Reasons For Decision

Settlement Hearing

1. The settlement hearing in this matter was held on September 13, 2017 before a Hearing Panel (the “Panel”) which consisted of two members, pursuant to the provisions of Section 19.9(b) of By-law No. 1 of the Mutual Fund Dealers Association of Canada (“MFDA”).

2. Shelley Willow Will (the “Respondent”) appeared in person at the hearing and was accompanied by legal counsel.

3. The Panel granted the motion made by MFDA Staff (“Staff”) at the commencement of the hearing, to move the proceedings in camera while the Panel considered the Settlement Agreement (the “Agreement”). Settlement hearings generally proceed in camera in order to protect the integrity of the process in the event that the Settlement Agreement is not accepted by the Panel. After hearing submissions by counsel for both parties, the Panel accepted the Settlement Agreement and issued an Order to that effect.  The Panel’s written Reasons for decision are set out below.

Settlement Agreement

4. A copy of the Settlement Agreement dated July 18, 2017 is attached to these Reasons as Schedule 1. The agreed facts are set out in Section IV of the Agreement.

Contraventions

5. In the Agreement, the Respondent admitted that:
   1. between about November 5, 2004 and January 31, 2013, she recommended to at least 264 clients that the clients concentrate all or a substantial portion of their investment holdings in precious metals sector funds, without using adequate due diligence to assess the suitability of her investment recommendations on a client-by-client basis having regard to the essential Know-Your-Client (“KYC”) factors relevant to each individual client, including the client’s risk tolerance, investment objectives and investment knowledge, contrary to MFDA Rules 2.2.1[1] and 2.1.1;
   2. between about November 5, 2004 and January 31, 2013, she recorded on account forms in respect of least 264 clients that the clients had, among other things, “100% high” risk tolerance, “100% aggressive growth” investment objectives, and “good” or better investment knowledge, in order to ensure that her investment recommendations to concentrate all or a substantial portion of the clients’ investment holdings in precious metals sector funds would be suitable for each client, contrary to MFDA Rules 2.2.1 and 2.1.1.
   3. between about November 5, 2004 and January 31, 2013, she failed to fully and adequately explain, or omitted to explain the risks and benefits of investing in precious metals sector funds, thereby failing to ensure that her recommendations were suitable for the clients and in keeping with their investment objectives, contrary to MFDA Rules 2.2.1 and 2.1.1.
   4. between December 7, 2014 and November 2, 2015, she obtained, possessed and in some cases, used to process transactions, 16 pre-signed client account forms in respect of 9 clients, contrary to MFDA Rule 2.1.1.

Proposed Penalty

6. The Respondent agreed to the following penalty:
   1. The Respondent shall be permanently prohibited from conducting securities related business in any capacity while in the employ of or associated with any MFDA Member pursuant to s. 24.1.1(e) of MFDA By-law No. 1;
   2. The Respondent shall pay a fine in the amount of $10,000 pursuant to section 24.1.1(b) of By-law No. 1;
   3. The Respondent shall pay costs in the amount of $5,000 pursuant to section 24.2 of By-law No. 1 upon acceptance of this Settlement Agreement;
   4. The fine and costs shall be paid in 6 installments, with the first installment of $2,500 to be paid on the date of the settlement hearing, and the remaining 5 installments payable on the last business day of the 5 months following the date of acceptance of the Settlement Agreement by the Hearing Panel; and
   5. The Respondent will attend in person, on the date set for the Settlement Hearing.

Analysis

Role of the Panel

7. A Hearing Panel which presides over a Settlement Hearing has only two options – either to accept or reject the Agreement. The Panel has no authority to add, delete or vary the terms which have been agreed to by the parties.
   1. MFDA By-law No. 1, s. 24.4.3

8. Hearing Panels have consistently identified that the role they perform in a Settlement Hearing is different than the role they perform in a Contested Hearing.

9. As stated by the MFDA Hearing Panel in Sterling Mutuals Inc. (Re) citing the I.D.A. Ontario District Council in Milewski (Re), [1999] IDACD No. 17 at p.12:
   1. “We also note that while in a contested hearing the Panel attempts to determine the correct penalty, in a settlement hearing the Panel
      1. will tend not to alter a penalty that it considers to be within a reasonable range, taking into account the settlement process and the fact that the parties have agreed.  It will not reject a settlement unless it views the penalty as clearly falling outside a reasonable range of appropriateness.”
      2. Sterling Mutuals Inc. (Re), MFDA File No. 200820, Hearing Panel of the Central Regional Council, Decision and Reasons dated August 21, 2008, at para. 37
         [emphasis added]

Factors Concerning Acceptance of a Settlement Agreement

10. Hearing Panels have repeatedly expressed the view that generally, settlement agreements should be accepted bearing in mind the following criteria:
    1. That it is in the public interest to do so and that the penalties proposed will be sufficient to protect investors;
    2. That the agreement is reasonable and proportionate, having regard to the conduct of the Respondent;
    3. That the agreement addresses the issues of both specific and general deterrence;
    4. That the agreement is likely to prevent the type of conduct set out in the facts;
    5. That the agreement will foster confidence in the integrity of the Canadian capital markets;
    6. That the agreement will foster confidence in the integrity of the MFDA; and
    7. That the agreement will foster confidence in the regulatory process itself.
    1. Sterling Mutuals Inc. (Re), supra, at para. 36

Appropriateness of the Proposed Penalty

11. Investor protection is the primary goal of all securities regulation.
    1. Pezim v British Columbia (Superintendent of Brokers), [1994] 2 S.C.R. 557 at paras.59 & 68

12. In addition to investor protection, the goals of securities regulation include fostering public confidence in the capital markets and in the securities industry.
    1. Pezim v British Columbia (Superintendent of Brokers), supra, at paras. 59 & 68

13. In determining the appropriateness of a proposed penalty Hearing Panels frequently cite the Panel’s decision in Breckenridge (Re), MFDA File No. 200708, Hearing Panel of the Central Regional Council, Decision and Reasons dated November 14, 2007, where the Panel stated that sanctions “… should be preventative, protective and prospective in nature …” taking into account the following:
    1. the protection of the investing public;
    2. the integrity of the securities markets;
    3. specific and general deterrence;
    4. the protection of the MFDA’s membership; and
    5. protection of the integrity of the MFDA’s enforcement processes.
    1. Breckenridge (Re), supra, at para. 76

14. In addition to these general considerations the Panel in Breckenridge (Re) set out the following factors which a Panel should consider, having regard to the specific circumstances of the case:
    1. The seriousness of the allegations proved against the respondent;
    2. The respondent’s experience in the capital markets;
    3. The level of the respondent’s activity in the capital markets;
    4. The harm suffered by investors as a result of the respondent’s activities;
    5. The benefits received by the respondent as a result of the improper activity;
    6. The risk to investors and the capital markets in the jurisdiction, were the respondent to continue to operate in capital markets in the jurisdiction;
    7. The damage caused to the integrity of the capital markets in the jurisdiction by the respondent’s improper activities;
    8. The need to deter not only those involved in the case being considered, but also any others who participate in the capital markets, from engaging in similar improper activity;
    9. The need to alert others to the consequences of inappropriate activities to those who are permitted to participate in capital markets; and
    10. Previous decisions made in similar circumstances.
    1. Breckenridge (Re), supra, at para. 77

Application of the Above Factors to the Present Case

15. In speaking to the appropriateness of the proposed penalty, Staff submitted that it would be useful for the Panel to balance the above referenced factors into two camps: aggravating factors and mitigating factors.

16. Overall, Staff submitted, the balancing of those factors in this case leads to a conclusion that the proposed penalties do fall within the range of reasonableness. In particular, Staff submitted that while the facts point to a number of small mitigating factors those factors are overridden by two significant aggravating factors.

17. Dealing first with the mitigating factors:
    1. the Respondent has no disciplinary record;
    2. the Respondent has obviously recognized the seriousness of the misconduct as evidenced by having entered into a Settlement Agreement with Staff; and
    3. there is no evidence of client harm or loss, or of benefits accruing to the Respondent.

18. Staff submitted, however, that while the Respondent’s conduct was undertaken with a genuine intention to help her clients that does not balance out the aggravating factors.

19. The aggravating factors in this case, Staff submitted, are: the seriousness of both types of misconduct at issue, relating to ‑ the suitability obligations identified in the first three admissions made by the Respondent; and the standard of conduct rule identified in the fourth admission made by the Respondent.

20. Staff submitted that the suitability obligations and the standard of conduct requirements, are cornerstones of securities regulation, particularly within the mutual fund industry.

Suitability

21. MFDA Rule 2.2.1 states, in part:
    1. “2.2.1  ‘Know-Your-Client’
    2. Each Member and Approved Person shall use due diligence:
       1. to learn the essential facts relative to each client and to each order or account accepted;
       2. to ensure that the acceptance of any order for any account is within the bounds of good business practice;
       3. to ensure that each order accepted or recommendation made, including recommendations to borrow to invest, for any account of a client is suitable for the client based on the essential facts relative to the client and any investments within the account.”
    3. MFDA Rule 2.2.1

22. In its submission, Staff referred the Panel to decisions of other MFDA Panels and other securities regulators which have discussed the significance of the rules relating to suitability and which stress that the “Know-Your-Client” and “suitability” obligations have consistently been recognized as an “essential component of consumer protection and a basic obligation of a registrant, and a course of conduct by a registrant involving a failure to comply with them is an extremely serious matter”.
    1. Pretty (Re), MFDA File No. 201128, Hearing Panel of the Atlantic Regional Council, Decision and Reasons dated January 30, 2014, at para. 89

23. Staff also pointed to what it described as the “foundational case” in this area – Lamoureux (Re) – a decision of the Alberta Securities Commission where the tribunal referred to the know-your-client rule as the “cardinal rule” and the cornerstone obligation of an Approved Person’s dealings with clients.
    1. Lamoureux (Re), [2001] A.S.C.D. No. 613 (A.S.C.), at p. 14

24. This type of misconduct, Staff submitted, will always be viewed as serious because it goes straight to the heart of protecting investors and ensuring that suitable investments are being made on their behalf.

25. Further, in this particular case, Staff submitted, the aggravating nature of the Respondent’s conduct is enhanced by virtue of the scope and scale of the number of clients affected, the time period involved and the near uniform application of the suitability breaches. This case involved 264 clients for whom the Respondent documented uniform know-your-client information regardless of whether the information was in fact an accurate reflection of the clients’ risk tolerance, investment objective and investment knowledge.

26. Further, as per the Respondent’s admissions in the Settlement Agreement, the Respondent also breached the suitability obligation because she failed to fully and adequately explain or omitted to explain to her clients, the risks and benefits of investing in precious metals sectors funds.

Standard of Conduct

27. MFDA Rule 2.1.1. states:
    1. “Each Member and each Approved Person of a Member shall:
       1. deal fairly, honestly, and in good faith with its clients;
       2. observe high standards of ethics and conduct in the transaction of business;
       3. not engage in any business conduct or practice which is unbecoming or detrimental to the public interest; and
       4. be of such character and business repute and have such experience and training as is consistent with the standards described in this Rule 2.1.1, or as may be prescribed by the Corporation.
    2. MFDA Rule 2.1.1

28. This Rule sets the standard of conduct to be followed by all Approved Persons, and is designed to protect the public interest by requiring Approved Persons to adhere to a high standard of ethical conduct. It has been interpreted and applied in a purposive manner in a wide range of circumstances. As stated by the MFDA Hearing Panel in Breckenridge (Re):  “The Rule articulates the most fundamental obligations of all registrants in the securities industry.”
    1. Breckenridge (Re), supra, at para. 71
    2. See also:  Price (Re), MFDA File No. 200814, Hearing Panel of the Central Regional Council, Decision and Reasons dated April 18, 2011, at paras. 118-121

29. Since October 31, 2007, the MFDA has made it clear to Approved Persons, that possessing and using pre-signed forms is contrary to the obligations of Rule 2.1.1.
    1. Member Staff Notice 0066: Pre-Signed Forms, dated October 31, 2007

30. The MFDA Hearing Panel in Price (Re) identified the dangers posed by pre-signed forms as follows:
    1. pre-signed forms present a legitimate risk that they may be used by an Approved Person to engage in discretionary trading;
    2. at worst, pre-signed forms create a mechanism for an Approved Person to engage in acts of fraud, theft or other harmful conduct towards a client;
    3. pre-signed forms subvert the ability of a Member to properly supervise trading activity.
    1. Price (Re), supra, at paras. 122-124

31. Hearing Panels of the MFDA, IIROC and provincial securities commissions have also confirmed that the possession and use of pre-signed forms is prohibited.
    1. Price (Re), supra, at para. 135

32. The prohibition on the use of pre-signed account forms applies regardless of whether the client was aware of or authorized the use of the pre-signed forms, or whether the forms were actually used by the Approved Person for discretionary trading or other improper purposes.
    1. Wellman (Re), MFDA File No. 201529, Hearing Panel of the Central Regional Council, Decision and Reasons dated December 21, 2015, at para. 10

33. In summary, therefore, Staff submitted that the two major aggravating factors reflected in the seriousness of the Respondent’s misconduct overwhelm the mitigating factors, particularly in light of the sustained time period, scope and scale of the misconduct in this case.

34. Staff went on to discuss the other matters for the Panel to consider in determining the appropriateness of the penalty, namely ‑ deterrence, the MFDA Penalty Guidelines, and decisions in similar cases.

35. With respect to deterrence, the Supreme Court of Canada and MFDA Hearing Panels have consistently held that deterrence is an appropriate factor to take into consideration when determining penalty.
    1. Cartaway Resources Corp. (Re), [2004] 1 S.C.R. 672, at paras. 52-62

36. As Staff identified in its written submission, the “effect of general deterrence should advance the goal of protecting investors”:
    1. “… A penalty that is meant to deter generally is a penalty that is designed to keep an occurrence from happening; it discourages similar wrongdoing in others.  In a word, a general deterrent is preventative.  It is therefore reasonable to consider general deterrence as a factor, albeit not the only one, in imposing a sanction …”
    2. Cartaway Resources Corp. (Re), supra, at para. 61

37. Staff submitted that in this case the proposed penalties are entirely appropriate because they send the general deterrent message to the industry that this type of misconduct should not be pursued by other Approved Persons.

38. The penalty of a permanent prohibition from returning to the industry also provides an effective specific deterrent.

39. With respect to the MFDA Penalty Guidelines, Staff pointed out that these Guidelines are non-binding and are meant to provide additional guidance where necessary. In this case, Staff submitted that the monetary fine being requested is in line with the Guidelines’ recommended minimum fines for suitability and know-your-client breaches and the agreement to a permanent prohibition, while larger than generally recommended penalties, is warranted in the present case given the seriousness of the misconduct, including its scope and nature.

40. Finally, with respect to similar cases, Staff referred the Panel to a number of decisions, the most relevant of which was Lemay (Re), MFDA File 201634, Hearing Panel of the Pacific Regional Council, Decision and Reasons dated February 28, 2017.

41. In that decision, the accepted Settlement Agreement identified similar facts: the Respondent breached the know-your-client obligations by recommending a concentration of investment holdings in precious metals sector funds without conducting adequate due diligence to assess the suitability of those recommendations.  The penalty in that case included a permanent prohibition, a fine of $5,000 and costs of $2,500.

42. Staff pointed out that in Lemay the scale of the clients at issue was much smaller than the scale in this case. Further, there was no allegation in Lemay that the Respondent had engaged in the second type of misconduct that is being put forward in this case, namely the use of pre-signed forms.

43. Overall, Staff submitted, therefore, the proposed penalty in this case is in line with penalties accepted or ordered in other decisions, regarding similar circumstances.

44. It should be noted that with respect to the issue of concentration, in response to questions from the Panel, Staff confirmed that the issue of concentration became a matter of concern in this case in the context of the Respondent’s breach of her know-your-client and suitability obligations. That is, Staff was not submitting that concentrating positions can never be suitable but rather that satisfying the suitability obligation must precede such recommendations and be followed thoroughly ‑ something which did not happen in this case.

Respondent’s Position

45. The Respondent’s counsel stated that the Respondent believed she had been doing her job to the best of her ability and in accordance with her firmly and honestly held beliefs.

46. Her counsel also submitted that it was important for the Panel, when considering whether to accept the proposed penalty, to understand the supervision context in which the Respondent conducted herself.

47. The Respondent’s position in this regard is articulated in Section V of the Settlement Agreement.

48. Specifically, the Respondent stated that in November 2010, the Member for whom she worked ‑ HollisWealth ‑ created an Acknowledgement and Release Form which asked clients to release and save HollisWealth harmless from any losses or damages arising from the gold strategy she was recommending.

49. HollisWealth then instructed the Respondent to have all new and existing clients complete the form. When the Respondent transferred her registration to Sterling Mutual in 2014, that firm adopted and instructed the Respondent to use the same Acknowledgement and Release form.

50. The Settlement Agreement in a footnote, goes on to identify that HollisWealth entered into a Settlement Agreement with Staff in which it admitted that the creation and dissemination of the Acknowledgement and Release form to the Respondent’s clients contravened MFDA Rules 2.2.1, 2.1.2 and 2.1.1. That Settlement Agreement was approved by a Hearing Panel of the Central Regional Council on March 27, 2017.
    1. HolllisWealth Advisory Services Inc. (Re), MFDA File No. 2016116, Hearing Panel of the Central Regional Council, Decision dated March 27, 2017

51. The Respondent’s counsel also referenced the fact that the Respondent’s immediate supervisor and Branch Manager was the subject of a disciplinary hearing which took place on September 7, 2017 regarding, among other things, his failure to adequately supervise her activities.

52. In this regard, the Panel notes that on December 6, 2017 an MFDA Hearing Panel determined, among other things, that the Respondent’s supervisor had failed to adequately supervise her activities when she recommended that clients concentrate all or a substantial portion of their investment holdings in precious metals sector funds contrary to MFDA Rules 2.2.1, 2.1.1 and 2.5.5.
    1. Re Boyd Dean Yahn, MFDA File No. 201746, Hearing Panel of the Prairie Regional Council, December 6, 2017

Acceptance of the Settlement Agreement in this Case

53. Having reviewed the written submission of Staff and having heard oral submissions from both Staff and counsel for the Respondent, the Panel is satisfied, based on the totality of the evidence, that the proposed penalty which has been agreed upon by the parties and set out in the Settlement Agreement, falls within a reasonable range of appropriateness and should be accepted.

54. The Panel finds that the proposed penalty: satisfies the primary goal of securities regulation to protect investors; is reasonable and proportionate; and appropriately addresses issues of both specific and general deterrence.

55. Accordingly, the Panel accepts the Settlement Agreement.

[1] MFDA Rule 2.2.1 was amended in December 2010 and in February 2013. In this Settlement Agreement, all references to the MFDA Rule 2.2.1 concern the version of the Rule that was in force prior to December 2010.
[2] As part of MFDA File No. 2016116, HollisWealth entered into a Settlement Agreement with Staff, in which it admitted that the creation and dissemination of the Acknowledgement and Release to the clients of the Respondent contravened MFDA Rules 2.2.1, 2.1.2 and 2.1.1. The Settlement Agreement was approved by a Hearing Panel of the Central Regional Council on March 27, 2017.
[3]MFDA Rule 2.2.1 was amended in December 2010 and in February 2013.  In this Settlement Agreement, all references to the MFDA Rule 2.2.1 concern the version of the Rule that was in force prior to December 2010.