Reasons For Decision

Introduction

1. By a settlement agreement dated November 20, 2017 (“Settlement Agreement”), Staff of the Mutual Fund Dealers Association of Canada (“Staff”) and Johnny Wu (“Respondent”) agreed to the settlement of this matter by way of a signed agreement. In the Settlement Agreement, the Respondent admitted to the following violations of the By-laws, Rules or Policies of the MFDA: between December, 2015 and February, 2016, he signed the signatures of four (4) clients on five (5) account forms, contrary to MFDA Rule 2.1.1.

2. The Respondent has agreed to the following penalty:

1. a six month prohibition from conducting any securities related businesses with a Member of the MFDA;
2. a fine of $3,500; and
3. costs of $2,500.

3. Staff submits that the Settlement advances the public interest as it is reasonable and proportionate having regards to the nature and extent of the Respondent’s misconduct in all of the circumstances. We agree.  A copy of the Settlement Agreement is attached as Schedule “1” to these Reasons.

4. It is accepted that pursuant to section 24.4.3 of MFDA of By-law No. 1, a Hearing Panel has only two options with respect to a settlement agreement referred to it on the recommendation of Staff. The Hearing Panel shall either accept the settlement agreement or reject it.

5. We adopt the views of the panel as stated in (Re) Sterling Mutuals Inc., MFDA File No. 200820, dated September 3, 2008 as follows:

“We subscribe to the views expressed by 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 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. 

(See, for instance, In Re Leer, [2007] MFDA Pacific Regional Council, File 200710, In Re Zollo, [2007] MFDA Ontario Regional Council, File 200610, and In Re Investors Group Financial Services, [2005] MFDA Ontario Regional Council, File 200401.) 

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.” (In Re Milewski, [1999] I.D.A.C.D. No. 17.)

6. We agree with the submission of MFDA Staff that Settlements assist the MFDA in achieving its regulatory objective of protecting the public by prescribing activities that are harmful to the public, and by enabling flexible remedies tailored to the interest of both the MFDA and a Respondent. We agree that 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 and Seifert, 2007 B.C.C.A 484 at para.31)

7. The MFDA Penalty Guidelines (September 20, 2006) are a further resource available to the Hearing Panel in fashioning an appropriate penalty. It is accepted that the list of factors is illustrative, not exhaustive, and that a Hearing Panel should consider case-specific factors in addition to those listed.  (MFDA Penalty Guidelines page 2)

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

SPECIFIC FACTORS TO CONSIDER

1. Nature of the circumstances and conduct.

2. Number of individuals affected.

3. Whether the conduct is likely to bring the individual, the Member or the mutual fund industry into disrepute

Approved Person:

-Fine: Minimum of $5,000.

-Write or rewrite an appropriate industry course (e.g. IFIC Officers’, Partners’, and Directors’ Course or Canadian Investment Funds Course).

-Suspension

-Permanent prohibition in egregious cases.

(MFDA Penalty Guidelines, page 27)

9. In our view it is settled that the primary goal in securities regulation, 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 (SCC) at paras. 59, 68; Re Breckenridge, MFDA file number 200718, dated November 14, 2007 at paras. 74.)

10. 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 (Superintendent of Brokers), supra, at paras. 59, 68.

11. Further, sanctions should be preventative, protective and prospective in nature. In exercising is discretion to impose a penalty, the Hearing Panel should take in to account the following considerations:
    1. the protection of the investing public;
    2. the integrity of the securities market;
    3. specific and general deterrence;
    4. the protection of the MFDA’s Membership; and
    5. the protection of the integrity of the MFDA’s enforcement processes.

 (Re Breckenridge, MFDA file number 200718, November 14, 2007 at page 21, para. 10.)

12. We adopt the following from the Reasons of the Panel in Re Breckenridge (supra):

“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 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.”

(Re Breckenridge, page 21, para. 10)

13. In their submissions, MFDA Staff pointed to two other MFDA documents dealing with pre-signed forms or signature falsification. MFDA Staff Notice MSN-0066, dated October 31, 2007, stated that the purpose of the Notice was to emphasize that obtaining pre-signed forms from clients by Members and Approved Persons is contrary to the obligation of Members and Approved Persons to deal fairly, honestly and in good faith with their clients, and observe high standards of ethics and conduct in the transaction of business.  The Notice pointed out that Members may only use forms that are duly executed by the client after information on the form has been properly completed.  It stated that some examples of pre-signed forms noted by Staff include blank trade order forms, cheques or account application forms pre-signed by clients, or blank pre-signed forms indicating branch manager or head office approval that have no other information filled in.  Referring to the use of pre-signed forms, the Notice pointed out that the existence of pre-signed trade order forms in client files may be evidence that an Approved Person is engaged in discretionary trading.  Under securities legislation and MFDA Rules, Members and Approved Persons are not permitted to accept discretionary trading authority from a client.

14. In MFDA Bulletin #0661-E, dated October 2, 2015, the MFDA pointed out that Staff continue to encounter situations where Approved Persons have created, possessed or used documents such as Know Your Client forms, trade forms and cheques which have been pre-signed, or on which client’s signatures have been falsified through other means. It went on to say that Members and Approved Person may only use forms that are properly executed by the client after information on the form has been properly completed.  Examples of signature falsification include, but are not limited to:
    1. having the client sign the form which is blank or 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.

15. The Bulletin went on to state that any falsification is unacceptable whether or not:
    1. it is done for the purpose of the client’s convenience;
    2. the client instructs or otherwise consents to the AP falsifying the document;
    3. the client complains where there is a financial harm to the client;
    4. it was the Approved Person intention to see the client or other Person;
    5. the document is used to commit a further breach of the Rules.

16. As can be seen from MFDA Staff Notice MSN-0066, and MFDA Bulletin #0661-E, the prohibition against falsifying forms exists regardless of the existence of client authorization, or the motive behind the use of the form. The MFDA has been warning Approved Person’s against falsifying forms for a number of years.

17. It is clear that hearing panels have held that falsifying forms is a contravention of the standard of the conduct as set out in MFDA Rule 2.1.1: Re Ewart, MFDA File No. 201528, September 11, 2015.

18. MFDA Staff submitted, and we agree, that the falsification of a client’s signature or initials is particularly serious. MFDA Staff referred to the decision of Re Barnai, MFDA File No. 201325, March 17, 2015, wherein they summarized the principles with respect to falsifying client’s signatures:

“7.       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.

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 thing as a “minor case” of forgery, hearing panels may distinguish between more and less egregious examples of forgery.”

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

19. MFDA Staff submitted, and we agree, 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: “the Rule articulates the most fundamental obligations of all registrants in the securities industry.” (Re Breckenridge, supra, para. 71; Re Price, MFDA File No. 200814, April 18, 2011 at paras. 118-121.)

20. 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. MFDA Staff submitted, and we agree, that by falsifying clients’ signatures on account forms as per Part 3 of 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.

21. It should be noted that all of the signature falsifications in this matter were committed after the MFDA issued Bulletin #0661-E on October 2, 2015. In our view this is an aggravating factor, which has been discussed 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.

22. In terms of past conduct, we note that the Respondent has not previously been disciplined by the MFDA and the Respondent was registered as a mutual fund dealing representative from April 2015 to June 2016 as per the Settlement Agreement at para. 18 and para. 7.

23. Further, the Respondent has recognized the seriousness of his misconduct 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 para. 19)

24. Further, there is no evidence of any 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. 17)

25. In our view, there must be significant deterrence as a result of the admitted misconduct. A fine of $3,500.00 with a six month prohibition in our view is necessary and sufficient to achieve the goals of specific and general deterrence, having regard to the factors present in this case and described herein.  In our view, this penalty demonstrates that the Respondent’s misconduct, given the circumstances herein, is serious and has significant consequences. Further, this penalty will also deter others in capital markets from engaging in similar activity.

26. We note that the $3,500.00 fine is lower than the minimum fine recommended by the Penalty Guidelines for this breach of conduct; however, Staff is also seeking a six month prohibition in addition to the fine. Staff submits, and we agree, that the combination of the fine and prohibition is appropriate in the present case to achieve the deterrence and penalty required.

27. With respect to previous decisions in similar cases, MFDA Staff submitted that there were four cases which were somewhat similar, and supported the penalty herein. Those cases are as follows:

28. Having reviewed the facts and admissions set forth in the Settlement Agreement, and having considered the submissions and authorities referred to us, this Panel concludes that the penalty proposed in the Settlement Agreement is reasonable and proportionate, and will deter the Respondent and other Approved Persons from engaging in similar misconduct. Further, acceptance of the Settlement Agreement will advance the public interest and the objective of the MFDA to enhance investor protection, and ensure high standards of conduct in the mutual fund industry.

29. For the foregoing Reasons this Panel accepted the Settlement Agreement between Staff of the MFDA and the Respondent Johnny Wu dated November 20, 2017.