Notice of Hearing

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

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. Commencing February 24, 2009, the Respondent was registered in British Columbia as a dealing representative.
2. From August 20, 2010 to April 20, 2017, the Respondent was registered with TeamMax Investment Corp. (the “Member”), a Member of the MFDA.
3. On April 20, 2017, the Respondent was terminated by the Member. He is not currently registered in the securities industry in any capacity.
4. At all material times, the Respondent conducted business in the Richmond, British Columbia area.

Background

The Member’s Policies and Procedures

5. At all material times, the Member’s policies and procedures required that its Approved Persons use due diligence to:
   1. learn the essential facts relative to each client and to each order or account accepted;
   2. ensure that the acceptance of any order for any account is within the bounds of good business practice; and
   3. ensure that each order accepted or recommendation made for any account of a client is suitable for the client and in keeping with the client’s investment objectives.
6. At all material times, the Member’s policies and procedures stated the following regarding leveraged investing:
   1. the Approved Person must maintain accurate and complete “Know-Your-Client” (“KYC”) information;
   2. annual income used to assess leveraging suitability for a client will be based on appropriate evidence obtained from the client;
   3. the client’s investment knowledge should be moderate or extensive and not limited;
   4. the client’s time horizon should be 5 years or higher;
   5. a leveraging investment strategy is generally not suitable for investing in low risk investments and short term investments;
   6. total debt and obligation payments should not exceed 35% of the client’s gross income, not including income generated from the leveraged investments; and
   7. an investment loan should not exceed 30% of a client’s net worth.

The Leveraged Investment Strategy

7. The Respondent met client WX in early 2013. Around this time, client WX retained the Respondent to prepare her 2012 income tax return.
8. During meetings between the Respondent and client WX, the Respondent told client WX that he was a mutual fund salesperson and recommended to client WX that she borrow to invest in mutual funds (the “Leveraged Investment Strategy”). The Respondent described the strategy as safe, and told client WX that the distributions from the underlying investments would cover the interest charges on the loan and provide additional income for the client.
9. Client WX informed the Respondent that she was interested only in a safe investment and did not want to risk losing her home, that she had limited investment knowledge, and that she was prepared to invest for up to three years. The Respondent assured client WX that the Leveraged Investment Strategy was safe and was a strategy that he had personally successfully employed for many years.
10. Client WX agreed to follow the Respondent’s recommendation and borrow monies to invest.
11. Beginning April 2013, the Respondent opened accounts for client WX at the Member. From April 2013 to February 2014, based on the Respondent’s recommendations, client WX applied for and obtained the following four investment loans:
    1. on or about April 16, 2013, a three-to-one loan from B2B Bank, with client WX agreeing to invest $100,000 of her own money in order to receive a $300,000 loan from B2B Bank;
    2. on or about May 15, 2013, a three-to-one loan from TD Bank, with client WX agreeing to invest $100,000 of her own money in order to receive a $300,000 loan from TD Bank;
    3. on or about May 15, 2013, a 100% loan from Manulife, with client WX receiving a $100,000 loan from Manulife; and
    4. on or about January 7, 2014, a one-to-one loan from TD Bank, with client WX agreeing to invest $200,000 of her own money in order to receive another $200,000 loan from TD Bank.
12. Based on the Respondent’s recommendation, client WX invested a total of $1.3 million (consisting of $400,000 that she provided for investment in the strategy and $900,000 that she borrowed from the lending institutions referred to in paragraph 11 above) in two “return of capital” mutual funds (“ROC Funds”).
13. The ROC Funds that the Respondent recommended to client WX provided a monthly distribution, which the Respondent represented could be used by client WX to make the interest payments on the loans and retain the excess as additional income.

Allegation #1 – The Respondent Failed to Accurately Record Client WX’s KYC Information

Leveraged Accounts

14. In order to implement the Leveraged Investment Strategy described above, the Respondent completed in respect of client WX the Member’s KYC forms, the Member’s Net Worth Statements, and the lending institutions’ loan applications (collectively, the “Account Documents”).
15. As described below, when completing the Account Documents, the Respondent failed to learn or accurately record the essential facts relative to client WX.
16. The Respondent knew or ought to have known that client WX had limited investment knowledge, a time horizon of approximately 3 years, and that her risk tolerance was low, if he had used due diligence to learn those essential facts during his initial meetings with the client or afterwards when he met with the client to have her execute the Account Documents that were required to implement the Leveraged Investment Strategy.
17. In addition, the Respondent had prepared client WX’s income tax returns and knew or ought to have known that client WX’s annual income in 2012, the latest year for which the information was available at the time of the first three loans, was $15,089. In 2013, client WX’s annual income was $50,135.  Finally, client WX informed the Respondent that she had a substantial mortgage on her home.
18. The Respondent recorded the following KYC information:

19. The KYC information recorded by the Respondent was inaccurate and overstated client WX’s investment knowledge, time horizon, and risk tolerance. It also overstated client WX’s annual income in 2012 and 2013 and inflated her net worth by failing to include the mortgage on her home of approximately $740,000 and related mortgage payments as liabilities.
20. As a result, the Respondent caused the client’s total net worth to loan ratio and total debt service ratio (“TDSR”) to inaccurately appear as if they were below the Member’s required maximums of 35% and 30%, respectively, for each loan.
21. When the Respondent had client WX sign the Account Forms, the Respondent did not explain the various documents to client WX. Instead, he simply guided client WX on each document to where client WX’s signature was required.
22. By inaccurately recording client WX’s KYC information, the Respondent increased the likelihood that the lending institutions would approve the client’s investment loans or that the Member would approve the implementation of the Leveraged Investment Strategy in the client’s accounts.
23. By virtue of the foregoing, the Respondent failed to learn or accurately record the essential facts relative to a client when completing the Account Documents, contrary to the Member’s policies and procedures and MFDA Rules 2.2.1, 2.1.1, 2.5.1, and 1.1.2.

Allegation #2 – The Respondent Failed to Ensure that the Leveraged Investment Strategy and ROC Funds were Suitable

24. As described above, the Respondent recommended that client WX implement the Leveraged Investment Strategy. The Respondent failed to ensure that the Leveraged Investment Strategy was suitable for client WX based on her actual KYC information, including her limited investment knowledge, short time horizon, low risk tolerance, annual income, and net worth.
25. Had the Respondent accurately recorded client WX’s annual income and net worth, taking into account her mortgage and related payments, client WX’s TDSR and loan to net worth ratio would have exceeded the Member’s required maximums of 35% and 30%, respectively, and been approximately as follows:

26. As described above, the Respondent recommended that client WX invest the $1.3 million into two ROC Funds. The Respondent made these recommendations without ensuring that it was suitable for the client based on client WX’s KYC information, including her limited investment knowledge, low risk tolerance, and short time horizon.
27. As described below, unbeknownst to client WX, the distribution from the ROC Funds could include a portion of the original investment (the capital) depending on the mutual funds’ performance. The ROC Funds were also subject to a 7-year deferred sales charge (“DSC”) schedule.  Both ROC Funds had a risk rating of low to medium risk and were suitable for investors with a medium to long-term time horizon.
28. The Respondent earned at least $48,000 in commissions from his recommendation to client WX to implement the Leveraged Investment Strategy and purchase the ROC Funds.
29. In late 2016, client WX requested that a different Approved Person begin servicing her accounts with the Member. In 2019, client WX borrowed approximately $600,000 and redeemed mutual funds from her accounts at the Member, and used the proceeds from the loan and the redemptions to repay the $900,000 owing on the investment loans associated with the Leveraged Investment Strategy.  Client WX continues to pay the interest and the outstanding balance owing on the line of credit.
30. By virtue of the foregoing, the Respondent failed to ensure that the Leveraged Investment Strategy and the underlying investments that he recommended and implemented in the accounts of client WX were suitable for the client, having regard to the client’s KYC information and within the bounds of good business practice, contrary to the Member’s policies and procedures and MFDA Rules 2.2.1, 2.1.1, 2.5.1, and 1.1.2.

Allegation #3 – The Respondent Failed to Explain the Risks, Benefits Material Assumptions, and Features of the Leveraged Investment Strategy and the ROC Funds

31. As described above, the Respondent recommended to client WX that she borrow $900,000 and invest a total $1.3 million in two ROC Funds.
32. When making these recommendations, the Respondent misrepresented or failed to adequately explain the risks, benefits, material assumptions, and features of the Leveraged Investment Strategy and the ROC Funds. For example, the Respondent:
    1. represented the Leveraged Investment Strategy as a safe way for client WX to generate income, and failed to advise client WX of the risks of borrowing to invest, including that:
       1. the investment returns generated by the investments purchased with the proceeds from the loans might not cover the interest payments owed on those loans; and
       2. the redemption of the investments purchased with borrowed money might not leave client WX with proceeds sufficient to repay the investment loans;

       and consequently, client WX might have to pay interest expenses or the outstanding loan amounts (to the extent that such loan amounts exceeded the value of the investments purchased with loan proceeds) from sources of money unconnected with the Leveraged Investment Strategy;

    2. failed to inform client WX about the nature of distributions that the ROC Funds paid to investors, such that client WX was not aware that a substantial portion of the distributions paid by the ROC Funds could consist of a return of her principal, and therefore the proceeds of redemption available from the ROC Funds might not be an amount sufficient to repay the investment loans obtained to finance the purchase of the ROC Funds;
    3. advised client WX that the ROC Funds could be relied on to pay a fixed distribution that would cover the interest payments of the loans without explaining to her the risk that such distributions could be reduced, suspended, or cancelled; and
    4. failed to tell client WX that if she attempted to redeem all or part of the amounts invested in the ROC Funds prior to the expiry of the 7-year DSC schedule, she would be required to pay deferred sales charges.
33. By virtue of the foregoing, the Respondent failed to adequately disclose to client WX the risks, benefits, material assumptions and features of the Leveraged Investment Strategy and the underlying investments that he recommended to her, contrary to MFDA Rules 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; 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: [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] The Respondent failed to record the pre-existing investment loan on this application.