Reasons For Decision

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File No. 201648

IN THE MATTER OF A SETTLEMENT HEARING PURSUANT TO SECTION 24.4 OF BY-LAW NO. 1 OF THE MUTUAL FUND DEALERS ASSOCIATION OF CANADA

Re: Raymond Kok-Leung Cheng

Heard: October 27, 2016 in Toronto, Ontario
Reasons For Decision: May 23, 2017

Reasons For Decision

Hearing Panel of the Central Regional Council:

  • H. Michael Kelly, Chair
  • Kenneth P. Mann, Industry Representative

Appearances:

Sarah Glickman, Counsel for the Mutual Fund Dealers Association of Canada|Raymond Kok-Leung Cheng, Respondent, In Person

  1. As a result of a Settlement Agreement dated July 12, 2016 entered into by Staff of the Mutual Fund Dealers Association of Canada (“Staff”) and Raymond Kok-Leung Cheng (“Respondent”), a Settlement Hearing was conducted on October 27, 2016 in Toronto, Ontario. The Hearing Panel, pursuant to s. 24.1 of MFDA By-law No.1, accepted the factual allegations set out in the Settlement Agreement, and the propriety of the penalty agreed to therein. The Order and Settlement Agreement are attached hereto as Schedules 1 and 2.

Registration History

  1. Since 1996, the Respondent has been registered in Ontario as a mutual fund salesperson (now known as a Dealing Representative).
  1. Since January 2012, the Respondent has been registered with Investia Financial Services Inc. (“Investia”), a Member of the MFDA.
  1. At all material times, the Respondent conducted business in the Richmond Hill, Ontario area.

Pre-Signed Account Forms

  1. At all material times, Investia’s policies and procedures prohibited its Approved Persons, including the Respondent, from holding and using pre-signed account forms.
  1. Between January 2012 and May 2015, the Respondent obtained, possessed, and in some instances, used to process transactions, 16 pre-signed account forms in respect of 10 clients. The Respondent submitted 4 of the pre-signed account forms to Investia for processing.
  1. The pre-signed account forms included order instruction forms and trade tickets.

Investia’s Investigation

  1. Investia’s compliance staff identified the conduct that is the subject of this Settlement Agreement during a routine branch audit and subsequent follow up review.
  1. As part of its investigation, on May 28, 2015, Investia sent letters to all clients serviced by the Respondent in order to determine whether the Respondent had engaged in any unauthorized trading. No clients reported any concerns.
  1. On May 26, 2015, Investia placed the Respondent under close supervision for a period of three months.

Additional Factors

  1. There is no evidence that the Respondent received any financial benefit from engaging in the misconduct described above beyond any commissions and fees that he would ordinarily be entitled to receive had the transactions been carried out in the proper manner.
  1. There is no evidence of any client harm or that the transactions were unauthorized.
  1. The Respondent has not previously been the subject of MFDA disciplinary proceedings.
  1. By entering into this Settlement Agreement, the Respondent has saved the MFDA the time, resources, and expenses associated with conducting a full hearing of the allegations.

SETTLEMENT AGREEMENT:

  1. The Respondent acknowledged that his conduct, referred to above, violated MFDA Rule 2.1.1, and Staff and the Respondent jointly recommended that the Hearing Panel accept the Settlement Agreement facts and the following penalties:
    1. the Respondent shall pay a fine in the amount of $5,000.00 pursuant to s. 24.1.1(b) of MFDA By-law No. 1;
    2. the Respondent shall pay costs in the amount of $2,500 pursuant to s. 24.2 of MFDA By-law No. 1;
    3. the Respondent shall in the future comply with MFDA Rule 2.1.1.

REASONS FOR ACCEPTANCE OF THE SETTLEMENT AGREEMENT:

  1. Pursuant to Rule 24.4.3 of MFDA By-law No.1, a Hearing Panel may either accept or reject a settlement agreement. A Hearing Panel will not, and should not, reject a settlement agreement unless the proposed penalty clearly falls outside the range of appropriate penalty. [1] An appropriate penalty is one that is fair and reasonable, addressing the nature and severity of the infraction, the element of specific and general deterrence, and the preservation of investor and public confidence in the integrity of the investment industry.[2]
  1. The use of pre-signed account forms is clearly a violation of Rule 2.1.1, as confirmed by a number of Panel decisions, including the following:
    1. Byce (Re), [2013], Hearing Panel of the Ontario Regional  Council,  MFDA File No.201311 : Panel Decision,  dated September 4, 2013;
    2. Price (Re) [2011] , Hearing Panel of the Ontario Regional Council, MFDA File No.200814,  Panel Decision (Misconduct) dated April 18, 2011;
    3. MacWhirter (Re) [2015] Hearing Panel of the Central Regional Counsel, MFDA File No. 201541, Panel Decision dated February 19, 2016.
  1. A “Pre-signed Account Form” is a generic term that applies to any circumstance where an Approved Person seeks to rely upon a client’s signature that was not provided by the client at the time that the document was completed. It is fundamental to compliance with Rule 2.1.1 that every transaction for the purchase or sale of an investment product, is explained to the investor client by the Approved Person, and is understood and approved by the client. The requisite details must be set out in the account form, and the client’s signature affixed to the completed form, to confirm the client’s understanding of the proposed transaction, and the client’s instruction to proceed.  Failure to perform in that manner opens the opportunity to an Approved Person to effect discretionary transactions, leads to destruction of the audit trail, and, in the worst case scenario, affords opportunity for fraud. The prohibition on the use of pre-signed account forms applies regardless of whether the client approved their use, or regardless of whether they were used to effect a transaction. This prohibition  has been addressed directly in MFDA Staff Notice 0035 (“Recording and Maintaining Evidence of Client Trade Instructions”) dated December 10, 2004 (updated March 4, 2013) ; MFDA Staff Notice 0066 (“Pre-signed Forms”) dated October 31, 2007 (updated March 4, 2013);  and MFDA Bulletin”0661-E”, dated October 2, 2015.  As well, a number of Panel decisions have confirmed this prohibition. The following was contained in the Settlement Hearing Panel Decision in the case of David Ewart, MFDA File No.201528,  dated September 11, 2015, paragraph 26:
    1. “The use of pre-signed forms raises a host of concerns. For example, an unscrupulous Representative may utilize these forms to misappropriate or otherwise place client funds at risk. A pre-signed form also promotes sloppiness, and makes it more likely that a client’s instructions will inadvertently not be followed. Properly completed forms better ensure informed decision-making, and also provide some protection for the Representative from an allegation that he or she misunderstood or failed to follow the client’s instructions.”
  1. Where an Approved Person fails to adhere to the standard of conduct set out in Rule 2.1.1, the MFDA Penalty Guidelines recommend one or all of the following (a) a minimum fine of $5,000.00; (b) requirement to write or rewrite an appropriate industry course; (c) suspension;  (d) permanent prohibition in egregious cases.
  1. Enforcement of strict compliance with the Rules of MFDA and those of the Member is fundamental to the protection of the investor, and to the integrity, and perceived integrity, of the investment industry. In addressing the appropriate penalty herein, the Panel has accepted:
    1. there was no evidence that a dishonest intent instructed the breach of Rule 2.1.1;
    2. there was no evidence that the relevant transactions had not been approved by the clients;
    3. no harm was suffered by a client;
    4. the Respondent had not been previously subject to MFDA disciplinary proceedings, and during Investia’s investigation, he was placed under close supervision by Investia for three months;
    5. the Respondent co-operated with Investia and the MFDA, in the investigation, admitted his breach, and in reaching agreement on penalty, saved MFDA the cost of proceeding to a full hearing;
    6. The Respondent was involved in the industry since 1996, and therefore must certainly have been aware of the relevant restriction, and the significance of a breach thereof.  However, the factors that would increase the severity of the misconduct, as illustrated in other Panel disciplinary hearings addressing  use of Pre-Signed Forms, or breach of undertaking to comply, are not present here.
  1. The Panel is therefore satisfied that the penalty agreed to in the Settlement Agreement, in the amount of $5,000.00 is appropriate, and conforms to the parameters applied in other MFDA decisions addressing similar misconduct. The Panel also is satisfied that the agreement on costs in the amount of $2,500.00 is appropriate.
  1. The Panel hereby confirms acceptance of the Settlement Agreement.

[1] Sterling Mutuals Inc. (Re) 2008 LNCMFDA16; Milewski (Re) [1999] I.D.A.C.D. No 17 Ontario District Council, 1999
[2] Jacobson (Re), 2007 LNCMFDA 27, at para. 68

Dated: May 23, 2017
  • H. Michael Kelly
    H. Michael Kelly
    Chair
  • Kenneth P. Mann
    Kenneth P. Mann
    Industry Representative

543387v2

Schedule “1”

Order
File No. 201648

IN THE MATTER OF A SETTLEMENT HEARING
PURSUANT TO SECTION 24.4 OF BY-LAW NO. 1 OF
THE MUTUAL FUND DEALERS ASSOCIATION OF CANADA

Re: Raymond Kok-Leung Cheng

ORDER

WHEREAS on July 13, 2016, the Mutual Fund Dealers Association of Canada (the “MFDA”) issued a Notice of Settlement Hearing pursuant to section 24.4 of By-law No. 1 in respect of Raymond Kok-Leung Cheng (the “Respondent”);

AND WHEREAS the Respondent entered into a settlement agreement with Staff of the MFDA, dated July 12, 2016 (the “Settlement Agreement”), in which the Respondent agreed to a proposed settlement of matters for which the Respondent could be disciplined pursuant to ss. 20 and 24.1 of By-law No. 1;

AND WHEREAS the Hearing Panel is of the opinion that between January 2012 and May 2015, the Respondent obtained, possessed, and in some instances, used to process transactions, 16 pre-signed account forms in respect of 10 clients, contrary to MFDA Rule 2.1.1.

 

IT IS HEREBY ORDERED THAT the Settlement Agreement is accepted, as a consequence of which:

  1. The Respondent shall pay a fine in the amount of $5,000 pursuant to s. 24.1.1(b) of MFDA By-law No. 1;
  1. The Respondent shall pay costs in the amount of $2,500 pursuant to s. 24.2 of MFDA By-law No. 1;
  1. The Respondent shall in the future comply with MFDA Rule 2.1.1; and
  1. If at any time a non-party to this proceeding, with the exception of the bodies set out in section 23 of MFDA By-law No. 1, requests production of or access to exhibits in this proceeding that contain personal information as defined by the MFDA Privacy Policy, then the MFDA Corporate Secretary shall not provide copies of or access to the requested exhibits to the non-party without first redacting from them any and all personal information, pursuant to Rules 1.8(2) and (5) of the MFDA Rules of Procedure.

DATED this 27th day of October, 2016.

 

“H. Michael Kelly”
 

H. Michael Kelly, Q.C.
Chair
 

“Kenneth P. Mann”
 

Kenneth P. Mann
Industry Representative
 

“Robert C. White”
 

Robert C. White
Industry Representative

Schedule “2”

Settlement Agreement
File No. 201648

IN THE MATTER OF A SETTLEMENT HEARING
PURSUANT TO SECTION 24.4 OF BY-LAW NO. 1 OF
THE MUTUAL FUND DEALERS ASSOCIATION OF CANADA

Re: Raymond Kok-Leung Cheng

SETTLEMENT AGREEMENT

I. INTRODUCTION

  1. Staff of the Mutual Fund Dealers Association of Canada (“Staff”) and the Respondent, Raymond Kok-Leung Cheng (the “Respondent”), consent and agree to settlement of this matter by way of this agreement (the “Settlement Agreement”).
  1. Staff conducted an investigation of the Respondent’s activities which disclosed activity for which the Respondent could be penalized on the exercise of the discretion of the Hearing Panel pursuant to s. 24.1 of By-law No. 1.

II. JOINT SETTLEMENT RECOMMENDATION

  1. Staff and the Respondent jointly recommend that the Hearing Panel accept the Settlement Agreement.
  1. The Respondent admits to the following violations of the By-laws, Rules or Policies of the MFDA:
    1. between January 2012 and May 2015, the Respondent obtained, possessed, and in some instances, used to process transactions, 16 pre-signed account forms in respect of 10 clients, contrary to MFDA Rule 2.1.1.
  1. Staff and the Respondent agree and consent to the following terms of settlement:
    1. the Respondent shall pay a fine in the amount of $5,000 pursuant to s. 24.1.1(b) of MFDA By-law No. 1;
    2. the Respondent shall pay costs in the amount of $2,500 pursuant to s. 24.2 of MFDA By-law No. 1;
    3. the Respondent shall in the future comply with MFDA Rule 1.1; and
    4. the Respondent will attend in person, on the date set for the Settlement Hearing.
  1. Staff and the Respondent agree to the settlement on the basis of the facts set out in Part III herein and consent to the making of an Order in the form attached as Schedule “A”.

III. AGREED FACTS

Registration History

  1. Since 1996, the Respondent has been registered in Ontario as a mutual fund salesperson (now known as a Dealing Representative).
  1. Since January 2012, the Respondent has been registered with Investia Financial Services Inc. (“Investia”), a Member of the MFDA.
  1. At all material times, the Respondent conducted business in the Richmond Hill, Ontario area.

Pre-Signed Account Forms

  1. At all material times, Investia’s policies and procedures prohibited its Approved Persons, including the Respondent, from holding and using pre-signed account forms.
  1. Between January 2012 and May 2015, the Respondent obtained, possessed, and in some instances, used to process transactions, 16 pre-signed account forms in respect of 10 clients. The Respondent submitted 4 of the pre-signed account forms to Investia for processing.
  1. The pre-signed account forms included order instruction forms and trade tickets.

Investia’s Investigation

  1. Investia’s compliance staff identified the conduct that is the subject of this Settlement Agreement during a routine branch audit and subsequent follow up review.
  1. As part of its investigation, on May 28, 2015, Investia sent letters to all clients serviced by the Respondent in order to determine whether the Respondent had engaged in any unauthorized trading. No clients reported any concerns.
  1. On May 26, 2015, Investia placed the Respondent under close supervision for a period of three months.

Additional Factors

  1. There is no evidence that the Respondent received any financial benefit from engaging in the misconduct described above beyond any commissions and fees that he would ordinarily be entitled to receive had the transactions been carried out in the proper manner.
  1. There is no evidence of any client harm or that the transactions were unauthorized.
  1. The Respondent has not previously been the subject of MFDA disciplinary proceedings.
  1. By entering into this Settlement Agreement, the Respondent has saved the MFDA the time, resources, and expenses associated with conducing a full hearing of the allegations.

IV. ADDITIONAL TERMS OF SETTLEMENT

  1. This settlement is agreed upon in accordance with section 24.4 of MFDA By-law No. 1 and Rules 14 and 15 of the MFDA Rules of Procedure.
  1. The Settlement Agreement is subject to acceptance by the Hearing Panel which shall be sought at a hearing (the “Settlement Hearing”). At, or following the conclusion of, the Settlement Hearing, the Hearing Panel may either accept or reject the Settlement Agreement.
  1. The Settlement Agreement shall become effective and binding upon the Respondent and Staff as of the date of its acceptance by the Hearing Panel. Unless otherwise stated, any monetary penalties and costs imposed upon the Respondent are payable immediately, and any suspensions, revocations, prohibitions, conditions or other terms of the Settlement Agreement shall commence, upon the effective date of the Settlement Agreement.
  1. Staff and the Respondent agree that if this Settlement Agreement is accepted by the Hearing Panel:
    1. the Settlement Agreement will constitute the entirety of the evidence to be submitted respecting the Respondent in this matter;
    2. the Respondent waives any 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;
    3. Staff will not initiate any proceeding under the By-laws of the MFDA against the Respondent in respect of the facts and contraventions described in this Settlement Agreement. 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.  Furthermore, nothing in this Settlement Agreement shall relieve the Respondent from fulfilling any continuing regulatory obligations;
    4. 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; and
    5. 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 the Respondent.
  1. If, for any reason, this Settlement Agreement is not accepted 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 the Settlement Agreement or the settlement negotiations.
  1. Staff and the Respondent agree that the terms of the Settlement Agreement, including the attached Schedule “A”, will be released to the public only if and when the Settlement Agreement is accepted by the Hearing Panel.
  1. The Settlement Agreement may be signed in one or more counterparts which together shall constitute a binding agreement. A facsimile copy of any signature shall be effective as an original signature.

DATED this 12th day of July, 2016.

“EC”

  

“Raymond Kok-Leung Cheung”

Witness – Signature

  

Raymond Kok-Leung Cheung

EC

    

Witness – Print name

    
   

“Shaun Devlin”
Staff of the MFDA
Per:  Shaun Devlin
Senior Vice-President,
Member Regulation – Enforcement

Schedule “A”

Order
File No. 201648

IN THE MATTER OF A SETTLEMENT HEARING
PURSUANT TO SECTION 24.4 OF BY-LAW NO. 1 OF
THE MUTUAL FUND DEALERS ASSOCIATION OF CANADA

Re: Raymond Kok-Leung Cheng

ORDER

WHEREAS on [date], the Mutual Fund Dealers Association of Canada (the “MFDA”) issued a Notice of Settlement Hearing pursuant to section 24.4 of By-law No. 1 in respect of [Respondent] (the “Respondent”);

AND WHEREAS the Respondent entered into a settlement agreement with Staff of the MFDA, dated [date] (the “Settlement Agreement”), in which the Respondent agreed to a proposed settlement of matters for which the Respondent could be disciplined pursuant to ss. 20 and 24.1 of By-law No. 1;

AND WHEREAS the Hearing Panel is of the opinion that between January 2012 and May 2015, the Respondent obtained, possessed, and in some instances, used to process transactions, 16 pre-signed account forms in respect of 10 clients, contrary to MFDA Rule 2.1.1; 

IT IS HEREBY ORDERED THAT the Settlement Agreement is accepted, as a consequence of which:

  1. The Respondent shall pay a fine in the amount of $5,000 pursuant to s. 24.1.1(b) of MFDA By-law No.1;
  1. The Respondent shall pay costs in the amount of $2,500 pursuant to s. 24.2 of MFDA By-law No.1;
  1. The Respondent shall in the future comply with MFDA Rule 2.1.1; and
  1. If at any time a non-party to this proceeding, with the exception of the bodies set out in section 23 of MFDA By-law No. 1, requests production of or access to exhibits in this proceeding that contain personal information as defined by the MFDA Privacy Policy, then the MFDA Corporate Secretary shall not provide copies of or access to the requested exhibits to the non-party without first redacting from them any and all personal information, pursuant to Rules 1.8(2) and (5) of the MFDA Rules of Procedure.

DATED this [day] day of [month], 20[  ].

Per:      __________________________
[Name of Public Representative], Chair

Per:      _________________________
[Name of Industry Representative]

Per:      _________________________
[Name of Industry Representative]