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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: Shawn Thomas Culliton

Heard: December 6, 2019 in Toronto, Ontario
Reasons For Decision: February 25, 2020

Reasons For Decision

Hearing Panel of the Central Regional Council:

  • Frederick W. Chenoweth, Chair
  • Kenneth P. Mann, Industry Representative

Appearances:

Jacklyn Neborak, Enforcement Counsel for the Mutual Fund Dealers Association of Canada
Shawn Thomas Culliton, Respondent, in person

Background

  1. By Notice of Settlement Hearing, a Hearing Panel of the Central Regional Counsel of the Mutual Fund Dealers Association of Canada (the “MFDA”) was convened to consider whether, pursuant to s. 24.4 of By-law No. 1 of the MFDA, the Panel should accept a settlement agreement dated November 15, 2019, (“Settlement Agreement”) entered into by the Staff of the MFDA (“Staff”) and Shawn Thomas Culliton (“Respondent”).
  2. At the outset of the proceeding, the Hearing Panel considered a joint motion by Staff and the Respondent to move the proceedings “in camera”. The Hearing Panel granted the motion.  The Hearing Panel then considered the provisions of the Settlement Agreement, aided by submissions as to the applicable law, which should guide the Hearing Panel in determining whether or not to accept or reject the Settlement Agreement. The Hearing Panel unanimously accepted the Settlement Agreement and issued an Order accordingly. These are the Hearing Panel’s reasons for doing so. The Hearing Panel also made an Order at the end of the hearing, declaring the hearing open to the public.

The Contraventions

  1. In the Settlement Agreement, the Respondent admits that:
    1. between January 2012 and February 2018, the Respondent obtained, possessed, and in some instances, used to process transactions, 112 pre-signed account forms in respect of 31 clients, contrary to MFDA Rule 2.1.1; and
    2. between February 2013 and April 2017, the Respondent altered and used to process transactions, 5 account forms in respect of 5 clients by altering information on the account forms without having the client initial the alterations, contrary to MFDA Rule 2.1.1.

The Facts

  1. In the Settlement Agreement, Staff of the MFDA and the Respondent agreed to a series of facts, which are set out in Part III of the said Settlement The Settlement Agreement is attached as Appendix “A” to these Reasons.
  2. As set out in the Settlement Agreement, the Respondent had been registered in the mutual fund industry since February of 1994. Since December 1999, the Respondent had been registered in Ontario as a mutual fund sales person (now known as a dealing representative) with FundEX Investments Inc.  (“FundEX”), a member of the MFDA.  At all material times, the Respondent conducted business in the Waterloo, Ontario area.

Discussion

  1. The Hearing Panel was aware that prior to accepting a Settlement Agreement, a Hearing Panel must be satisfied that:
    1. The facts admitted by the Respondent constitute misconduct in contravention of the By-laws, MFDA Rules or policies, or provincial securities legislation; and
    2. The penalties contemplated in the Settlement Agreement fall within a reasonable range of appropriateness, bearing in mind the nature and extent of the misconduct and all the circumstances.
  2. The Hearing Panel accepted that the role of a Hearing Panel at a settlement hearing is fundamentally different than its role at a contested hearing.  As stated by the MFDA Hearing Panel in Sterling Mutuals (Re), citing the I.D.A. Ontario District Council in Milewski (Re):
    1. We also note that while in a contested hearing the Panel attempts to determine the correct penalty, in a settlement hearing the Panel “will tend not to alter a penalty that it considers to be within a reasonable range, taking into account the settlement process and the fact that the parties have agreed.  It will not reject a settlement unless it views the penalty as clearly falling outside a reasonable range of appropriateness.” [Emphasis added].
      1. Sterling Mutual Inc. (Re), MFDA File No. 200820, Hearing Panel of the Central Regional Council, Decision and Reasons dated August 21, 2008 at para. 37.
      2. Milewski (Re), [1999] I.D.A.C.D. No. 17 at p. 12, Ontario District Council Decision dated July 28, 1999.

Pre-Signed Forms

  1. The Hearing Panel was also aware that the MFDA had been warning Approved Persons against the use of pre-signed and altered account forms for a number of years.
    1. MFDA Staff Notice MSN-0066, dated October 31, 2007 (updated March 4, 2013 and January 26, 2017).
    2. MFDA Bulletin #0661-E dated October 2, 2015.
  2. MFDA Hearing Panels have consistently held that both categories of improper account forms, their creation and their use, constitute a contravention of the standard of conduct under MFDA Rule 2.1.1.
    1. Price (Re), 2011 CanLII 72458 at paras. 115-138 (MFDA), SBA, Tab 6; Symes (Re), 2017 LNCMFDA 104 at paras. 15-16.
    2. Owen (Re), 2017 LNCMFDA 287 at paras. 31-34;
    3. Lewis (Re), 2018 LNCMFDA 59 at para. 29.
  3. The prohibition on the issue of pre-signed and altered account forms and their use, apply regardless of whether the client was aware, or authorized the use, of the pre-signed forms.
    1. Price (Re), supra at paras. 122-124, SBA, Tab 6; Symes (Re), supra at para. 18.
    2. Owen (Re), supra at para. 32, SBA, Tab 8; Lewis (Re), supra at para. 30.
  4. The Hearing Panel considered in detail the agreed facts set out in the Settlement Agreement, and having done so, concluded that both allegations admitted by the Respondent had been proven and constitute misconduct in contravention of the By-laws, MFDA Rules or policies, or provincial securities legislation.
  5. The Hearing Panel then proceeded to consider the appropriateness of the proposed penalty as set out in the Settlement Agreement.  In doing so, the Hearing Panel considered the submissions of Staff and the Respondent, the MFDA Sanction Guidelines and the substantial case law to which it was referred.
  6. In doing so, the Hearing Panel was mindful that the primary goal of securities regulation is the protection of the investor. The Hearing Panel was further mindful that in addition to protection of the public, the goals of securities regulation also include fostering public confidence in the capital markets and the securities industry.
    1. Pezim v. British Columbia (Superintendent of Brokers), [1994] 2 S.C.R. 557.
    2. Breckenridge (Re), MFDA File No. 200718, Hearing Panel of the Central Regional Council, Decision and Reasons dated November 14, 2007 @ para. 71.
  7. The Hearing Panel also accepted the submissions of Staff that the following factors are frequently considered by Hearing Panels when determining whether a penalty is appropriate:
    1. The seriousness of the allegations proved against the Respondent;
    2. The Respondent’s past conduct, including prior sanctions;
    3. The Respondent’s experience and level of activity in the capital markets;
    4. Whether the Respondent recognizes the seriousness of the improper activity;
    5. The harm suffered by investors as a result of the Respondent’s activity;
    6. The benefits received by the Respondent as a result of the improper activity;
    7. The risk to investors and the capital markets in the jurisdiction, were the Respondent to continue to operate in the capital markets in the jurisdiction.
    8. The damage caused to the integrity of the capital markets in the jurisdiction by the Respondent’s improper activities;
    9. 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;
    10. The need to alert others to the consequences of inappropriate activity in the capital markets; and
    11. Previous decisions made in similar circumstances.
    1. Breckenridge, supra.
  8. The Hearing Panel further considered that settlements play an important and necessary role in facilitating the MFDA’s principal goal of protecting the investing public. An administrative tribunal cannot adjudicate every matter that comes before it.  Settlements provide an efficient and effective way for the MFDA to proscribe conduct that is harmful to the public, while providing a flexible remedy that can be tailored to address the interests of Staff and respondents:
    1. But the power to settle, I find, is necessary if the Commission is going to carry out its purpose under s. 4(2) and its enforcement mandate under ss. 161 and 162 in an effective and efficient manner.  Administrative tribunals do not and cannot adjudicate on every matter that commences before them.
    2. 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.  Enforcement is rarely a concern because the settlement is voluntary.  A person who is the subject of an investigation retains the option of refusing to settle and proceeding to a hearing. Settlements are also efficient.  Both parties can forego the time and expense of a hearing.
    3. British Columbia (Securities Commission) v. Seifert, [2006] B.C.J. No. 225 at paras. 48-49 (S.C.), aff’d, [2007] B.C.J. No. 2186 at para. 31 (C.A).
  9. Accordingly, it is generally accepted that hearing panels will not lightly interfere in a settlement agreement reached between Staff and a respondent. Section 24.4.3 of MFDA By-Law No. 1 provides that hearing panels may only accept or reject a settlement in its entirety.  A hearing panel’s role is therefore not to determine the correct sanction, but instead to ascertain whether the sanction agreed to between Staff and a respondent falls within a reasonable range of appropriateness:
    1. In a contested Hearing, the Hearing Panel attempts to determine the correct penalty.  In a Settlement Hearing, the Hearing Panel takes into account the settlement process itself and the fact that the parties have agreed to the penalties set out in the Settlement Agreement.  In our view, a Hearing Panel should not interfere lightly in a negotiated settlement and should not reject a Settlement Agreement unless it views the penalty as clearly falling outside a reasonable range of appropriateness.  As has been said: “The settlement process is one of negotiation and compromise and the penalty imposed following a settlement will often be less onerous than one imposed following a Hearing where similar findings are made.”
      1. MFDA By-law No. 1.
      2. Professional Investments (Kingston) Inc. (Re), 2009 LNCMFDA 9 at para. 13. [Emphasis added.]
      3. Ho (Re), 2018 LNCMFDA 21 at paras. 24-26.
  10. In respect of the factors considered specifically relating to this Respondent, the Hearing Panel was mindful that:
    1. The nature of the contraventions that had been admitted by the Respondent were serious and warranted significant penalties. In particular, the use of pre-signed account forms is a serious breach of MFDA Rule 2.1.1;
      1. Balani (Re), MFDA File No. 201402, Hearing Panel of the Central Regional Council, Decision and Reasons dated January 15, 2015
    2. The Respondent did not have a history of previous contraventions or prior sanctions;
    3. There is no evidence that the transactions processed by the Respondent pursuant to the pre-signed and altered account forms resulted in any client loss or that the transactions were unauthorized;
    4. There is no evidence that the Respondent received any financial benefit from engaging in the misconduct that is the subject of this proceeding, beyond any commissions and fees that he would ordinarily be entitled to receive, had the transactions been carried out in a proper manner;
    5. The Respondent had cooperated fully with Staff, and acknowledged his contraventions thereby avoiding the necessity of a full trial on the issues;
    6. On March 26, 2018, the Member issued to the Respondent a reprimand letter for pre-signed forms and placed him under strict supervision, effective March 27, 2018. During the period of strict supervision, the Member imposed a monthly financial penalty of $625. The strict supervision and monthly penalty imposed by the Member continued until the conclusion of the current MFDA proceeding.  As of the date of the Hearing, in excess of $11,000 had been deducted from the Respondent’s commissions.  The Respondent also paid the Member a total of $1,047 in administrative fees to cover the cost of client mailings;
    7. With respect to the matter of costs, the Panel was referred to five previous decisions all with similar factual situations. In each of the five cases, costs were assessed in the amount of $2,500;
    8. The Respondent had been registered in the mutual fund industry for over 25 years. The conduct that is the subject of the Settlement Agreement went on for many years. As an experienced dealing representative, the Respondent ought to have known and respected the compliance requirements of the Member and the MFDA.
    9. The Hearing Panel also referred to the MFDA’s new sanction guidelines, which came into effect on November 15, 2018. The guidelines were not mandatory or binding on the Hearing Panel, but provide a summary of the key factors upon which discretion can be exercised consistently and fairly.

Result

  1. For all the above reasons, the Hearing Panel concluded that the Settlement Agreement was reasonable and proportionate. Accordingly, the following penalties were imposed upon the Respondent:
    1. The Respondent shall pay a fine in the amount of $16,500 upon acceptance of the Settlement Agreement, pursuant to section 24.1.1(b) of MFDA By-law No. 1, in instalments as follows:
      1. $4,125, in certified funds, upon acceptance of this Settlement Agreement by the Hearing Panel;
      2. $4,125, on or before January 31, 2020;
      3. $4,125, on or before February 28, 2020; and
      4. $4,125, on or before March 31, 2020.
    2. The Respondent shall pay costs in the amount of $2,500 in certified funds, upon acceptance of the Settlement Agreement, pursuant to s. 24.2 of MFDA By-law No.1;
    3. The Respondent shall in the future comply with MFDA Rule 2.1.1; and
    4. If at any time a non-party to this proceeding, with the exception of the bodies set out in section 23 of MFDA By-law No. 1, requests production of or access to exhibits in this proceeding that contain personal information as defined by the MFDA Privacy Policy, then the MFDA Corporate Secretary shall not provide copies of or access to the requested exhibits to the non-party without first redacting from them any and all personal information, pursuant to Rules 1.8(2) and (5) of the MFDA Rules of Procedure.
  • Frederick W. Chenoweth
    Frederick W. Chenoweth
    Chair
  • Kenneth P. Mann
    Kenneth P. Mann
    Industry Representative

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