Reasons For Decision

Introduction

1. On November 27, 2017, Lucas Stemshorn-Russell (the “Respondent”) entered into a Settlement Agreement dated November 27, 2017 (the “Settlement Agreement”) with the Mutual Fund Dealers Association of Canada (“MFDA”) Staff (“Staff”) pursuant to which the Respondent agreed to be disciplined under sections 20, 24.1.1, 24.1.4, 24.2, and 24.4 of MFDA By-law No. 1.

2. In the Settlement Agreement the Respondent admits to the following violations of the By-laws, Rules or policies of the MFDA: in or about June, 2016, the Respondent cut and pasted client’s signatures from account forms previously signed by two clients, onto two new account forms, contrary to MFDA Rule 2.1.1.

3. The Settlement Agreement provides that the Respondent would:
   1. pay a fine in the amount of $2,500;
   2. pay costs in the amount of $2,500; (the fine and costs to be paid according to a schedule set out therein)
   3. be prohibited from conducting securities related business in any capacity while in the employ of or associated with an MFDA Member for a period of six months, pursuant to section 24.1.1 (b) MFDA By-law No. 1. The Respondent also agrees that he shall in the future comply with MFDA Rules 2.1.1, and would attend the settlement hearing in person, which he did. The Settlement Agreement is attached to this decision as Appendix A.

4. This matter came before the Hearing Panel as a settlement hearing on January 22, 2017. The Respondent attended the settlement hearing in person and did not have legal counsel.

5. At the commencement of the hearing, the panel granted Staff’s motion to conduct the proceedings in camera while the Panel considered the Settlement Agreement. The request, which is typically made by Staff at the commencement of a Settlement Hearing, is to ensure that Members of the public do not become privy to the confidential contents of the Settlement Agreement unless and until it is accepted by the Panel.  After hearing submissions by counsel for the MFDA, and the Respondent having declined to make any submissions, the Panel, having considered the submissions, the Settlement Agreement, and the authorities, accepted the Settlement Agreement and issued an order to that affect.  These are the written reasons for the Panels’ acceptance.

Agreed Facts

6. The Settlement Agreement contains the following agreed facts:

Registration History

7. The Respondent was registered in the mutual fund industry commencing in March 2009.
8. Between January 2015 and June 2016, the Respondent was registered in the British Columbia as a mutual fund salesperson (now known as a dealing representative) with Worldsource Financial Management Inc. (“Worldsource”), a Member of the MFDA.
9. Between March 2009 and January 2015, the Respondent was registered in British Columbia as a mutual fund salesperson (now known as a dealing representative) with two other mutual fund dealers.
10. On June 9, 2016, Worldsource terminated the Respondent’s registration for the matters described below, and the Respondent is not currently registered in the securities industry in any capacity.
11. At all material times, the Respondent carried on business in [the] Sydney, British Columbia area.

The Respondent Cut and Pasted Client Signatures

12. At all material times, Worldsource’s policies and procedures prohibited its Approved Persons, including the Respondent, from holding, obtaining, or using photocopies of previously signed trading instructions or forms.
13. In or about June 2016, Worldsource staff completed a sales review of client files serviced by the Respondent and identified that two account forms were missing.
14. In response to the deficiencies identified in the sales review, in or about June 2016, the Respondent cut and pasted the signatures of 2 clients from account forms previously signed by the clients onto 2 new account forms, rather than having the clients sign the account forms.
15. The account forms consisted of an Engagement Letter and an Investment Guide.

Worldsource’s Investigation

16. In June 2016, Worldsource identified the forms described above in paragraph 14 during an onsite branch review. Worldsource subsequently reviewed all files for clients that were serviced by the Respondent and identified no further instances of the Respondent copying and pasting client signatures.
17. On June 9, 2016, Worldsource terminated the Respondent’s registration.

Additional Factors

18. 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.
19. There is no evidence of any client loss or that any transactions were unauthorized.
20. The Respondent has not previously been the subject of MFDA disciplinary proceedings.
21. 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.

Admission

7. Based on the facts set out above, the Respondent admitted that in or about June, 2016, the Respondent cut and pasted client signatures from account forms previously signed by two clients onto two new accounts form, contrary to MFDA Rule 2.1.1.

Analysis

8. At a settlement hearing, a Hearing Panel has only two options with respect to a Settlement Agreement referred to it on the recommendation of Staff. The Hearing Panel may either accept the Settlement Agreement or reject it. (MFDA By-law No. 1)

9. It is clear that the role of the Hearing Panel at a settlement hearing is fundamentally different than its role at a contested hearing. As stated by the MFDA Hearing Panel in Re Sterling Mutuals Inc., citing the IDA Ontario District Counsel decision in Re Milewski:
   1. “We also note that while in a contested hearing the Panel attempts to determine the correct penalty, in a settlement hearing the Panel “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. (Re Sterling Mutuals Inc., MFDA File No. 200820, Decision and Reasons dated August 21, 2008 at para. 37; citing Re Milewski (1999) IDACD No. 17 at page 12)

10. Staff submitted, and we agree, that settlements assist the MFDA in meeting its regulatory objective of protecting the public by proscribing activities that are harmful to the public, and by enabling flexible remedies tailored to the interests of both the MFDA and a respondent. The ability of the MFDA to enter into settlements is enhanced where Hearing Panels do not reject a settlement agreement unless the proposed penalty clearly falls outside the reasonable range of appropriateness. (see British Columbia Securities Commission v Seifert, 2007 BCCA 484 at para. 31)

11. We adopt the views expressed by the Hearing Panel in Re Sterling Mutuals Inc. (supra at para. 34) and the views of past hearing panels that, in general, 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 penalty 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 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 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.”

12. Staff submitted, and we agree, that the MFDA Penalty Guidelines are an additional resource that a Hearing Panel may consult when determining the appropriateness of the penalty to be imposed pursuant to a settlement agreement. The penalty types and ranges stated in the Penalty Guidelines are not mandatory or binding; they are intended to provide a basis upon which a Hearing Panel’s discretion can be exercised consistently in like circumstances.

13. In cases involving misconduct of the type admitted to in the present case, the Penalty Guidelines recommend consideration of the following penalties and factors:

14. In considering the appropriateness of the proposed penalty, it is clear that a primary goal of securities regulation, whether in the context of a settlement hearing or a contested hearing, is protection of the investor (Pezim v. British Columbia (Superintendent of Brokers) 1994 2 S.C.R. 557 (FCC) at paras. 59, 68.)

15. In addition to protection of the investor, the goals of securities regulation include fostering public confidence in the capital markets and the securities industry. (Pezim v. British Columbia Supra at paras. 59, 68; Re Breckenridge, MFDA File No. 200718; Decision and Reasons dated November 14, 2007 at para. 74)

16. Previous Hearing Panels have set out a number of additional factors which should be considered when determining an appropriate penalty. These include:
    1. The seriousness of the allegation proved against the Respondent;
    2. The Respondent’s past conduct including prior sanctions;
    3. The Respondent’s experience and 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 and improper activities;
    9. The need to alert others to the consequences of inappropriate activities to those who are permitted to participate in the capital market; and
    10. Previous decisions made in similar circumstances.”
    1. (Re Breckenridge, MFDA File No. 200718, Decision and Reasons dated November 14, 2007 at para. 74 and decisions cited therein)

17. Further, Staff submitted, and we agree, that there is an additional consideration for the Hearing Panel to take into account namely, MFDA Bulletin No. 0661-E, dated October 2, 2015. In that Bulletin Staff reminded Members and Approved Persons that “signature falsification” is not permissible under MFDA Rules.  This term includes conduct like pre-signed account forms, altered account forms and the falsification of a client signature.  In the Bulletin Staff advised Members and Approved Persons that Staff will be seeking enhanced penalties at MFDA disciplinary proceedings for conduct that occurred after the publication of the Bulletin on October 2, 2015.  The Bulletin gave the following examples of signature falsification pointing out that falsification may include, but are not limited to:
    1. having a client sign a form which is blank or only partially completed (“pre-signed form”);
    2. signing a client’s name to a document;
    3. cutting and pasting, photocopying or using correction fluid on a document to “reuse” a previous signature;
    4. altering any information on a signed document, without the client initialing the document to show the change was approved.

18. Further, the Bulletin pointed it out that any falsification is unacceptable whether or not it is done for the purpose of client convenience; the client instructs or otherwise consents to the Approved Person falsifying the document; the client complains or there is financial harm to the client; it was the Approved Person’s intention to deceive a client or other person; and the document is used to commit a further breach of the Rules.

19. Staff submitted, and we agree, that the falsification of a client’s signature or initials is particularly serious. In Re Barnai, MFDA File No. 201325, Decision and Reasons dated March 17, 2015, the Hearing Panel, citing earlier decisions, summarized the principles with respect to falsifying client signatures:
    6. “Falsifying client signatures or initials is serious misconduct. Signature falsification (like the use of pre-signed forms) adversely affects the integrity and reliability of account documents, leads to the destruction of the audit trail, has a negative impact on Member complaint handling, and has the potential for misuse in the form of unauthorized trading, fraud and misappropriation.
    7. As a Hearing Panel of the Investment Dealers Association (now IIROC) stated in Bell (Re):

       “Forgery is always serious.  It is unequivocally condemned because it is fundamentally dishonest and dangerous.  Any act of forgery is a step onto a steep and slippery slope of deception that is always potentially harmful to clients and actually harmful to the Member firm and the securities industry as a whole.”

       Bell Re, [2005] LD. A.C.D. No. 15, Alberta District Council, Panel Decision dated March 21, 2005, at para. 35.

    8. Lamontagne (Re) reiterated the principle set out in Bell (Re), but went on to state that, where warranted, hearing panels may distinguish between serious and less egregious instances of falsification:

       “Forgery is always a serious regulatory matter because it shows that the Respondent lacks the honesty required of a professional in the securities industry…forgery often attracts severe sanctions.  While there is no such things as a “minor case” of forgery, hearing panels may distinguish between more and less egregious examples of forgery.”

       Lamontatagne (Re), [2009] IIROC No. 6, Alberta District Council, Panel Decision dated January 27, 2009, at para. 14 and 45.  Wise (Re), 2012 LNCMFDA 79.

20. It is accepted that MFDA Rule 2.1.1 sets the standard of conduct to be followed by all Approved Persons. The Rule is designed to protect the public interest by requiring Approved Persons to adhere to a high standard of ethical conduct.  The Rule has been interpreted and applied in a purposive manner in a wide range of circumstances.  As stated by the MFDA Hearing Panel in Re Breckenridge:
    1. “The Rule articulates the most fundamental obligations of all registrants in the securities industry.”
    2. (Re Breckenridge, supra, para. 71)

21. Further, MFDA Rule 2.1.1 requires that each Member and Approved Person deal fairly, honestly, and in good faith with clients; observe high standards of ethics and conduct in the transaction of business; and refrain from engaging in any business conduct or practice which is unbecoming or detrimental to the public interest.

22. MFDA Staff submitted, and we agree, that on the basis of the foregoing, by falsifying client’s signatures on account forms, as described in the Settlement Agreement, the Respondent engaged in conduct prohibited by MFDA Rule 2.1.1, and thus engaged in misconduct that should be regarded as serious.

23. Further, it should be noted that all of the signature falsifications were committed after the MFDA issued Bulletin No. 0661-E on October 2, 2015. Staff submitted, and we agree, that this is an aggravating factor which has been discussed by hearing panels in several MFDA decisions: Re Techer, MFDA File No. 201662, December 5, 2016, para. 44; Re Ackerman, MFDA File No. 201734, September 13, 2017, para. 29; see also Re Owen, MFDA File No. 201325, Reasons dated November 23, 2017, at para. 35.

24. We note that the same principles, with respect to an “aggravating factor,” were reiterated in the recent decision Re Kakkar, MFDA File No. 201708, Decision and Reasons dated November 17, 2017, at paras. 46, 50 and 51. That Panel stated “…Respondent engaged in conduct prohibited by MFDA Rule 2.1.1, and therefore, engaged in misconduct that should be regarded as serious.” (para. 51)

25. Considering whether the Hearing Panel should accept or reject the Settlement Agreement, it should be noted that the Respondent has not previously been disciplined by the MFDA. We note the Respondent was registered as a mutual fund dealing representative from May 2009 to June 2016.  Further, by entering into the Settlement Agreement, the Respondent has saved the MFDA the time, resources, and expenses associated with conducting a full hearing of the allegations. (Settlement Agreement at para. 20, 7, 21)

26. We also note that there is no evidence in this case of client harm. There is no evidence the Respondent received any financial or other benefits through his conduct; and there was no client complaint. (Settlement Agreement at para. 18 and 19)

27. With respect to the goals of specific and general deterrence, it is our view that the fine of $2,500.00, coupled with a six month prohibition, is sufficient to achieve the goals of specific and general deterrence. In our view the penalty demonstrates that the Respondent’s misconduct, in all of the circumstances, is serious, and has significant consequences.  The penalty will also deter others in the capital markets from engaging in similar activity.

28. With respect to the Penalty Guidelines, we note that the $2,500.00 fine is lower than the minimum fine recommended by the Penalty Guidelines for an Approved Person’s breach of the standard of conduct. However, when the $2,500.00 fine is coupled with the six month prohibition, in our view that combination is appropriate in the present case having regard to the factors present.

29. Staff cited four previous decisions in similar cases and we note that all were pre-Bulletin cases:

Conclusion

30. Having regard to all the foregoing circumstances, and the authorities cited to and considered by us, it is our view that the proposed penalty is reasonable and proportionate, will have a significant deterrent effect, and is in keeping with the MFDA’s mandate to enhance investor protection and strengthen public confidence in the Canadian mutual fund industry by ensuring high standards of conduct by Members and Approved Persons.

31. Thus this Hearing Panel unanimously accepted the Settlement Agreement. The Settlement Agreement is attached as Schedule “1” to these Reasons.