Hearing Panel of the Central Regional Council:
- Martin L. Friedland, Chair
- Brigitte J. Geisler, Industry Representative
Alan Melamud, Enforcement Counsel for the Mutual Fund Dealers Association of Canada
Jeff W. Galway, Counsel for the Respondent
Mark Kinzel, President of Investors Group Financial Services Inc.
- This is a Settlement Hearing under Section 24.4 of By-law No. 1 of the Mutual Fund Dealers Association of Canada (the “MFDA”). The hearing was held on Friday, May 17, 2019. The full Settlement Agreement, dated May 1, 2019, entered into between Staff of the MFDA and Investors Group Financial Services Inc. (“Investors Group” or the “Respondent”) is available on the MFDA website. The Respondent was represented by counsel at the Hearing.
- The Panel accepted the proposed Settlement Agreement at the conclusion of the hearing, with reasons to follow. These are our reasons for our decision to accept the Settlement Agreement.
- The Respondent is a mutual fund dealer and Member of the MFDA and is registered under securities legislation in all Canadian provinces and territories. The Respondent has been a Member of the MFDA since February 8, 2002.
- A Notice of Settlement Hearing was issued on May 14, 2019. The Notice states:
- “The proposed Settlement Agreement concerns an allegation that from May 2013 to July 2014, the Respondent failed to adequately query the suitability of the recommendation and sale of mutual funds subject to deferred sales charges to two elderly clients, contrary to MFDA Rules 2.2.1 and 2.5.1 and MFDA Policy No. 2.”
The Settlement Agreement
- In Paragraph 45 of the Settlement Agreement, the Respondent admits the conduct set out in the previous paragraph.
- The Settlement Agreement sets out in paragraph 46 the following terms of settlement:
- “The Respondent agrees to the following terms of settlement:
- the Respondent shall pay a fine in the amount of $150,000, pursuant to s.24.1.2(b) of MFDA By-law No. 1;
- the Respondent shall pay costs in the amount of $15,000, pursuant to s.24.2 of MFDA By-law No. 1; and
- a senior officer of the Respondent will attend in person on the date set for the Settlement Hearing.”
- “The Respondent agrees to the following terms of settlement:
- The agreed facts are set out in detail in paragraphs 7 to 39 of the Settlement Agreement and will not be repeated in full here. In brief, between May 2013 and July 2014, the Respondent failed to adequately query the suitability of the recommendation and sale of mutual funds subject to deferred sales charges (“DSC”) to two elderly clients, client MC and client FD. In both instances, the clients died prior to the expiry of the applicable DSC schedule and the clients’ estates were subject to DSCs.
- Each client had purchased mutual funds under similar circumstances. MC, who was 92 years old at the time of the purchase, had sold her condominium and moved into a retirement residence. She invested $380,000, a significant portion of her net worth, in various funds. Client FD, who was 95 years old at the time of the purchase of funds, sold her home and moved into a retirement residence. She invested close to $500,000, a significant portion of her net worth, in a mutual fund with a DSC.
- Two of the Respondent’s Approved Persons were involved in these transactions. Approved Person PL handled the purchases for client MC and Approved Person SS handled the purchases for client FD.
- Client MC, who had an investment time horizon of 10+ years, died at the age of 93, twenty months after her purchase, and client FD, who had an investment time horizon of 6-10 years, died at age 97, approximately 18 months after her purchase.
- In each case, there was a DSC, rather than a no-load charge. This benefitted the Approved Person by giving the Approved Person a larger sum up front than if the client had paid a commission upon the purchase of the funds. DSCs gradually reduce the amount payable on redemption depending on how long the client holds the mutual funds. The funds used in the present case used a seven-year cycle.
- In the case of client FD, the Approved Person had initially invested in a no-load fund, but a few months later switched it to a DSC fund. Approved Person SS stated in an email at the time that the switch in funds was “mainly to provide incentive for the heirs to remain clients of IG as well as acknowledging remuneration for myself and my staff.” (See paragraph 30 of the Settlement Agreement.)
- In the case of each of the elderly clients, the sum owing at the death of the client was significant. For client MC it was almost $13,000 and for client FD it was about $18,000. Many firms will not use a DSC for a client age 65 and older because of the shorter life expectancy of those clients. For a discussion of the issue of DSCs and the elderly, see MFDA Bulletin #0670-C, describing a review by the MFDA that commenced in 2015, after the trades described in the present case.
- The alleged misconduct in the present case – counsel for the Respondent stressed and with which counsel for the MFDA agreed – is not that it was necessarily improper to sell mutual funds with a DSC to the two elderly clients, but rather that the Respondent “failed to adequately query the suitability of the recommendation and sale of mutual funds subject to deferred sales charges to two elderly clients.” Whether an adequate review would have resulted in the sales is not the subject of the present inquiry.
- In both cases, the review was admitted by the Respondent to have been inadequate. Client MC did not complete the required form and the person doing the tier one oversight did not examine the form, but took Approved Person PL’s word for the fact that the client understood what her options were. But even if disclosure to the client had been made, this would not mean that the investments were suitable. (See Re Lamoureux  A.S.C.D. No. 613. ) Had the compliance department reviewed the document, it would have become aware that the Summary had not been entirely completed by client MC. Moreover, it would have noted that the form used by Approved Person PL was not a form that had been approved by the Respondent.
- In the case of client FD, there is an absence of documentation concerning what took place in the reviewing process. The Settlement Agreement states in paragraph 32:
- “The Respondent states that a member of its compliance staff reviewed the trade at tier 2 but has no record of the details of any such review. The Respondent has no record of any queries or requests for information being submitted.. .in respect of the trade. The Respondent has no record of how a determination was made that the trade was suitable for client FD having regard to her age.”
Acceptance of the Settlement Agreement
- As stated above, the Panel accepted the terms of the Settlement Agreement. A Panel can either accept or reject a Settlement Agreement. It cannot modify it.
- The conduct in this case was serious. Know-your-client and suitability are obviously important. As the Ontario Securities Commission stated: “The Commission has recognized that the know-your-client and suitability requirements…are an essential component of the consumer protection scheme of the Act 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.” (Re Daubney 2008 LNONOSC 338 at paragraph 15) Adequate supervision of registrants is necessary to help ensure that purchases are suitable and is another essential component of effective securities regulation.
- After becoming aware of these transactions, the Respondent examined the sales practices of both Approved Persons. The present case was the only similar sale by Approved Person PL. But in the case of Approved Person SS, this was one of many such transactions. It was found that there were 96 trades with respect to 18 clients 60 years of age or older which the Respondent viewed as unsuitable. (See paragraph 38 of the Settlement Agreement.) As a result of this conduct, the Respondent terminated the employment of Approved Person SS.
- Moreover, the Respondent took the conduct very seriously in other ways. It reimbursed the two clients’ estates and other elderly clients for their DSCs and changed its practices to avoid future issues. Initially, the Respondent’s Compliance Department implemented enhanced monitoring and review of DSC purchases for clients aged 70 years and older and updated its policies and procedures to indicate that DSC products were rarely suitable for clients age 70 and older. Then, in 2016 the Respondent adopted a policy of not accepting DSC purchases for persons 65 years of age or older and in 2017 stopped DSCs for its own proprietary mutual funds for any client, regardless of the client’s age. These and other significant changes are documented in paragraphs 41 to 44 of the Settlement Agreement.
- Without these positive changes, the penalty sought by the MFDA would no doubt have been much higher.
- The penalty of $150,000 is not out-of-line with the new Sanctions Guidelines as well as the cases cited to us by counsel. (Re Worldsource Financial Management Inc. 2017 LNCMFDA 164; Re IPC Investment Corp. 2017 LNCMFDA 13; and Re HollisWealth Advisory Services Inc. 2015 LNCMFDA 131) It provides a significant measure of specific and general deterrence. Further, the Respondent has not been disciplined by the MFDA over the past 15 years.
- Settlements can be important and useful in achieving outcomes which further the goals of the securities regulatory context. The British Columbia Supreme Court stated in paragraph 49 of British Columbia Securities Commission v. Seifert  B.C.J. No. 225, aff’d  B.C.C.A. No. 484:
- “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.”
- Hearing Panels should respect settlements worked out by the parties. A Panel does not know what led to a settlement, what was given up by one party or the other in the course of the negotiations, and what interest each party has in agreeing to resolve the matter. The Panel cannot go beyond the Settlement Agreement. There are almost always facts that play a role in the settlement which are not set out in the Settlement Agreement or brought to the attention of the Panel. Respecting settlements is particularly desirable in cases, such as this one, where experienced counsel were involved and where there were substantial negotiations.
- As a Panel stated (Re Keshet, File No. 201419 at paragraph 7), to take one of many such cases: “It is well established that hearing panels should not interfere lightly in negotiated settlements and should not reject a settlement agreement unless it views the proposed penalty clearly falling outside a reasonable range of appropriateness.” There are many similar statements by MFDA Panels, stemming from the leading decision of Re Milewski  I.D.A.C.D. No. 17, which stated:
- “A District Council considering a settlement agreement 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.”
- The penalty and the costs agreed to in this case clearly fall within “a reasonable range of appropriateness.”
- For the above reasons the Panel accepted the Settlement Agreement.
Martin L. FriedlandMartin L. FriedlandChair
Brigitte J. GeislerBrigitte J. GeislerIndustry Representative