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IN THE MATTER OF A DISCIPLINARY HEARING PURSUANT TO SECTIONS 20 AND 24 OF BY-LAW NO. 1 OF THE MUTUAL FUND DEALERS ASSOCIATION OF CANADA

Re: John David Elwood

Heard: October 24-25, 2019, December 4, 2019 in Toronto, Ontario
Reasons For Decision: (Misconduct): February 20, 2020

Reasons For Decision

(Reasons of misconduct)

Hearing Panel of the Central Regional Council:

  • Frederick H. Webber, Chair
  • Linda J. Anderson, Industry Representative

Appearances:

Brendan Forbes, Enforcement Counsel for the Mutual Fund Dealers Association of Canada
Peter Tuovi, Counsel for the Respondent
John David Elwood, Respondent, in person

I. INTRODUCTION

  1. This matter was commenced by a Notice of Hearing dated June 7, 2019, a copy of which is attached hereto as Schedule 1 (the “NOH”). The Respondent filed a Response to the NOH, dated July 8, 2019, a copy of which is attached hereto as Schedule 2 (the “Response”).

II. ALLEGATIONS

  1. In the NOH, the Mutual Fund Dealers Association of Canada (the “MFDA”), made the following allegations against the Respondent:
    1. Allegation #1: Between September 2012 and April 2017, the Respondent borrowed $16,000 from a client thereby engaging in personal financial dealings with the client that gave rise to an actual or potential conflict of interest that the Respondent failed to disclose to the Member or to the client in writing and failed to otherwise address by the exercise of responsible business judgment influenced only by the best interests of the client, contrary to the Member’s policies and procedures and MFDA Rules 2.1.4, 2.5.1,1.1.2, and 2.1.1.
    2. Allegation #2: Between September 2013 and January 2017, the Respondent misled the Member by providing false responses to Member questionnaires, thereby interfering with the Member’s ability to supervise the Respondent, contrary to MFDA Rules 2.1.1, 2.5.1 and 1.1.2.
    3. Allegation #3: Between about February 2016 and April 2017, the Respondent failed to report that he had been named a defendant in a civil claim related to borrowing money from a client, contrary to MFDA Rules 1.4(b) and 2.1.1 and section 4 of MFDA Policy No. 6.
  2. In his Response, the Respondent denied each of these allegations.

III. MFDA STATEMENT OF FACTS

  1. The MFDA’s position is that their witnesses, Stephen M. Davis (MFDA Senior Investigator), John Webster (Vice President and Director of Queensbury Strategies Inc. (“Queensbury)) and Christina Lockyer (Assistant Chief Compliance Officer and Director of Litigation at FundEX Investments Inc. (“FundEX”)), and their affidavits filed as exhibits at the hearing, establish the following facts in support of the allegations:
    1. Between October 2000 and September 2013, the Respondent was an Approved Person (“AP”) registered with FundEX;
    2. Between September 2013 and April 2017, the Respondent was an AP registered with Queensbury;
    3. In November 2000, client RW became a client of FundEX;
    4. On May 20, 2008, client RW provided updated information for his investment accounts with FundEX;
    5. On September 26, 2013, client RW transferred his investment accounts held with FundEX to Queensbury;
    6. Commencing between September 2012 and December 2012, the Respondent borrowed a total of $16,000 from client RW;
    7. The Respondent did not offer client RW any security on the loan, nor did he promise to pay any interest on the money that he borrowed from client RW;
    8. The Respondent did not inform FundEX that he borrowed money from client RW before or after he obtained the $16,000 loan from client RW;
    9. The Respondent did not inform Queensbury that he had borrowed $16,000 from client RW before or after he transferred his registration and arranged for client RW to transfer his investment accounts to Queensbury in September 2013;
    10. On September 12, 2013, the Respondent completed and signed a demand promissory note acknowledging that he owed $16,000 to client RW and listing himself as “the Borrower” within the document;
    11. On February 10, 2017, the Respondent and client RW signed minutes of settlement in respect of a Small Claims Court action that was commenced by client RW against the Respondent pursuant to which the Respondent agreed to a schedule for the repayment of the money that he had borrowed from client RW;
    12. Between March 1, 2017 and May 8, 2017, the Respondent made three $500 payments to client RW in compliance with the terms of the minutes of settlement;
    13. After May 20l7, the Respondent defaulted on the terms of the minutes of settlement and ceased to make any further repayment of the amounts that he had borrowed from client RW in 2012;
    14. On February 28, 2017, client RW obtained a Garnishment Order against the Respondent in respect of amounts owing under the minutes of settlement;
    15. The Notice of Garnishment was served on Queensbury in early March 2017;
    16. Queensbury reported to the MFDA on the MFDA Member Event Tracking System (“METS”) that the Member had received the Notice of Garnishment and commenced an investigation to determine the reason why the Notice of Garnishment had been issued;
    17. In a March 10, 2017 email to Queensbury staff, responding to questions from Queensbury about the reasons why the Notice of Garnishment was issued, the Respondent admitted to Queensbury that he had borrowed money from client RW;
    18. The Respondent did not inform Queensbury that a civil proceeding had been commenced against him by client RW to recover the amounts that the Respondent had borrowed from client RW prior to the issuance of the Notice of Garnishment to Queensbury in March 20I7;
    19. Client RW passed away on November 2, 2017;
    20. The Respondent’s acceptance of the $16,000 loan from client RW gave rise to a conflict of interest between the interests of the Respondent and the interests of client RW;
    21. The Respondent did not disclose the conflict of interest to FundEX at any time;
    22. The Respondent did not disclose the conflict of interest to Queensbury at any time;
    23. The Respondent failed to address the conflict of interest by the exercise of responsible business judgment influenced only by the best interests of client RW;
    24. FundEX’s Compliance Policies and Procedures Manual (“CPPM”) required disclosure to FundEX of any conflicts of interest arising between APs and clients of FundEX;
    25. The Respondent signed an acknowledgement that he was aware of and was required to comply with FundEX’s CPPM on February 8, 2011;
    26. Queensbury’s CPPM prohibited borrowing from a client and required disclosure to Queensbury of any conflicts of interest arising between APs and clients of Queensbury;
    27. The Respondent signed an acknowledgement that he was aware of and required to comply with Queensbury’s CPPM on February 28, 2016;
    28. On September 17, 2013, the Respondent filed a Due Diligence Questionnaire with Queensbury in which he falsely indicated that he had not borrowed money from any clients;
    29. Between November 30, 2013 and January 23,2017, the Respondent filed four Annual Questionnaires with Queensbury in which he falsely indicated that he had not borrowed money from any clients.

IV. RESPONDENT’S STATEMENT OF FACTS

  1. The Respondent filed an affidavit and testified on his own behalf at the hearing. He did not take issue with many of the facts outlined in paragraph 4 above, but took a different position with some of them as follows:
    1. the Respondent acknowledged that he received money from client RW between September and December 2012, but testified that any money from client RW was not “borrowed” as alleged in paragraph 4(f) above. In his submissions, Respondent’s counsel characterized the transaction as a gift or receipt on a resulting trust;
    2. the Respondent does not deny the matters set out in paragraphs 4(g), (h) and (i), but states that he was not required to pay interest on the money or advise FundEX or Queensbury of the transaction because he did not borrow the money from client RW;
    3. The Respondent did not deny signing the promissory note referred to in paragraph 4(j), but testified that he did so, not in acknowledgment of a debt, but only to appease client RW who made angry demands that the Respondent acknowledge the borrowing;
    4. the Respondent does not deny signing the minutes of settlement referred to in paragraph 4(k), but states that he did so only to reduce stress for both he and client RW and to avoid having to go to court; the Respondent also does not deny making the three $500 payments referred to in paragraph 4(l) or that no further payments were made as stated in paragraph 4(m);
    5. the Respondent does not deny that he did not report the civil action against him to Queensbury, but testified that he believed that he was only required to do so if he was going to have to go to court, which he avoided by settling;
    6. the Respondent denies that the money he received from client RW was “borrowed” or might otherwise create a conflict of interest with client RW, or the need to report the borrowing or conflict of interest as referred to in paragraphs 4(t)-(cc).
    7. the Respondent did not take issue with the facts set out in paragraphs 4(a)-(e).

V. CENTRAL ISSUE

  1. There are relevant facts in addition to the facts summarized in paragraphs 4 and 5. These will be reviewed below, but the central issue which must be determined is whether there was a loan from client RW to the Respondent.

VI. PRELIMINARY LEGAL MATTERS

  1. The Respondent agreed in his submissions that the MFDA had jurisdiction over the Respondent in this matter even though he was no longer an AP when the NOH was issued. The Respondent also agreed that the panel could receive hearsay evidence and that the standard of proof in this case was the civil standard as stated in H. v. McDougall, 2008 SCC 53. The panel also agrees with the MFDA that MFDA Rules should be interpreted purposively and with a broad scope, so as to best ensure the primary goal within the securities industry of protecting the investing public. (Pezim v British Columbia (Superintendent of Brokers), [1994] 2 SCR 557 (SCC) at paragraphs 59 and 68 and Ironside (Re), [2002] LNABASC 24, at paragraphs 18-19

VII. ALLEGATION 1

  1. The following are the elements of allegation 1 which need to be proven in order to determine whether the allegation had been proven by the MFDA:
    1. between September 2012 and April 2017,
    2. the Respondent borrowed $16,000 from a client,
    3. thereby engaging in personal financial dealings with the client,
    4. that gave rise to an actual or potential conflict of interest,
    5. that the Respondent failed to disclose to the Member or the client in writing,
    6. and failed to otherwise address by the exercise of responsible business judgment influenced only by the best interests of the client,
    7. contrary to the Member’s policies and procedures,
    8. and MFDA Rules 2.1.4, 2.5.1, 1.1.2 and 2.1.1.
  2. (a) between September 2012 and April 2017;
    1. The Respondent does not dispute that the financial transaction giving rise to this matter took place between September 2012 and December 2012, while he was an AP with FundEX, but denies that the transaction was a “borrowing”. No other borrowing transaction has been referenced in this matter, in particular after the Respondent transferred to Queensbury in September 2013; Respondent’s counsel submitted that the only act of “borrowing” could have related to his time at FundEX and not at Queensbury. However, it is the panel’s opinion that the reference to dates beyond December 2012 refers to the fact that the original transaction remained outstanding and therefore was a continuous “borrowing” throughout the period to April 2017 (when the Respondent was terminated by Queensbury). This becomes relevant in relation to allegation 2. Whether or not the transaction is a “borrowing”, there is no dispute that it occurred in the time-frame alleged.
  3. (b) the Respondent borrowed $16,000 from a client

10.1 Client

While the reference to “a client” is general, the particulars in the NOH make it clear that the allegations involve client RW, and only client RW. The Respondent raised no issue about the adequacy of the allegation from a procedural standpoint regarding the identity of the client.

10.2 Amount

The allegation is that the amount allegedly borrowed was $16,000.00. The Respondent raised some issues about the evidence of the amount provided by the MFDA including copies of client RW memos which refer to a loan of $16,000.00 but also, at one point, to $12,000.00. The NOH stated that the alleged loan was made in 8 advances of $2000.00 each on September 27 and 28, October 1, 23, 24, and 25 and December 14 and 17, 2012. As stated by Respondent’s counsel, there were no receipts or other banking documents put in evidence for these amounts and the Respondent testified that he could not recall the exact amount he received from client RW. On the other hand, he testified that the amount received was in the range of $16,000.00, he signed the promissory note for $16,000.00, the civil suit by client RW was to collect a debt of $16,000.00 and the settlement of that suit agreed to by the Respondent was for $16,000.00. The panel’s decision is that, while the  MFDA did not have to prove the precise amount of the alleged loan, there was sufficient evidence that the alleged loan was for $16,000.00 of which the Respondent repaid $1500.00 pursuant to the settlement of the civil suit.

10.3 Borrowing

10.3.1 The central issue in this proceeding is whether the amount received by the Respondent from client RW was “borrowed”. In other words, was the $16,000.00 a loan from client RW to the Respondent.

10.3.2 While maintaining at all times that the transaction was a loan, the MFDA took the position that “the Respondent’s conduct constituted a conflict of interest …” and that the panel was “permitted to find that the Respondent violated MFDA Rule 2.1.4 regardless of whether the monies advanced by client RW are characterized as a “loan.” The panel disagrees with this submission by the MFDA. There are many cases which conclude that MFDA allegations need not be drafted with the precision of criminal proceedings, but that a Respondent is entitled to know the case which he will be required to meet. See e.g. Re Clinton Wayne 2018, MFDA File No. 201507, Re Blackmont Capital Inc. 2011 BCSCCOM 490, Re Myatovic 2012 IIROC 47, Re Castonguay 2012 IIROC 76 and Re Russell Chang 2015, MFDA File No. 201431. In drafting allegation 1, the MFDA had a choice as to how to characterize the transaction between client RW and the Respondent, e.g. a loan, a gift or otherwise, and still bring it within the Rules alleged to have been breached, none of which specifically refer to a loan. The allegation specified a loan, and from the standpoint of procedural fairness to the Respondent, it is the panel’s conclusion that the MFDA must prove that the transaction was a loan.

10.3.3 The Respondent testified that he never considered the amount received to be a loan, but rather a gift to enable him to travel to Mexico to visit his close friend (and client) RW who was suffering health problems at that time. The Respondent testified that, in a phone conversation with client RW in the fall of 2012, he told client RW that he could not come to Mexico as he had done regularly, because he could not afford to do so, due in part to a large debt owing to Revenue Canada. According to the Respondent, client RW replied, “What do you need”, but the Respondent did not ask for the money, client RW did not ask for any documentation evidencing the transaction and there was no discussion of a payback or a loan. Respondent’s counsel also submitted that “these were enabling funds for which the Client RW derived …the exclusive benefit.” Its sole purpose was to enable the Respondent to come to Mexico to provide help and comfort to his ailing friend. The panel does not agree that the Respondent received no benefit from the money.  Client RW may have benefited from the Respondent’s trip to Mexico, but so did the Respondent. Also, the transaction can be a loan even if the Respondent did not request it and even if it was not documented at the time. Furthermore, by the Respondent’s own testimony, client RW did not restrict the Respondent’s use of the money. Unfortunately, the panel received no evidence from client RW about this conversation as he died on November 2, 2017. However the panel received documentary evidence that client RW considered the advances to be a loan. This is reviewed in paragraph 10.3.6 and following.

10.3.4 The Respondent testified that the first time client RW asked to be repaid was in January 2013 in Mexico. Upon the Respondent returning from the grocery store, client RW asked angrily, “where’s my money”. The Respondent testified that he did not initially understand that client RW was asking to be repaid the $16,000.00 because he did not consider the advances to be a loan, he had never asked for a loan and had not been told that the advances were a loan. However, in order to de-escalate the situation and calm client RW, he offered a $16,000.00 cheque and said he would repay the money when he could afford to do so as a friend would do. He testified that he did not consider the advances to be a loan, but did not say so to client RW at the time.

10.3.5 In his testimony, the Respondent attempted to characterize the $16,000.00 as no different that the common casual payments made between friends on each other’s behalf, in this case to pay for the Respondent’s trip to Mexico, but was not a loan. However, in response to questions from the panel, the Respondent acknowledged that the $16,000.00 was far greater than the prior minor financial accommodations  between them, was far greater than the cost of a trip to Mexico, and that the money could be used by him to help repay the debt owing to Revenue Canada and other personal items, e.g. his $1500 condo fees in Toronto.

10.3.6 In addition to the Respondents oral testimony, the panel received documentation relevant to the issue of whether the advances were a loan.

10.3.7 It is not disputed that, on September 12, 2013, the Respondent signed a demand promissory note for $16,000.00 in favour of client RW in which the Respondent is described as “Borrower”. The Respondent testified that he signed the note only because client RW insisted on having a record of the amount outstanding and not as an acknowledgement of a loan. However, on cross-examination, MFDA counsel asked the Respondent whether the promissory note “obligated you to repay [RW].” to which the Respondent replied “… it was always my intention to repay the loan.” What the Respondent did not say at the time of signing the note was also significant. In the Respondent’s own testimony about the signing, he never attempted to change his description as “Borrower” and never stated to client RW that he did not consider the advances to be a loan, nor did he make any other protestation about signing the note. In addition, the panel notes that the Respondent had a long history in the banking business as well as the securities business, and therefore would be familiar with the purpose and effect of promissory notes as well as their wording. The Respondent’s counsel submitted that there was no fresh consideration for the promissory note and therefore it was unenforceable. It is the panel’s conclusion that even if that submission were correct, that assertion would be relevant only in the civil suit brought by client RW. In these proceedings, the promissory note is only evidence of the loan from client RW to the Respondent whether or not it is enforceable.

10.3.8 In 2015, client RW initiated a civil suit in small claims court claiming repayment from the Respondent of a loan of $16,000.00. This suit is evidence that client RW considered the $16,000.00 to have been a loan. The panel was not provided with copies of the Small Claims Court claim, but the Respondent did not dispute that it occurred or that it was to recover a loan to the Respondent.

10.3.9 The Respondent testified that he filed a defense to the Small Claims Court suit. However, the Respondent did not provide a copy of his defense to this panel. The panel finds the Respondent’s failure to do so to be significant; if the Respondent had considered the $16,000.00 not to be a loan, he would have stated so in his defense to the civil suit and would have put that defense in evidence in this hearing.

10.3.10 The Respondent signed Minutes of Settlement of the Small Claims Court claim in which he agreed to pay $16,000.00 to client RW and which he admitted were signed in respect of the claim on the promissory note. In addition he made three payments of $500.00 each pursuant to the settlement. The Respondent’s counsel claimed that the Minutes of Settlement do not specifically refer to a “loan”. The panel considers that to be irrelevant. The Minutes were not put in evidence in this hearing, but there was no dispute that the Minutes were in settlement of the civil suit by client RW against the Respondent and the Respondent does not dispute that the claim in the civil suit was to recover a loan of $16,000.00 from client RW to the Respondent. In addition, the Respondent claims that he only signed the Minutes of Settlement in order to avoid having to make a court appearance. This panel does not accept that explanation. If the Respondent wanted to avoid a court appearance, he would not have filed a defense and would have paid the claim when the claim was issued. In any event, the time for reporting the civil suit to the Member was within two days of receiving notice of the suit, long before the Minutes of Settlement.

10.3.11 Client RW filed a complaint with the MFDA which was Exhibit 12 to the affidavit of Stephen Davis, MFDA’s investigator, detailing his loan to the Respondent.

10.3.12 The Respondent drafted an email to James MacNeil of Queensbury which was Exhibit 13 to the Davis affidavit; in it the Respondent indicated that he had received “personal financial accommodations” from client RW which “were always satisfied in a timely manner” and “it has been my intention to satisfy this outstanding amount which, as I said is imminent.”

10.3.13 The panel also finds it significant that the Respondent did not deny that the advances were a loan until these proceeding commenced, and did not put in evidence any documentation to support his claim, in particular the statement of defense in the client RW civil suit. That denial came only in the Response to the NOH and in his testimony at the hearing. However, in his own testimony, when describing his conversations with client RW in the fall of 2012 and January 2013, when signing the promissory note and when signing the minutes of settlement, the Respondent never said to client RW that he did not consider the advances to be a loan.

10.3.14 Based on the oral and documentary evidence outlined above and the absence of contrary evidence prior to commencement of these proceedings, it is the panel’s conclusion that the Respondent borrowed $16,000.00 from client RW as alleged.

  1. (c) thereby engaging in personal financial dealings with the client

Given the panel’s decision that the Respondent borrowed $16,000.00 from the client RW, and the fact that the money was substantially for the Respondent’s personal use, and certainly not for investment purposes on behalf of the client, this part of allegation 1 is proven.

  1. (d) that gave rise to an actual or potential conflict of interest

12.1 This panel agrees with the conclusion of previous hearing panels that where an AP borrows money from a client, such circumstances give rise to a conflict of interest within the meaning of MFDA Rule 2.1.4. See Re Arnold Tonnies, [2005], MFDA File No. 200503, Re Peter Harald Brauns, [2013], MFDA File No.201203, and Re Keith Lorne Davis, [2016] MFDA File No. 201615. The Respondent’s counsel submitted that no conflict existed because the Respondent did not engage in any financial dealings on behalf of client RW during any time relevant to these proceedings. This panel disagrees with this submission because client RW remained a client of the Respondent throughout the period and it is the borrowing from a client while the advisor/client relationship is in place which gives rise to the conflict, which may be actual or potential according to Rule 2.1.4.

12.2 This panel also concludes that the fact that the borrowing was from a friend does not avoid the conflict of interest. Previous MFDA hearing panels have determined that borrowing money from a “friend” gives rise to a conflict of interest which must be disclosed to the Member and must be resolved in the best interests of the client. See for example Re Larry Leslie Williams, [2018], MFDA File No. 201778, and Re Kimberly Ann Haylock, [2013] MFDA File No. 201243.

12 3 Furthermore, the MFDA has previously released two staff notices, MFDA Notice #MSN-0047 dated October 3, 2005 and MFDA Notice MSN-0054 dated June 22, 2006 (updated March 4, 2013) that clarify the obligations of Members and APs regarding personal financial dealings with clients. Specifically, these Notices state that borrowing from a client raises a conflict of interest which, in almost all cases, will be impossible to resolve in favour of the client.

  1. (e) that the Respondent failed to disclose to the Member or the client in writing

This panel agrees with the submission of the MFDA that the evidence of witnesses Lockyer of FundEX and Webster of Queensbury, establish that the Respondent did not disclose the loan or the conflict of interest arising from the loan to either Member. There was no evidence that the conflict was disclosed to client RW. This conclusion was not disputed by Respondent’s counsel, since the Respondent’s position was that there had been no loan, and therefore no loan or conflict to disclose.

  1. (f) and failed to otherwise address by the exercise of responsible business judgment influenced only by the best interests of the client

14.1 The MFDA cited the Braun case (supra) for the proposition that borrowing from clients gives rise to a conflict of interest that is

“so profound that [an AP] could not conceivably exercise responsible business judgment influenced only by the [client’s] best interests. This is the classic situation in which the conflict could only be resolved by an absolute prohibition on obtaining monies from [the client], whether their relationship is described as a partnership or as …lender-borrower, while [the AP] was the mutual fund advisor.”

This panel has reservations about the accuracy of this proposition, although it is unnecessary for us to decide so in this case because of our conclusion stated in paragraph 14.2 below. It is possible to resolve the conflict by repaying the loan or having the Member do so. Our doubt is substantiated by the wording of MFDA Notices #MSN-0047 and MSN-0054 (supra) which state that borrowing from a client raises a conflict of interest which, in almost all cases, will be impossible to resolve in favour of the client. [emphasis added] and is confirmed by the Tonnies case (supra).

14.2 This panel agrees with the MFDA submission that, in fact, the Respondent did not address the conflict by the exercise of responsible business judgment influenced only by the best interests of the client because he:

  1. did not initially document the loan agreement in writing;
  2. neither promised nor paid any interest on the loan;
  3. did not pledge any collateral to secure the loan;
  4. did not fully repay the loan; and
  5. took no other steps to protect the client, e.g. repay or have his Member repay the loan.
  1. (g) contrary to the Member’s policies and procedures

15.1 MFDA Rule 2.5.1 requires Members to establish, implement and maintain policies and procedures to ensure the handling of its business is in accordance with MFDA Bylaws, Rules and Policies.

15.2 MFDA Rule 1.1.2 places a corresponding obligation on APs to do their part to facilitate compliance by the Member with MFDA Rules including in this context by complying with the policies and procedures established and implemented by the Member to comply with its regulatory obligations to supervise the conduct of its APs.

15.3 Hearing Panels have held that when an AP fails to comply with the Member’s policies and procedures, the AP acts contrary to MFDA Rules 1.1.2 and 2.5.l. As the Hearing Panel stated in Franco (Re) [2011], MFDA File No. 207016, at paragraph 38,

“The obligation of Approved Persons to comply with the policies and procedures of the Member that they are registered with is a cornerstone of the self-regulatory system… When Approved Persons disregard those obligations, the Member’s ability to supervise the conduct of such Approved Persons and protect the interests of clients and the public is undermined.”

15.4 According to the evidence of Lockyer, the CPPM of FundEX required disclosure to the Member of any conflicts of interest arising between APs and clients

15.5 According to the evidence of Webster, the CPPM of Queensbury prohibited borrowing from clients and required disclosure to the Member of any conflicts of interest arising between APs and clients.

15.6 As stated above the Respondent’s position is that he did not consider the transaction with his client RW to be a loan, that it was in fact, not a loan, but a gift or transfer on a resulting trust, that there was no conflict of interest, and therefore he was not in violation of the Members’ CPPMs.

15.7 As stated in paragraphs 10 and 12, this panel concluded that the transaction between the Respondent and his client RW was, in fact, a loan resulting in the Respondent being in a conflict of interest with client RW. This is based on the oral and documentary evidence outlined above, notwithstanding the Respondent’s testimony the he did not believe the transaction to be a loan. It is this panel’s decision that the Respondent’s belief is not relevant; the nature of the transaction is a matter of fact and the panel decided it was a loan resulting in a conflict of interest and therefore that the Respondent’s actions in this matter were in direct contravention of the CPPMs of both FundEX and Queensbury.

15.8 Compliance by the Respondent with the applicable policies and procedures of either FundEX or Queensbury in this case would have enabled either Member to intervene to prohibit the conduct giving rise to the conflict of interest that arose from the Respondent’s acceptance of the loan from client RW, which in turn would have facilitated compliance by both FundEX and Queensbury with their own obligations under MFDA Rule 2.1.4. This panel agrees with the MFDA position that by borrowing money from client RW and by failing to disclose the conflict of interest between himself and client RW to the Member as required by both FundEX and Queensbury’s Policies and Procedures, the Respondent contravened the Policies and Procedures of both FundEX and Queensbury.

  1. (h) and [contrary to] MFDA Rules 2.1.4, 2.5.1, 1.1.2 and 2.1.1

16.1 Conflicts of Interest, Rule 2.1.4

16.1.1 This Rule requires that:

  1. APs be aware of possible conflicts of interest and disclose conflicts or potential conflicts to the Member;
  2. APs must ensure that conflicts are addressed by the exercise of responsible business judgment, influenced only by the best interests of the client; and
  3. such conflicts shall be immediately disclosed in writing to the client.

16.1.2 As stated in paragraphs 12, 13 and 14, the MFDA has proven all the elements of Rule 2.1.4 and therefore it is the panel’s decision that allegation 1 has been proven in regard to that Rule.

16.2 Policies and Procedures, Rules 2.5.1 and 1.1.2

As stated in paragraph 15, it is the panel’s decision that the Respondent failed to comply with the Members’ CPPMs. This panel recognizes that these two Rules are interrelated and that previous cases have held that where an AP has failed to comply with the member’s policies and procedures, the AP has been found to be in violation of both Rules 1.1.2 and 2.5.1. This panel does not see how an AP can be in violation of Rule 2.5.1 because on its very wording, it only compels “Members” to establish, implement and maintain policies and procedures. It puts no obligation on the APs. That obligation comes only in Rule 1.1.2; therefore this panel finds that the Respondent is in violation of MFDA Rule 1.1.2, but not Rule 2.5.1.

16.3 Standard of Conduct

16.3.1 MFDA Rule 2.1.1 requires, among other things, that:

“Each Member and Approved Person of a Member shall: deal fairly, honestly and in good faith with its clients; observe high standards of ethics and conduct in the transaction of business; and not engage in any business conduct or practice which is unbecoming or detrimental to the public interest.”

16.3.2 MFDA Panels have repeatedly held that an AP who engages in personal financial dealings or enters into in a conflict of interest position with a client has engaged in conduct that is contrary to MFDA Rule 2.1.1. See Davis, (supra), Re Mervin Evans Visneskie, [2017], MFDA File No. 201553.

16.3.3 MFDA Panels have further held that an AP who breaches the Member’s Policies and Procedures also has engaged in conduct that is contrary to MFDA Rule 2.1.1. See Davis, (supra) at para 39, and Tonnies,(supra)

16.3.4 This panel agrees with the MFDA, that the Respondent’s conduct in this case was not consistent with the standard of conduct required in the industry and accordingly, the Respondent contravened MFDA Rule 2.1.1 as:

  1. he failed to deal fairly, honestly and in good faith with his client by obtaining an unsecured loan that he failed to repay,
  2. he failed to observe high standards of ethics and conduct in the transaction of business by not complying with the policies and procedures of the Member and MFDA Rule 2.1.4; and
  3. his conduct also constituted business conduct which was unbecoming and detrimental to the public interest.

VIII. ALLEGATION 2

  1. The MFDA must prove the following elements of allegation 2:
    1. between September 2013 and January 2017,
    2. the Respondent misled the Member by providing false responses to Member questionnaires,
    3. thereby interfering with the Member’s ability to supervise the Respondent,
    4. contrary to MFDA Rules 2.1.1, 2.5.1 and 1.1.2.

17.1 (a) between September 2013 and January 2017

The timeframe refers only to the Respondent’s time as an AP at Queensbury. Therefore the allegation encompasses only the Respondents answers to Queensbury questionnaires, which occurred in this timeframe.

17.2 (b) the Respondent misled the Member by providing false responses to Member questionnaires

17.2.1 According to the affidavit and testimony of Webster of Queensbury, in advance of his registration with Queensbury, the Respondent completed a Due Diligence Questionnaire on September 17, 2013 in which the Respondent answered “No” to the question, “Do you or have you lent or borrowed money to/from clients.” This answer was provided only 4 days after the Respondent signed the promissory note in favour of client RW in which the Respondent is described as the “Borrower”.

17.2.2 In addition, on December 30, 2013, December 9 2014, December 30, 2015 and January 23, 2017, the Respondent answered “No” to the question “Have you borrowed from or lent money to a client.”

17.2.3 In his affidavit, Webster stated that he believed that these answers were false based on the disclosure of the transfer of money from client RW to the Respondent between September and December 2012 that had not been repaid at the time the Respondent answered the questions. He testified  that the questions were not limited to the AP’s time at Queensbury, but meant borrowing or lending whenever the transaction occurred.

17.2.4 The Respondent’s position (as it was regarding allegation 1) is that he did not “borrow” money from client RW and therefore these answers were correct and not misleading.

17.2.5 As the panel has concluded that the transfer of money from client RW to the Respondent was a loan which was not repaid at the time of the Respondent’s answers, the panel’s decision is that these answers were false and misleading to Queensbury.

17.2 6 In the Queensbury annual questionnaires, the Respondent also answered “No” to the question, “Have you ever been a defendant or respondent in any civil proceeding…in which fraud, theft, deceit, misrepresentation, or similar conduct is, or was, alleged. The only “civil proceeding” in issue in this case is the Small Claims Court action brought by client RW to collect what he claimed was a debt owing to him by the Respondent. That claim does not involve fraud, theft, deceit, misrepresentation, or similar conduct. Therefore the panel concludes that this question was answered accurately by the Respondent and did not mislead Queensbury.

17.3 (c) thereby interfering with the Member’s ability to supervise the Respondent

17.3.1 Since the loan was not disclosed to Queensbury, it had no way of supervising the Respondent in that regard. This portion of the allegation was not questioned by the Respondent, basing his position on denying that the transaction was a loan. The panel’s decision is that this part of allegation 2 has been proven.

17.4 (d) contrary to MFDA Rules 2.1.1, 2.5.1 and 1.1.2

Rule 2.1.1 Standard of Conduct

17.4.1 As noted in relation to allegation 1, Rule 2.1.1 encompasses the most fundamental obligations of all registrants in the securities industry. Under MFDA Rule 2.1.1(b), Approved Persons are to conduct themselves in accordance with “high standards of ethics and conduct” in the transaction of mutual fund business. Furthermore, MFDA Rule 2.1.1(c) prohibits APs from engaging in conduct that is unbecoming or detrimental to the public interest. This panel agrees with MFDA’s position that misrepresentations to the Member are inconsistent with both of these provisions as decided in previous cases cited to us. See e.g. Visneskie, supra at para 23, and Re Paul Leland Wemple, [2017], MFDA File No.201654.

17.4.2 The Respondent’s testimony was that he did not borrow money from client RW, and therefore, when answering the Queensbury questionnaires, his answer that he had not borrowed from a client was what he truthfully believed. The MFDA submitted that the “Respondent intentionally denied that he had borrowed monies from…client RW while knowing the statements to be untrue” when answering the questionnaires.

17.4.3 While it is possible to speculate that the Respondent intentionally misled Queensbury regarding the loan, there is no direct evidence to that effect and the panel’s decision is not based on that assertion. Rather, our decision is based on our conclusion, as detailed in paragraph 10 above, that the transaction with client RW was, in fact, a loan and the Respondent cannot escape that conclusion by a simple assertion that he did not believe that he had borrowed from client RW, in particular since the Respondent did not provide any evidence that he made that assertion at any time prior to commencement of these proceedings; furthermore, when responding to the Queensbury questionnaires, the Respondent knew that he had signed the promissory note as “Borrower” only 5 days prior to the initial questionnaire; and, when answering all the questionnaires, the Respondent knew that client RW claimed that the Respondent had  borrowed  money from client RW. In addition, both Members’ CPPMs and  MFDA Notices #MSN-0047 and MSN-0054 (supra) emphasized that borrowing from clients would not be allowed, or at least was strongly discouraged. As an experienced AP, the Respondent knew, or is deemed to know that the industry strongly discourages borrowing from clients. If not intentionally misleading Queensbury, at a minimum the Respondent simply ignored industry standards and the evidence of the borrowing from client RW when answering the questionnaires. In doing so, it is the panel’s decision that the Respondent’s conduct is a violation of MFDA Rule 2.1.1.

17.5 Compliance with Member Policies and Procedures

17.5.1 MFDA Rule 2.5.1 requires Members to establish, implement and maintain policies and procedures to ensure the handling of its business is in accordance with MFDA By-laws, Rules and Policies; and MFDA Rule 1.1.2 places a corresponding obligation on APs to do their part to facilitate compliance by the Member with MFDA Rules including, in this context, by complying with the policies and procedures established and implemented by the Member to comply with its regulatory obligations to supervise the conduct of its APs.

17.5.2 This panel agrees with previous MFDA Panels which have held that where an AP misleads the Member and in turn fails to comply with the Member’s Policies and Procedures, the AP contravenes MFDA Rule 1.1.2. However as explained in paragraph 16.2 above the AP does not breach MFDA Rule 2.5.1

17.5.3 The Respondent’s disregard for the prohibition on borrowing and the obligation to disclose conflicts of interest to the Member also contravened the Queensbury’s Policies and Procedures and, in so doing, contravened MFDA Rule 1.1.2.

IX. ALLEGATION 3

  1. In order to find misconduct under allegation 3, the MFDA must prove the following elements:
    1. between about February 2016 and April 2017,
    2. the Respondent failed to report that he had been named as a defendant in a civil suit related to borrowing money from a client,
    3. contrary to MFDA Rules 1.4(b) and 2.1.1 and section 4 of MFDA Policy No. 6.

18.1 The Respondent admitted that he failed to report the civil suit in the timeframe alleged, or at all, but denied that such failure was a contravention of the Rules and Policy stated in allegation 3.

18.2 MFDA Rule 1.4(b) requires all APs to report to his or her Member:

“such information… as may be prescribed by the Corporation from time to time relating to complaints, criminal, civil and other legal proceedings, regulatory proceedings, arbitrations, contraventions and potential contraventions of legal and regulatory requirements, disciplinary action by regulatory bodies, settlements with and compensation paid to clients, registration or licensing by any regulatory body, bankruptcies, insolvencies, garnishments and related events.” [emphasis added]

18.3 There was no dispute that the words “as may be prescribed…from time to time” referred to MFDA Policy No. 6, section 4 which therefore is incorporated into and limits the reporting requirements of MFDA Rule 1.4(b).

18.4 A number of the subsections of Policy No. 6, section 4 cannot apply in this case, and the panel will only review those events listed which could possibly refer to a “civil suit related to borrowing money from a client”, which is the allegation in this case:

18.5 Section 4.1(a) requires an AP to report to the Member if he is “subject to a client complaint in writing”. Such a complaint could take many forms, but it is this panel’s conclusion that a civil suit by the client RW claiming an unpaid debt owing by the Respondent, is a “client complaint in writing” as stated in section 4.1(a) of MFDA Policy No. 6.

18.6 Section 4.1(b)(v) requires an AP to report to the Member any complaint “involving allegations of…personal financial dealings with a client.” As stated in paragraph 11(c) above, it is this panel’s conclusion that the civil suit by client RW claiming the unpaid debt owing by the Respondent, is an “allegation of personal financial dealings with a client as stated in section 4.1(b)(v) of MFDA Policy No. 6.

18.7 Section 4.1(c) requires an AP to report to the Member if he “has reason to believe that he… has contravened, or is named as a defendant…in any proceeding…alleging the contravention of:

  1. any securities law; or
  2. any regulatory requirements.”

It is this panel’s conclusion that the said civil suit by client RW is a proceeding alleging contravention of regulatory requirements, namely MFDA Rules and Policies and Member CPPMs prohibiting an AP from borrowing from a client.

18.8 In his submissions, Respondent’s counsel stated that the civil claim was “not related to borrowing money from a client, rather is in relation to a confluence of events whereby an unsatisfied demand on (an unenforceable) promissory note was the basis for a claim which was settled without mention or admission of borrowing.”

This panel does not agree with that submission. Whether or not the Respondent actually borrowed money from client RW, the fact is that the civil suit made that claim, viz. that the Respondent borrowed money from client RW; and whether or not the promissory note was enforceable was relevant only in the civil suit not in these proceedings where the promissory note is only evidence of the borrowing. The absence of an admission of borrowing by the Respondent in the settlement itself is not relevant because it was a settlement of suit claiming a borrowing from a client.

18.9 MFDA counsel cited the case of Re Zenon Smiechowski, [2010], MFDA File No. 201007, to support the  conclusion that MFDA Hearing Panels have previously held that failing to report a civil claim resulting from borrowing from a client constitutes a violation of MFDA sub-Rule 1.4(b) and MFDA Policy #6. The panel agrees with Respondent’s counsel that this case is weak support for the proposition stated because the facts were different, the defendant did not appear and no defense was provided. MFDA counsel referred the panel to additional cases in support of his submission, namely Re Byron H Daues [2104], MFDA File No. 201339, Re Richard Kenneth Giuliani [2018], MFDA File No. 2017103 and Re Zhengwen (Katherine) Qi and Xiaodan (Bonnie) Huang MFDA File No. 201253. Although of limited help because of factual differences or because some of them were settlements, these cases do support this panel’s decision stated in paragraph 18.7, viz. that the Respondent contravened Rule 1.4(b) as stated in allegation 3.

18.10 The panel questioned whether Policy No. 6 was enforceable in the same way as MFDA Rules. MFDA counsel referred the panel to section 24.1.1(h) & (i) to support the conclusion that the Policy was enforceable against the Respondent. Accordingly, the panel decided that the Respondent also contravened Policy No. 6, section 4 as stated in allegation 3.

18.11 As noted above, MFDA Rule 2.1.1 requires APs to uphold a standard of conduct applicable to all registrants in the mutual fund industry. MFDA Hearing Panels have consistently held that when an AP fails to report required information under MFDA sub-Rule 1.4(b) or MFDA Policy #6, that Person also contravenes MFDA Rule 2.1.1. This panel agrees with those cases and consequently decided that the Respondent has contravened Rule 2.1.1.

  • Frederick H. Webber
    Frederick H. Webber
    Chair
  • Linda J. Anderson
    Linda J. Anderson
    Industry Representative

721467


Schedule “1”

Notice of Hearing
File No. 201940

IN THE MATTER OF A DISCIPLINARY HEARING
PURSUANT TO SECTIONS 20 AND 24 OF BY-LAW NO. 1 OF
THE MUTUAL FUND DEALERS ASSOCIATION OF CANADA

Re: John David Elwood

NOTICE OF HEARING

NOTICE is hereby given that a first appearance will take place by teleconference before a hearing panel of the Central Regional Council (“Hearing Panel”) of the Mutual Fund Dealers Association of Canada (“MFDA”) in the hearing room at the MFDA offices, 121 King Street West, Suite 1000, Toronto, Ontario on July 9, 2019 at 10:00 a.m. (Eastern), or as soon thereafter as the hearing can be held, concerning a disciplinary proceeding commenced by the MFDA against John David Elwood (“Respondent”).

DATED this 7th day of June, 2019.

“Michelle Pong”
Michelle Pong
Director, Regional Councils
Mutual Fund Dealers Association of Canada
121 King Street West, Suite 1000
Toronto, ON M5H 3T9
Telephone: 416-945-5134
Email: corporatesecretary@mfda.ca

NOTICE is further given that the MFDA alleges the following violations of the By-laws, Rules or Policies of the MFDA:

Allegation #1: Between September 2012 and April 2017, the Respondent borrowed $16,000 from a client thereby engaging in personal financial dealings with the client that gave rise to an actual or potential conflict of interest that the Respondent failed to disclose to the Member or to the client in writing and failed to otherwise address by the exercise of responsible business judgment influenced only by the best interests of the client, contrary to the Member’s policies and procedures and MFDA Rules 2.1.4, 2.5.1, 1.1.2, and 2.1.1.

Allegation #2: Between September 2013 and January 2017, the Respondent misled the Member by providing false responses to Member questionnaires, thereby interfering with the Member’s ability to supervise the Respondent, contrary to MFDA Rules 2.1.1, 2.5.1 and 1.1.2.

Allegation #3: Between about February 2016 and April 2017, the Respondent failed to report that he had been named a defendant in a civil claim related to borrowing money from a client, contrary to MFDA Rules 1.4(b) and 2.1.1 and section 4 of MFDA Policy No. 6.

PARTICULARS

NOTICE is further given that the following is a summary of the facts alleged and intended to be relied upon by the MFDA at the hearing:

Registration History

  1. The Respondent was first registered in the mutual fund industry in Canada in October 2000.
  2. Between October 2000 and September 2013, the Respondent was registered in Ontario as a mutual fund salesperson (now known as a dealing representative)[1] with FundEX Investments Inc. (“FundEX”), a Member of the MFDA. Between August 2004 and December 2010, the Respondent was also registered with FundEX in New Brunswick.
  3. Between September 2013 and April 2017, the Respondent was registered as a dealing representative with Queensbury Strategies Inc. (“Queensbury”), a Member of the MFDA.
  4. On April 4, 2017, the Respondent was terminated by Queensbury. The Respondent is not currently registered in the securities industry in any capacity.
  5. At all material times, the Respondent conducted business from a branch office located in the Toronto area.

Allegation #1 – Personal Financial Dealings

  1. At all material times, the policies and procedures of FundEX:
    1. prohibited Approved Persons from borrowing from a client for any reason; and
    2. required Approved Persons to:
      1. avoid any activity, interest or association which might interfere with the independent exercise of their judgment in the best interests of the Member, its clients or the public;
      2. contact all affected individuals where a conflict of interest exists between the Approved Person and that individual; and
      3. notify the Member where a conflict of interest or potential conflict of interest is identified.
  2. On May 24, 2008, client RW became a client of FundEX. The Respondent was the Approved Person who serviced client RW’s investment accounts at FundEX.
  3. In or about September 2012, while the Respondent was registered with FundEX, the Respondent solicited and accepted a loan from client RW in the amount of $16,000 (the “Loan”). Client RW advanced the Loan in 8 increments of $2,000 on the following dates:

DATE

LOAN AMOUNT

September 27, 2012

$2,000

September 28, 2012

$2,000

October 1, 2012

$2,000

October 23, 2012

$2,000

October 24, 2012

$2,000

October 25, 2012

$2,000

December 14, 2012

$2,000

December 17, 2012

$2,000

  1. According to client RW, at the time of the loan agreement, the Respondent agreed to begin repayment of the Loan within “a couple of months.” As it turned out, the Respondent did not repay the Loan except to the extent described below.
  2. The Respondent did not provide client RW with any collateral to secure repayment of the Loan nor did the Respondent offer or agree to pay any interest on the Loan.
  3. On September 12, 2013, the Respondent signed a promissory note that documented the outstanding Loan. The promissory note stated that the Respondent agreed to repay the Loan to client RW upon demand. The promissory note also stated that no interest was payable on the Loan. Thereafter, the Respondent made no payments on the Loan except as described below.
  4. The Respondent did not disclose the existence of the Loan to FundEX.
  5. On September 30, 2013, the Respondent transferred his registration to Queensbury.
  6. When the Respondent transferred his registration to Queensbury, client RW transferred his investment accounts to Queensbury, and the Respondent serviced client RW’s investment accounts at Queensbury until the Respondent’s registration was terminated.
  7. At all material times, the policies and procedures of Queensbury:
    1. prohibited Approved Persons from borrowing from clients for any reason; and
    2. required Approved Persons to notify the Member and the client when a potential conflict of interest was identified, and support the Member in taking the appropriate action to ensure the conflict was addressed in the best interests of the client.
  8. The Respondent did not disclose to Queensbury that he had borrowed money from client RW.
  9. Sometime between June 2015 and February 2016, client RW commenced legal proceedings against the Respondent to compel the Respondent to repay the Loan. On February 10, 2016, the Respondent and client RW agreed through Minutes of Settlement that the Respondent would repay client RW $500 per month until the Loan was repaid in full.
  10. The Respondent did not disclose to Queensbury that a legal proceeding had been commenced against him by client RW or that he had entered into the Minutes of Settlement to settle the legal proceeding.
  11. The Respondent made three payments of $500 to client RW on March 1, 2016, April 3, 2016 and May 4, 2016. After May 2016, the Respondent ceased making payments to client RW.
  12. The Respondent subsequently told client RW that he would repay the Loan from proceeds from the sale of his residence. However, the Respondent did not sell his residence, nor did the Respondent make further instalment payments to repay the Loan.
  13. On February 28, 2017, client RW obtained a Notice of Garnishment against the Respondent to compel repayment of the Loan. According to the Notice of Garnishment, client RW was entitled to recover $14,976.67 from the Respondent. However, client RW was unable to recover any further amounts from the Respondent after the Notice of Garnishment was issued.
  14. On November 2, 2017, client RW passed away. The Executor of client RW’s estate continues to seek recovery of the outstanding Loan.
  15. By soliciting and accepting a loan from a client, the Respondent engaged in personal financial dealings with a client that gave rise to a conflict of interest.
  16. The Respondent did not disclose the Loan, or the resulting conflict of interest, to FundEX, Queensbury or the client.
  17. The Respondent failed to take steps to ensure that the conflict of interest arising from the Loan was addressed by the exercise of responsible business judgment influenced only by the best interests of client RW.
  18. By failing to inform FundEX or Queensbury of the Loan or the conflict of interest, the Respondent contravened the policies and procedures of FundEX and Queensbury that are described in paragraphs 6 and 15 above.
  19. By engaging in the conduct described above, the Respondent engaged in personal financial dealings with a client that gave rise to an actual or potential conflict of interest that he failed to disclose to FundEX, Queensbury or the client and failed to take other steps to ensure that the conflict was addressed by the exercise of responsible business judgment influenced only by the best interests of the client, contrary to the Member’s policies and procedures and MFDA Rules 2.1.4, 2.5.1, 1.1.2, and 2.1.1.

Allegation #2 – Misleading the Member

  1. As noted above, on September 30, 2013, the Respondent transferred his registration from FundEX to Queensbury.
  2. As part of the transfer process to Queensbury, the Respondent completed a mandatory questionnaire concerning his business practices that was necessary to facilitate Queensbury’s due diligence process (the “Due Diligence Questionnaire”). The Due Diligence Questionnaire required the Respondent to answer the following question: “Do you or have you lent or borrowed money to/from clients?”
  3. The Respondent falsely answered “NO” to this question. The Respondent did not disclose to Queensbury that he had borrowed money from client RW in 2012 that remained outstanding and he did not inform Queensbury that he had signed a promissory note on September 12, 2013 confirming the amount that he owed to client RW. The Respondent did disclose to Queensbury that he had personally loaned money to a client (not client RW) 15 years prior.
  4. Between September 2013 and April 2017, while he was registered with Queensbury, the Respondent was required to complete Annual Questionnaires in respect of his business practices. The Respondent completed these questionnaires on December 30, 2013, December 9, 2014, December 30, 2015 and January 23, 2017.
  5. Each of the Annual Questionnaires that the Respondent completed and submitted to Queensbury required the Respondent to answer the following question: “Have you borrowed from or lent money to a client?” The Respondent falsely answered “NO” to this question in each of the Annual Questionnaires. The Respondent did not disclose to Queensbury in his responses to the Annual Questionnaires (or otherwise) that he had obtained the 2012 Loan from client RW and signed a promissory note dated September 12, 2013 acknowledging that the Loan remained outstanding.
  6. By engaging in the conduct described in paragraphs 28-32 above, the Respondent provided false statements on Member questionnaires, thereby misleading Queensbury and interfering with the Member’s ability to supervise the Respondent and ensure his compliance with the policies and procedures of the Member and regulatory requirements, contrary to MFDA Rules 2.1.1, 2.5.1 and 1.1.2.

Allegation #3 – Failure to Report a Civil Proceeding

  1. As stated above, sometime between June 2015 and February 2016, client RW commenced legal proceedings against the Respondent to compel the Respondent to repay the Loan. On February 10, 2016, the Respondent and client RW agreed through Minutes of Settlement that the Respondent would repay client RW $500 per month until the Loan was repaid in full.
  2. After May 2016, the Respondent ceased making payments to client RW.
  3. On February 28, 2017, client RW obtained a Notice of Garnishment against the Respondent to compel repayment of the Loan.
  4. Queensbury first became aware of the civil action against the Respondent once served with the Notice of Garnishment against the Respondent on or about February 28, 2017.
  5. Between approximately February 2016 and February 2017, the Respondent was aware of the civil action but did not report this event to Queensbury.
  6. By failing to report the civil claim related to borrowing from a client to Queensbury, the Respondent failed to fulfill his reporting obligations to a Member, contrary to MFDA Rules 1.4(b) and 2.1.1 and section 4 of MFDA Policy No. 6.

NOTICE is further given that the Respondent shall be entitled to appear and be heard and be represented by counsel or agent at the hearing and to make submissions, present evidence and call, examine and cross-examine witnesses.

NOTICE is further given that MFDA By-laws provide that if, in the opinion of the Hearing Panel, the Respondent:

  • has failed to carry out any agreement with the MFDA;
  • has failed to comply with or carry out the provisions of any federal or provincial statute relating to the business of the Member or of any regulation or policy made pursuant thereto;
  • has failed to comply with the provisions of any By-law, Rule or Policy of the MFDA;
  • has engaged in any business conduct or practice which such Regional Council in its discretion considers unbecoming or not in the public interest; or
  • is otherwise not qualified whether by integrity, solvency, training or experience,

the Hearing Panel has the power to impose any one or more of the following penalties:

  1. a reprimand;
  2. a fine not exceeding the greater of:
    1. $5,000,000.00 per offence; and
    2. an amount equal to three times the profit obtained or loss avoided by such person as a result of committing the violation;
  3. suspension of the authority of the person to conduct securities related business for such specified period and upon such terms as the Hearing Panel may determine;
  4. revocation of the authority of such person to conduct securities related business;
  5. prohibition of the authority of the person to conduct securities related business in any capacity for any period of time; and
  6. such conditions of authority to conduct securities related business as may be considered appropriate by the Hearing Panel.

NOTICE is further given that the Hearing Panel may, in its discretion, require that the Respondent pay the whole or any portion of the costs of the proceedings before the Hearing Panel and any investigation relating thereto.

NOTICE is further given that the Respondent must serve a Reply on Enforcement Counsel and file a Reply with the Office of the Corporate Secretary within twenty (20) days from the date of service of this Notice of Hearing.

A Reply shall be served upon Enforcement Counsel at:

Mutual Fund Dealers Association of Canada
121 King Street West
Suite 1000
Toronto, ON M5H 3T9
Attention: Brendan Forbes
Email: bforbes@mfda.ca

A Reply shall be filed by:

  1. providing four copies of the Reply to the Office of the Corporate Secretary by personal delivery, mail or courier to:
    1. The Mutual Fund Dealers Association of Canada
      121 King Street West
      Suite 1000
      Toronto, ON M5H 3T9
      Attention: Office of the Corporate Secretary; or
  2. transmitting one electronic copy of the Reply to the Office of the Corporate Secretary by e-mail at CorporateSecretary@mfda.ca.

A Reply may either:

  1. specifically deny (with a summary of the facts alleged and intended to be relied upon by the Respondent, and the conclusions drawn by the Respondent based on the alleged facts) any or all of the facts alleged or the conclusions drawn by the MFDA in the Notice of Hearing; or
  2. admit the facts alleged and conclusions drawn by the MFDA in the Notice of Hearing and plead circumstances in mitigation of any penalty to be assessed.

NOTICE is further given that the Hearing Panel may accept as having been proven any facts alleged or conclusions drawn by the MFDA in the Notice of Hearing that are not specifically denied in the Reply.

NOTICE is further given that if the Respondent fails:

  1. to serve and file a Reply; or
  2. attend at the hearing specified in the Notice of Hearing, notwithstanding that a Reply may have been served,

the Hearing Panel may proceed with the hearing of the matter on the date and the time and place set out in the Notice of Hearing (or on any subsequent date, at any time and place), without any further notice to and in the absence of the Respondent, and the Hearing Panel may accept the facts alleged or the conclusions drawn by the MFDA in the Notice of Hearing as having been proven and may impose any of the penalties described in the By-laws.

End.

[1] In September 2009, the registration category mutual fund salesperson was changed to “dealing representative” when National Instrument 31-103 came into force.


“Schedule “2”

SAGEGATE CORPORATION
360 Bay Street, 9th Floor [999]
Toronto, ON, M5H-2V6
Ph. # (416) 363-5900; CELL # 416-460-4444
fsalvati@sagegate.com

HAND DELIVERED

July 8, 2019

Mutual Fund Dealers Association of Canada [“MFDA”]
121 King Street West, Suite #1000
Toronto, ON, M5H-3T9 bforbes@mfda.ca

ATTENTION: OFFICE OF THE CORPORATE SECRETARY

Dear Mr. Forbes, Brendan;

Re: MFDA letter dated June 19, 2019 (response due July 9, 2019).

ALLEGATION #1

The Respondent pleads that no borrowings took place;

ALLEGATION #2

The Respondent pleads that it he did not mislead the Member;

ALLEGATION #3

The Respondent pleads that he did not fail to report the civil claim.

The Respondent relies on the facts as presented by him in various correspondence, and additional correspondence coming to light as a result of further due diligence on his part, to be provided at or before the Hearing, and as it further becomes available to him.

Respectfully submitted,

“Frank Salvati”
Frank Salvati, CPA, CFE, CDir

cc/ John David Elwood