Lyla Simon, Counsel for the Mutual Fund Dealers Association of Canada|Janice Wright, Counsel for the Respondent
- By Notice of Hearing dated December 17, 2015, the Mutual Fund Dealers Association of Canada (the “MFDA”) alleged misconduct against International Capital Management Inc. (the “Respondent”) and John Paul Sanchez (“Sanchez”).
- The Notice of Hearing was for a hearing in the matter to be held on February 2, 2016. On the return of the Notice of Hearing, the matter was adjourned to December 16, 2016 for hearing on the merits.
- Prior to December 16, 2016, the Staff of the MFDA (“Staff”), in the exercise of its prosecutorial discretion, withdrew Allegation #2 in the Notice of Hearing as against Sanchez.
- Allegation #2: Between June 2012 and September 2013, John Paul Sanchez (“Sanchez”) failed to make appropriate queries or inform himself as to ICM’s adherence to the Early Warning rules and requirements, contrary to MFDA Rule 2.5.2(b).
- On the joint motion of Staff and the Respondent, the Hearing Panel granted an order that the proceeding dealing with the approval of the Settlement Agreement would be held in camera.
- After considering the Settlement Agreement as well as the extensive submissions from both Staff and counsel for the Respondent, the Hearing Panel unanimously accepted the Settlement Agreement and signed an order dated December 16, 2016 to that effect. The Hearing Panel also indicated, as is its duty under Rule 15.2 (3), that it would provide reasons for its decision in due course. These are those reasons.
- The salient portions of the Settlement Agreement are as follows:
- Staff conducted an investigation of the Respondent’s activities. The investigation disclosed that the Respondent had engaged in activity for which the Respondent could be penalized on the exercise of the discretion of the Hearing Panel pursuant to s.24.1 of MFDA By-law No. 1.
- Staff and the Respondent agree with the facts set out in Part IV herein for the purposes of this Settlement Agreement only and further agree that this agreement of facts is without prejudice to the Respondent or Staff in any other proceeding of any kind including, but without limiting the generality of the foregoing, any proceedings brought by the MFDA (subject to Part XI) or any civil or other proceedings which may be brought by any other person or agency, whether or not this Settlement Agreement is accepted by the Hearing Panel.
IV. AGREED FACTS
- The Respondent is registered as a mutual fund dealer in Alberta and Ontario, and has been a Member of the MFDA since February 8, 2002.
- John Paul Sanchez (“Sanchez”) is the President and the Ultimate Designated Person of the Respondent. Sanchez and his brother, JS, jointly own ICM.
- Since June 1, 1996, Sanchez has been registered in Alberta and Ontario as a dealing representative (formerly known as a mutual fund salesperson) with the Respondent.
- The Respondent’s bookkeeper, WV, is not registered in the mutual fund industry. WV reported directly to Sanchez.
- WV was responsible for completing the MFDA Form 1 and was the Respondent’s contact person for any financial and compliance related queries from MFDA Staff. Sanchez and WV met regularly to discuss budgetary concerns and other matters, and to review the Form 1 before submitting it to Staff. Sanchez’s review of the Form 1s consisted of a limited review of Schedule 5, the Early Warning tests, and the Respondent’s risk adjusted capital (“RAC”). As well, Sanchez signed the Certificate of Partners and Directors.
- In addition to their ownership of ICM, Sanchez and JS also jointly own HoldCo and owned I-Boss.
- HoldCo owns the office building in which the Respondent carries on business. According to the lease between the Respondent and HoldCo, the Respondent is required to pay HoldCo $4,675 monthly to lease its office space.
- I-Boss carried on business at the same office space as the Respondent and provided marketing services to the Respondent. I-Boss ceased its operations in 2012.
- The Respondent is designated as a Level 3 Member of the MFDA for the purposes of determining its minimum capital. In accordance with MFDA Rule 3.1.1, a Level 3 Member of the MFDA must maintain minimum capital of $75,000 and RAC greater than zero at all times.
Early Warning – May 2012 to September 2013
- In March 2012, Staff conducted an onsite examination of the Respondent and identified deficiencies in the Respondent’s Form 1. Staff found that accounting adjustments were incorrectly reported, including an understated tax liability of $28,000 and an overstated commission receivable of $15,000. The Profitability Test was triggered in the Respondent’s April 2012 Form 1 after the accounting adjustment were corrected.
- By letter dated May 30, 2012 (sent same day via email), Staff advised ICM that it had been placed in Early Warning as a result of accounting adjustments that would cause the Respondent to be capital deficient as at January 31, 2012. The letter stated that while designated in Early Warning and in accordance with MFDA Rule 3.4.2(b)(iv), The Respondent could not make any payments by way of loan, advance, dividend or bonus to Officers or related companies of the Respondent without the prior approval of Staff. The Respondent was required to submit a plan on how it would resolve the deficiencies and a letter confirming that the circumstances of MFDA Rule 3.4.2 are applicable.
- By email on June 6, 2012, ICM submitted a letter to Staff. The Respondent’s external accountant was copied on the email. The letter stated that the Respondent was aware that it had been placed in Early Warning as a result of the MFDA examination and had sold $52,654 in investments to remedy the issue.
- The Respondent triggered the Profitability Test again in its April, May, and June 2012 Form 1s. Since the Respondent triggered the Profitability Test more than two times within 12 months, the Respondent was subject to the Frequency Penalty and was aware or ought to have been aware that it remained subject to the Early Warning restrictions.
- The Frequency Penalty expired with the submission of the Respondent’s June 2013 Form 1. As a result of fluctuations in the Respondent’s RAC, the Respondent remained designated in Early Warning at the discretion of Staff. On September 26, 2013, Staff removed the Respondent from Early Warning after a satisfactory review of the Respondent’s August 31, 2013 Form 1.
- During periods when the Respondent was designated in early warning, ICM was subject to the early warning requirements set out in MFDA Rule 3.4.2(b) including, in particular, the requirements that the Respondent:
- refrain from:
- reducing its capital in any manner including by redemption, repurchase or cancellation of any of its shares;
- reducing or repaying any indebtedness which has been subordinated;
- directly or indirectly making any payments by way of loan, advance, bonus, dividend, repayment of capital or other distribution of assets to any director, officer, partner, shareholder, related company, affiliate or associate,
- increasing its non-allowable assets (as specified by the MFDA) unless a prior binding commitment to do so exists or entering into any new commitments which would have the effect of materially increasing the non-allowable assets of the Member;
without the prior written consent of the MFDA; and
- provide to the MFDA such reports or information, on a daily or a less frequent basis, as may be necessary or desirable in the opinion of the MFDA to assess and monitor the financial condition or operations of the Member.
- refrain from:
Unauthorized Payments – Overview
- While designated in Early Warning and without the prior written consent of the MFDA, the Respondent made payments to various entities as follows:
- salary and override payments to Officers of the Respondent from June 2012 to August 2013;
- payments to I-Boss from June 2012 to December 2012; and
- a payment to HoldCo in March 2013.
Unauthorized Payments of Salaries and Overrides to Officers of the Respondent
- From June 2012 to August 2013, while the Respondent was designated in Early Warning, the Respondent made monthly payments of salaries and overrides to Sanchez and JS totaling $302,418 without prior written approval from the MFDA. The payments were processed by WV.
- ICM was responsible for ensuring its adherence to the Early Warning rules and requirements, including responsibility for supervising WV. ICM ought to have confirmed that WV had obtained prior approval from Staff to make the payments of salaries and overrides from June 2012 to August 2013, in order to ensure its adherence to the Early Warning rules and requirements.
Unauthorized Payments to I-Boss
- From June 2012 to December 2012, while the Respondent was designated in Early Warning, the Respondent made five payments totaling $14,035 to I-Boss without obtaining prior written approval from the MFDA. The payments were processed by WV.
- ICM was responsible for making appropriate queries and informing itself as to its adherence to the Early Warning rules and requirements, including responsibility for supervising WV. ICM ought to have confirmed that WV had obtained prior approval from Staff to make the five payments to I-Boss from June 2012 to December 2012, in order to ensure the Respondent’s adherence to the Early Warning rules and requirements.
Unauthorized Payment to HoldCo
- During Staff’s review of the Respondent’s March 31, 2013 Form 1, Staff noted an increase of $50,780 in prepaid expenses. By email dated April 22, 2013, Staff requested the Respondent provide a breakdown of the expenses.
- By email dated April 23, 2013, WV provided Staff with a copy of the Respondent’s prepaid expenses balance as at March 31, 2013 which indicated that in March 2013, the Respondent had paid $32,000 in “advanced” rent to HoldCo. Staff noted that the lease agreement between the Respondent and HoldCo provided that lease payments were to be made in equal monthly instalments in advance on the first day of each month. Of the $32,000 paid to HoldCo, $5,000 represented the current rent payment due, and the remaining $27,000 was over and above any payment due to HoldCo by the Respondent.
- In or about June 2013, Staff contacted ICM to review the Early Warning requirements. ICM acknowledged that the prepayment of rent was a breach of the Early Warning restrictions and indicated that it would obtain approval prior to making such payments in the future. By letter dated September 20, 2013, Staff requested that ICM explain why the Respondent prepaid 6 months in rent and did not seek prior written approval from Staff.
- In a letter from ICM to Staff, delivered via email on October 11, 2013, ICM indicated that it had reviewed its RAC for the month to ensure it was positive prior to making the prepayment and the Respondent’s shareholders decided to prepay the rent because HoldCo needed a capital injection.
- WV stated to Staff that he was instructed by ICM to make the payment of $27,000 to HoldCo and to record the payment as prepaid rent. WV stated that he made the payment as instructed and did not make any inquiries about the payment. The $27,000 described by WV as “advanced rent” was used to make an RRSP contribution for the benefit of JS.
- The Respondent was responsible for making appropriate queries and informing itself as to the Respondent’s adherence to the Early Warning rules and requirements, including responsibility for supervising WV. The Respondent ought to have confirmed that WV had obtained prior approval from Staff to make any such payments, including the payment to HoldCo and the RRSP contribution for the benefit JS in March 2013.
- Between June 2012 and September 2013, while the Respondent was designated in Early Warning, the Respondent contravened the early warning requirements set out in MFDA Rule 3.4.2 by making payments without prior written approval from the MFDA for:
- salary and override payments to Officers of the Respondent from June 2012 to August 2013;
- payments to I-Boss from June 2012 to December 2012; and
- a payment to HoldCo in March 2013.
all of which is contrary to MFDA Rule 3.4.2(b)(iv)(C).
VII. TERMS OF SETTLEMENT
- The Respondent agrees to the following terms of settlement:
- ICM shall pay a fine in the amount of $30,000, pursuant to section 24.1.2(b) of MFDA By-law No. 1;
- ICM shall pay costs in the amount of $5,000, pursuant to section 24.2 of MFDA By-law No. 1;
- ICM shall in the future comply with MFDA Rule 3.4.2; and
- a senior officer of the Respondent will attend in person on the date set for the Settlement Hearing.
VIII. STAFF COMMITMENT
- If this Settlement Agreement is accepted by the Hearing Panel, Staff will not initiate any proceeding under the By-laws of the MFDA against the Respondent or any of its officers or directors in respect of the facts set out in Part IV and the contraventions described in Part VI of this Settlement Agreement, subject to the provisions of Part XI below. Nothing in this Settlement Agreement precludes Staff from investigating or initiating proceedings in respect of any facts and contraventions that are not set out in this Settlement Agreement or in respect of conduct that occurred outside the specified date ranges of the facts and contraventions set out in this Settlement Agreement, whether known or unknown at the time of settlement. Furthermore, nothing in this Settlement Agreement shall relieve the Respondent from fulfilling any continuing regulatory obligations.
IX. PROCEDURE FOR APPROVAL OF SETTLEMENT
- Acceptance of this Settlement Agreement shall be sought at a hearing of the Central Regional Council of the MFDA on a date agreed to by counsel for Staff and counsel for the Respondent.
- Staff and the Respondent may refer to any part, or all, of the Settlement Agreement at the settlement hearing. Staff and the Respondent also agree that if this Settlement Agreement is accepted by the Hearing Panel, it will constitute the entirety of the evidence to be submitted respecting the Respondent in this matter, and the Respondent agrees to waive its rights to a full hearing, a review hearing before the Board of Directors of the MFDA or any securities commission with jurisdiction in the matter under its enabling legislation, or a judicial review or appeal of the matter before any court of competent jurisdiction.
- Staff and the Respondent agree that if this Settlement Agreement is accepted by the Hearing Panel, then the Respondent shall be deemed to have been penalized by the Hearing Panel pursuant to s. 24.1.2 of By-law No. 1 for the purpose of giving notice to the public thereof in accordance with s. 24.5 of By-law No. 1.
- Staff and the Respondent agree that if this Settlement Agreement is accepted by the Hearing Panel, neither Staff nor the Respondent will make any public statement inconsistent with this Settlement Agreement. Nothing in this section is intended to restrict the Respondent from making full answer and defence to any civil or other proceedings against it.
X. FAILURE TO HONOUR SETTLEMENT AGREEMENT
- If this Settlement Agreement is accepted by the Hearing Panel and, at any subsequent time, the Respondent fails to honour any of the Terms of Settlement set out herein, Staff reserves the right to bring proceedings under section 24.3 of the By-laws of the MFDA against the Respondent or any of its officers or directors based on, but not limited to, the facts set out in Part IV of the Settlement Agreement, as well as the breach of the Settlement Agreement. If such additional enforcement action is taken, the Respondent agrees that the proceeding(s) may be heard and determined by a hearing panel comprised of all or some of the same members of the hearing panel that accepted the Settlement Agreement, if available.
XI. NON-ACCEPTANCE OF SETTLEMENT AGREEMENT
- If, for any reason whatsoever, this Settlement Agreement is not accepted by the Hearing Panel or an Order in the form attached as Schedule “A” is not made by the Hearing Panel, each of Staff and the Respondent will be entitled to any available proceedings, remedies and challenges, including proceeding to a disciplinary hearing pursuant to sections 20 and 24 of By-law No. 1, unaffected by this Settlement Agreement or the settlement negotiations.
- Whether or not this Settlement Agreement is accepted by the Hearing Panel, the Respondent agrees that it will not, in any proceeding, refer to or rely upon this Settlement Agreement or the negotiation or process of approval of this Settlement Agreement as the basis for any allegation against the MFDA of lack of jurisdiction, bias, appearance of bias, unfairness, or any other remedy or challenge that may otherwise be available.
- After considering the Settlement Agreement, together with the submissions made by counsel for the MFDA as well as those made in support of the Settlement Agreement by counsel for the Respondent, the Hearing Panel unanimously accepted the Settlement Agreement and signed an order to that effect while indicating that as required by the Rules, Reasons for Decision would be delivered in due course.
Analysis and Reason for Decision
- Staff submitted, and the Hearing Panel agrees, that prior to approving a Settlement Agreement, a Hearing Panel must be satisfied that:
- The facts admitted to by the Respondent constitute misconduct in contravention of the MFDA By-law No.1 (By-law), MFDA Rules or policies or provincial securities legislation; and
- The penalties contemplated in the Settlement Agreement fall within a reasonable range of appropriateness bearing in mind the nature and extent of the misconduct and all of the circumstances.
As will be apparent from what follows, the Hearing Panel was satisfied that the foregoing requirements had been met in this case.
- It is well established that settlements such as the one before us serve the objective of protecting the public interest. As Mr. Justice Kelleher said in British Columbia Securities Commission v. Seifert,  B.C.J. No. 225 at para. 49:
- Settlements assist the Commission to ensure that its overriding objective, the protection of the public, is met. Settlements proscribe activities that are harmful to the public. In so doing, they are effective in accomplishing the purposes of the statute. They provide means of reaching a flexible remedy that is tailored to address the interests of both the Commission and the person under investigation. Enforcement is rarely a concern because the settlement is voluntary.
- The duty of a Hearing Panel sitting on a Settlement Hearing differs from that of a Hearing Panel at a contested hearing. As was stated in Re Clark  I.D.A.C.D. No. 40:
- In a contested Hearing, the Hearing Panel attempts to determine the correct penalty. In a Settlement Hearing, the Hearing Panel takes into account the settlement process itself and the fact that the parties have agreed to the penalties set out in the Settlement Agreement. In our view, a Hearing Panel should not interfere lightly in a negotiated settlement and should not reject a Settlement Agreement unless it views the penalty as clearly falling outside a reasonable range of appropriateness. As has been said: “The settlement process is one of negotiation and compromise and the penalty imposed following a settlement will often be less onerous than one imposed following a Hearing where similar findings are made.”
- Settlements form an integral part of the regulatory process itself. By demonstrating to the members of the regulated industry that early admission of transgression and subsequent cooperation will usually lead to lesser penalties, the effectiveness and efficiency of the regulatory process is enhanced.
- When determining whether it would be appropriate to accept a proposed settlement, MFDA hearing panels typically take into consideration whether the settlement:
- Would be in the public interest and whether the penalty imposed will protect investors;
- Is reasonable and proportionate, having regard to the conduct of the Respondent as set out in the Settlement Agreement;
- Addresses the issues of both specific and general deterrence;
- Will prevent the type of conduct described in the Settlement Agreement from occurring again in the future; and
- Will foster confidence in the integrity of the Canadian capital markets and the MFDA, and in the regulatory process itself.
Sterling Mutuals Inc. (Re), 2016 LNCMFDA 77 at para 13 Reasons for Decision dated June 27, 2016 [“Sterling Mutuals”]
- Hearing panels have also taken into account the following additional factors when evaluating whether the penalties proposed in a settlement agreement should be accepted:
- The seriousness of the contraventions admitted to by the Respondent;
- The Respondent’s past conduct, experience in the capital markets and disciplinary history;
- Whether the Respondent recognizes that the conduct was improper and has demonstrated remorse;
- The harm suffered by investors as a result of the Respondent’s conduct;
- Whether the settlement agreement addresses both specific and general deterrence and will tend to prevent both the Respondent and others who participate in the capital markets from engaging in similar improper activity in the future;
- Whether acceptance of the settlement agreement would be in the public interest as the penalties agreed upon will protect investors and are reasonable and proportionate having regard to the conduct of the Respondent;
- Whether the settlement agreement will foster confidence in the integrity of the Canadian capital markets, the MFDA and the regulatory process; and
- Previous decisions in similar circumstances.
Sterling Mutuals at para 14.
Suitability of the Penalties Imposed
- As noted above, hearing panels typically take into account a variety of factors when assessing the appropriateness of a settlement agreement, a number of which are applied to the present case as follows:
- Seriousness of the Contraventions: The contraventions that the Respondent has admitted to are serious, and the matter is appropriately the subject matter of a disciplinary proceeding. It is notable that the Respondent and Sanchez were nevertheless diligent in preventing any threat of harms to clients by verifying, in the ordinary course, that the impugned payments would not create an illiquid position for the Member. Additionally, at all material times, the Respondent was diligent in ensuring that it maintained a positive RAC and profit/loss ratio.
- Harm: there were no client losses and no client complaints as a result of the misconduct admitted to herein.
- Past Conduct, Experience & Disciplinary History: The Respondent has been a Member of the MFDA since February 8, 2002. The Respondent has not been the subject of previous MFDA disciplinary proceedings.
- Remorse: Staff is satisfied that the Respondent has demonstrated remorse, accepted responsibility for its conduct, and regrets the contraventions. The Respondent cooperated with Staff and entered into the Settlement Agreement, thus reducing the length and complexity of the disciplinary proceeding that might have otherwise been necessary.
- Deterrence: Both general and specific deterrence are of importance to Staff and to the securities industry more widely. The Settlement Agreement penalty amounts will serve as a caution and a deterrent regarding potential outcomes for engaging in such misconduct.
- Public Interest & Proportionality: It is in the public interest to accept the Settlement Agreement. The Settlement Agreement is the result of substantial negotiations between the parties and indicates that the Respondent’s misconduct constituted a serious regulatory contravention, resulting in a significant penalty.
- MFDA Penalty Guidelines: In addition to considering the factors set out above, hearing panels typically refer to the MFDA Penalty Guidelines when determining the appropriate penalties to be imposed in disciplinary proceedings. The Guidelines are not mandatory or binding on a hearing panel, but do provide a basis upon which discretion can be exercised consistently and fairly. In cases involving a Member’s financial requirements, the Penalty Guidelines iterate that the Rule 3 requirements “are designed to enhance investor protection” and recommend consideration of the following penalties for Members in breach of the requirements:
- Financial Requirements: minimum fine of $25,000, suspension (where deficiency is result of deliberate or reckless disregard for requirements) interim order pursuant to s. 24.3 of MFDA By-law No. 1, or termination in egregious cases.
- Penalty Guidelines, page 13.
- Of the decisions that the Panel was referred to, the one that was found to be most relevant was H. Stuart Mutuals Ltd. (Re), 2012 LNCMFDA 7. Like the present case, it concerned the approval of a settlement and a breach of the early warning restrictions by a payment to a related party without the prior written consent of MFDA staff, contrary to MFDA Rule 3.4.2 (b)(iv)(C). The fine agreed to was $45,000, which is significantly higher than that agreed to in the present case. The Panel questioned counsel why that was the case and it was explained to our satisfaction that the facts in the Stuart case were significantly more egregious than the one we are presently dealing with.
- The Hearing Panel is satisfied that the penalties agreed to in the Settlement Agreement are reasonable and proportionate and will deter the Respondent and other MFDA members from engaging in similar misconduct. We concluded that the acceptance of the Settlement Agreement would advance the public interest and the MFDA objectives of enhancing investor protection and ensuring high standards of conduct in the mutual fund industry.
John Lorn McDougall Q.C.John Lorn McDougall Q.C.Chair
Guenther W. K. KlebergGuenther W. K. KlebergIndustry Representative