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IN THE MATTER OF A SETTLEMENT HEARING PURSUANT TO SECTION 24.4 OF BY-LAW NO. 1 OF THE MUTUAL FUND DEALERS ASSOCIATION OF CANADA

Re: Jerome Thomas Bates

Heard: October 25, 2019 in Vancouver, British Columbia
Reasons For Decision: April 6, 2020

Reasons For Decision

Hearing Panel of the Pacific Regional Council:

  • Michael Carroll, QC, Chair
  • Darlene Barker, Industry Representative

Appearances:

Justin Dunphy, Enforcement Counsel for the Mutual Fund Dealers Association of Canada
Jerome Thomas Bates, Respondent, by teleconference

Settlement Agreement

  1. The Hearing Panel accepted the settlement agreement dated July 9, 2019 (“Settlement Agreement”) between the staff of the Mutual Fund Dealers Association of Canada (“MFDA”) and Jerome Thomas Bates (“Respondent”). A copy of the Settlement Agreement is attached as Schedule “1” to these Reasons for Decision. The agreed facts are as set out in Schedule III of the Settlement Agreement.

Contraventions

  1. The Respondent admitted that:
    1. Between October 2009 and April 2017, he, or his assistant for whom he was responsible, altered and used to process transactions, 27 account forms in respect of 15 clients by altering information on the account forms without having the clients initial the alterations, contrary to MFDA Rule 2.1.1, and
    2. Between October 2009 and April 2017 he failed to comply with the Member’s policies and procedures by failing to record and maintain evidence of client instructions with respect to alterations made to 27 account forms in respect of 15 client, contrary to MFDA Rules 2.5.1, 1.1.2 and 2.1.1.

Agreed Penalties

  1. The Respondent has agreed to pay a fine of $15,000 and costs of $2,500.

Considerations

  1. Pursuant to s. 24.4.3 of MFDA By-law No. 1, a Hearing Panel must either accept the Settlement Agreement or reject it.
  2. In making the determination to accept or reject the Settlement Agreement, Hearing Panels have taken into account a number of factors including:
    1. Whether the acceptance of the Settlement Agreement would be in the public interest and whether the penalty imposed will protect investors;
    2. Whether the Settlement Agreement is reasonable and proportionate having regard to the conduct of the Respondent and is within the acceptable range taking into account similar cases;
    3. Whether it will prevent the type of conduct described in the Settlement Agreement from occurring again; and
    4. Whether it will foster confidence in the integrity of the MFDA and the regulatory process itself.
  3. In the present case the Respondent’s conduct is serious. He or his assistant for whom he was responsible altered and used 27 account forms in respect of 15 clients contrary to MFDA Rule 2.1.1.
  4. The MFDA has made clear to Approved Persons since October 31, 2007, in both MFDA staff notices and bulletins that possessing and using altered and pre-signed account forms is contrary to the obligations set out in Rule 2.1.1.
  5. The Hearing Panel in Price (Re) MFDA File No.200814, Hearing Panel of the Central Regional Council, dated April 18, 2011 at paras 122-124, identified the dangers posed by pre-signed forms as follows:
    1. Pre-signed forms present a legitimate risk that they may be used by an Approved Person to engage in discretionary trading;
    2. At worst they create a mechanism for an Approved Person to engage in acts of fraud, theft, or other forms of harmful conduct towards a client; and
    3. They subvert the ability of a Member to properly supervise trading activity.
  6. The reasoning in Price (Re) is equally applicable to the use of altered account forms, with the additional concern that there also exists the possibility that changes are made to the forms with the client’s knowledge or consent.
  7. In the present case there is an additional factor to consider in assessing the seriousness of the Respondent’s conduct. In MFDA Bulletin 0661-E dated October 2, 2015 Members and Approved Persons were reminded that “signature falsification” is not permissible under MFDA Rules. This term includes conduct such as obtaining pre-signed account forms, altering account forms, and falsifying client signatures. In the Bulletin, Members and Approved Persons were reminded that Staff would be seeking enhanced penalties at MFDA disciplinary proceedings for conduct that occurred after the publication of the Bulletin.

Post Bulletin Misconduct

  1. Thirteen altered account forms were obtained after the MFDA issued Bulletin 0661-E. This has been considered by other Hearing Panels to be an aggravating factor.
    1. Owen (Re) MFDA File No. 201784, Hearing Panel of the Prairie Regional Council dated December 7,2017 at para 35
    2. Lo (Re) MFDA File No. 201776 , Hearing Panel of the Central Regional Council dated February 7,2018 at paras 16 and 18

Respondent is Responsible for Assistant

  1. MFDA Rule 2.1.1 has a broad application. In several cases Hearing Panels found that the Approved Person was responsible for the actions of their assistant who obtained and used pre-signed or altered account forms.
    1. Barak (Re) MFDA File No. 201635, Hearing Panel of the Central Regional Council dated September 9, 2016
    2. Boucher (Re) MFDA File No. 201744, Hearing Panel of the Central Regional Council dated December 8, 2017
  2. The Respondent was designated as a branch manager from March 1997 until August 2011 when some of the forms were obtained and used. Staff submits and the Hearing Panel agrees that this is an aggravating factor.

Failure to Maintain Evidence of Client Instructions

  1. The Respondent also failed to record and maintain evidence of client instructions with respect to the alterations made to the account forms as required by the Member’s policies and procedures. Other Hearing Panels have found this to be contrary to MFDA Rules 2.5.1, 1.1.2, and 2.1.1.
    1. Irwin (Re) MFDA File No. 200915, Hearing Panel of the Central Regional Council dated April 28, 2010
    2. Boldt (Re) MFDA File No. 201649 Hearing Panel of the Central Regional Council dated February 6, 2017 at paras 6 and 7.15
  2. A mitigating factor is that no evidence was presented to indicate unauthorized trades or client losses. Furthermore there was no evidence to indicate that the Respondent received a financial or other benefit through his conduct and there were no client complaints.
  3. MFDA Counsel referred us to other similar cases and the Panel finds that the agreed penalties fall within the range imposed in such cases.
    1. Villegas (Re) MFDA File No. 201872 ,Hearing Panel of the Prairie Regional Council dated March 12, 2019
    2. Knezevic (Re) MFDA File No. 2018100, Hearing Panel of the Central Regional Council dated June 11, 2019
    3. Blake (Re) MFDA File No. 201873 ,Hearing Panel of the Central Regional Council dated December 7, 2018
    4. Riewe (Re) MFDA File No. 201822, Hearing Panel of the Prairie Regional Council dated April 23,2018
  4. Based on the foregoing the Panel finds that the Settlement Agreement is in the public interest and we accept it.
  • Michael Carroll, QC
    Michael Carroll, QC
    Chair
  • Darlene Barker
    Darlene Barker
    Industry Representative