations, contrary to MFDA Rules 1.2.5(a)(iii) and 2.1.1;
    2. Between September 2009 and April 2014, the Member failed to establish, implement and maintain adequate policies and procedures to supervise leveraging recommendations and ensure the suitability of leveraging recommendations made by Approved Persons to clients, contrary to MFDA Rules 2.2.1, 2.5 and 2.10 and MFDA Policy No. 2;
    3. Commencing October 2011, the Member failed to conduct a historical leveraging review of the Respondent’s leveraged client accounts to identify and correct deficiencies identified by Staff relating to those leveraged client accounts, contrary to MFDA Rules 1.2.5(a)(iii), 2.2.1 and 2.1.1;
    4. Between September 2009 and July 2015, the Member failed to implement a supervisory structure for the Respondent compliant with the requirements set out in MFDA Policies No. 2 and 5, and failed to effectively discharge the supervisory obligations prescribed by MFDA Rule 2.5, contrary to MFDA Rules 2.5 and MFDA Policies No. 2 and 5, and the Order dated July 8, 2014;
    5. Between, August 2010 and April 2014, the Member failed to regularly update the Respondent’s policies and procedures manual, contrary to MFDA Rule 2.10 and MFDA Policy No. 2;
    6. Between March 2010 and July 2015, the Member failed to implement a Branch Review Program compliant with the requirements set out in MFDA Policy No. 5;
    7. Between March 2010 and July 2015, the Member failed to adequately detect and query patterns in the Know-Your-Client information collected from clients by three Approved Persons: EYCQ, MF and HHYZ, contrary to MFDA Rule 2.2.1 and MFDA Policy No. 2; and
    8. Between March 2010 and July 2015, the Member failed to conduct sufficient supervisory activities of its Approved Persons’ outside business activities, contrary to MFDA Rule 1.2.1(c).
  4. On July 7, 2017, the 2017 Settlement Agreement was accepted at a Settlement Hearing by a MFDA Hearing Panel (the “2017 Settlement Hearing”). As a consequence, the Member paid a fine of $60,000 and costs of $10,000.
  5. The terms and conditions of the 2014 Order were removed pursuant to the order arising from the 2017 Settlement Hearing.

Allegation #1 – The Respondent Failed in His Capacity as Ultimate Designated Person to Supervise Former Approved Person EYCQ

  1. In April 2014, the Member retained a new CCO in response to the concerns raised by Staff during the 2013 Examination.
  2. As UDP of the Member, the Respondent was responsible for supervising the activities of the Member that are directed towards ensuring compliance with the MFDA’s By-laws, Rules and Policies and with applicable securities legislation by the Member and its Approved Persons; and promoting compliance with the MFDA’s By-laws, Rules and Policies and with applicable securities legislation by the Member and its Approved Persons. The Respondent was also responsible for ensuring that all instances of non-compliance are resolved in a timely and effective manner.
  3. At all material times, former Approved Person EYCQ was an Approved Person registered with the Member. In the 2017 Settlement Agreement, the Member admitted to failing to adequately detect and query patterns in the KYC information recorded by former Approved Person EYCQ between March 2010 and July 2015, as described above at paragraph 16(g).
  4. Beginning in 2015, the new CCO repeatedly raised concerns with the Respondent about the business conduct of former Approved Person EYCQ. In particular, from her Tier 1 reviews, the CCO believed that former Approved Person EYCQ was not accurately recording KYC information from clients.  In addition, when the CCO attempted to address these issues with former Approved Person EYCQ, she found him to be unresponsive.
  5. The CCO reported her concerns about former Approved Person EYCQ to the Respondent in:
    1. repeated conversations between 2015 and 2017;
    2. a Sub-Branch Review Report dated February 19, 2016, concerning Approved Person EYCQ, which stated in part that there appeared to be a pattern of uniform KYC information recorded by former Approved Person EYCQ and that he had not adequately addressed this issue after the concern had been raised with him;
    3. Report to the Board of Directors,[1] dated October 30, 2016, which stated that there continued to be problems with former Approved Person EYCQ surrounding his recording of KYC information and a failure to cooperate with compliance requests;
    4. Report to the Board of Directors, dated January 30, 2017, which stated that the CCO continued to have concerns with former Approved Person EYCQ’s business conduct surrounding his recording of KYC information, notwithstanding the CCO’s attempts to work with him and his completion of an education course;[2] and
    5. multiple emails in 2016 and 2017.
  6. The CCO also recommended to the Respondent that former Approved Person EYCQ’s registration be terminated due to his failure to accurately record KYC information and his resistance to the CCO’s attempts to address the issue with him.
  7. The Respondent did not follow the CCO’s recommendations to terminate or otherwise discipline former Approved Person EYCQ. Instead, the Respondent insisted that he would speak with the Approved Person about the concerns raised by the CCO.  The Respondent claims that he advised EYCQ of the importance of listening and complying with the CCO.
  8. Other than the Respondent’s claims that he had such conversations, the Respondent did not take adequate steps to ensure that the KYC information recorded by former Approved Person EYCQ was accurate and that KYC information recorded by him in the future would be done accurately. The Respondent did not maintain any records of his conversations with former Approved Person EYCQ.
  9. The Respondent in his capacity as UDP failed to take adequate supervisory steps to address the concerns reported by the CCO and promote compliance with the MFDA’s Rules by former Approved Person EYCQ. The Respondent further failed to address the non-compliance with the MFDA Rules reported by the CCO in a timely and effective manner.
  10. The CCO’s concerns about former Approved Person EYCQ’s failure to accurately record KYC information continued from the time she first reported her concerns to the date of EYCQ’s termination.
  11. Former Approved Person EYCQ’s registration was terminated by the Member on April 20, 2017 for, among other issues, his failure to accurately record KYC information.
  12. By virtue of the foregoing, the Respondent failed in his capacity as UDP to adequately supervise an Approved Person with respect to concerns the Approved Person was not accurately recording client Know-Your-Client information, contrary to MFDA Rules 2.5.2 and 2.1.1.

Allegation #2 – The Respondent in His Capacity as Ultimate Designated Person Failed to Take Adequate Steps to Ensure the Member’s Compliance with the 2014 Order

  1. As described above at paragraph 13, the 2014 Order:
    1. prohibited the Member from: (i) opening any new non-registered leveraged accounts; (ii) making any new leveraged trade recommendations; or (iii) processing any leveraged trades in any existing non-registered accounts; and
    2. mandated that the Respondent ensure the Member’s compliance with the Order.
  2. In 2016, the CCO raised concerns to the Respondent that some of the Approved Persons registered with the Member may have made leveraged trade recommendations and/or processed leveraged trades. The CCO discovered several instances where large dollar amount trades were made shortly after a line of credit or home equity loan had been approved for a client.[3]  The CCO recommended to the Respondent that the CCO contact the responsible Approved Persons and ask for clarification of the source of money for each trade identified.
  3. The Respondent, however, directed the CCO to not speak with any of the Approved Persons and stated that he wanted to speak with the Approved Persons personally.
  4. Following these conversations, the CCO subsequently submitted the Report to the Board of Directors, dated October 30, 2016,[4] which stated the following:
    1. A review was conducted by CCO into referral fees received vs. large trade amounts (issue: possible leveraging without disclosure).  It was discovered that there were several instances where large dollar amount trades were made just days after a Line of Credit or Home Equity Loan was approved for a client.  This was brought to the attention of [the Respondent]. Discussion was held about how to proceed.  It was recommended that a request be sent to each of the advisors identified in the transactions for clarification of source of funds for each of the trades identified.  One such request was made to Approved Person JC, who confirmed that the funds were from the client’s own resources.  [The Respondent] advised that he wanted to speak with each of the advisors personally.  No further action has been taken on this issue.
  5. According to the Respondent, he spoke with the Approved Persons and advised them that leveraged trading was not permitted. Beyond such conversations, the Respondent failed to take adequate supervisory steps to review the potentially leveraged transactions and determine if Approved Persons were acting in violation of the 2014 Order.
  6. The Respondent has no records of any supervisory steps he took in response to the concerns raised by the CCO that Approved Persons may have been acting in violation of the 2014 Order.
  7. By interfering with the CCO’s investigation of the possible contravention of the 2014 Order and failing to take adequate steps himself to investigate and address the situation, the Respondent, in his capacity as UDP, failed to properly:
    1. supervise the activities of the Member that are directed towards ensuring compliance with the MFDA’s By-laws, Rules and Policies and with applicable securities legislation by the Member and its Approved Persons;
    2. promote compliance with the MFDA’s By-laws, Rules and Policies and with applicable securities legislation by the Member and its Approved Persons; and
    3. ensure compliance with the 2014 Order,
    contrary to the terms of the 2014 Order and MFDA Rules 2.5.2 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; 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: Alan Melamud
Email: amelamud@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] As noted at paragraph 9, the Respondent was the sole director of the Respondent.
[2] Following the Sub-Branch Review of former Approved Person EYCQ by the CCO discussed at paragraph 23(b), the CCO required that EYCQ complete the Canadian Securities Institute course, “Enhanced Suitability for IIROC Advisors”.
[3] The loans were not processed through the Member.
[4] As noted at paragraph 9, Chau was the sole director of the Respondent.