Hearing Panel of the Pacific Regional Council:
- Joseph A. Bernardo, Chair
- Liz Chichka, Industry Representative
Sakeb Nazim, Enforcement Counsel for the Mutual Fund Dealers Association of Canada
Tom Newnham, Counsel for the Respondent
James Alexander Hunter, Respondent
- These are the reasons for the September 30, 2020 decision of the Hearing Panel to accept a settlement agreement dated September 21, 2020 (“Settlement Agreement”) made between Staff of the Mutual Fund Dealer’s Association of Canada (“MFDA”) and James Alexander Hunter (the “Respondent”).
II. RELEVANT FACTUAL ADMISSIONS
- The Settlement Agreement is attached as Appendix “A”.
- Briefly, this case concerns the problem of an Approved Person cutting corners for the sake of convenience:
- Since November 2012, the Respondent has been registered in British Columbia as a dealing representative with Desjardins Financial Security Investments Inc., a Member of the MFDA (the Member).
- The Member’s policies and procedures required Approved Persons to obtain client initials to confirm any changes made to client account forms, and prohibited them from possessing or using pre-signed account forms.
- During a June 2017 branch review, the Member discovered evidence that the Respondent had engaged in these practices. This led to a full review of the Respondent’s client files, which disclosed that:
- Between February 2009 and March 2017, the Respondent made alterations to 78 account forms in respect of 57 clients without having them initial the changes.
- Between January 2013 and February 2017, he also used 26 pre-signed account forms in respect of 20 clients.
- Some of the improperly prepared documentation was used to process transactions. There is no evidence of any client loss, or that the Respondent derived anything other than normal course financial compensation from the transactions.
- The Member sent letters to all of the relevant clients to determine whether any unauthorized transactions had taken place in their accounts. No clients reported any concerns.
- On January 15, 2018, the Member issued a warning letter to the Respondent for possessing and using pre-signed and altered account forms, and placed him under close supervision.
- The Respondent has been registered in the mutual fund industry since September 1989. He has not previously been disciplined.
- MFDA Rule 2.1.1 obligates Approved Persons to deal fairly, honestly and in good faith with their clients and observe high standards of ethics and conduct in the transaction of business.
- MFDA Rule 2.3.1(b) prohibits Members and Approved Persons from engaging in discretionary trading on behalf of clients:
- In light of this Rule, the use of pre-signed trade order forms is inherently risky. This is because the practice, if permitted, would render all clients vulnerable to transactions being implemented without their prior knowledge or approval.
- This is why transactions in mutual funds are typically permitted only upon the receipt of trade specific written instructions.
- The limited exceptions to this general rule do not apply to the facts of this case.
- On October 31, 2007, Staff of the MFDA (“Staff”) issued Notice 0066: Pre-Signed Forms (updated March 4, 2013) affirming prior guidance that:
- The use of pre-signed trade order forms is evidence an Approved Person may be engaging in discretionary trading. Its discovery will result in a referral to Enforcement for investigation.
- The same logic applies when previously completed documents are found to have been altered without the client’s explicit approval.
- It is never appropriate to resort to the use of pre-signed documentation for the sake of client convenience.
- The use of pre-signed forms constitutes a breach of Rule 2.1.1.
- On October 2, 2015, Staff issued MFDA Bulletin #0661-E in which Staff informed Members and Approved Persons that it would seek enhanced penalties in cases involving the use of pre-signed forms or signed documents that had been altered without the client initialing the changes.
- The Respondent’s admissions leave no doubt that he breached MFDA Rule 2.1.1.
- MFDA By-Law 24.4 sets out the procedures for settlement hearings and grants hearing panels the jurisdiction to accept or reject settlements.
- As has been routinely observed in previous decisions, settlements are to be encouraged and supported because they enable the efficient allocation of limited enforcement resources. This is crucial for maximizing public protection, which is the core purpose of securities regulation.
- Moreover, settlements are the result of negotiations between litigants opposed in interest, and therefore emerge from the competing perspectives of the persons closest to the facts of a case. As such, settlements deserve a measure of deference, because they represent a pragmatic and balanced assessment of the issues achieved through the best efforts of the persons most engaged with them.
- British Columbia Securities Commission v. Seifert, 2007 BCCA 484 at paras. 26 and 31.
- A hearing panel, therefore, ought not to assess a proposed outcome against what it might itself deem appropriate if it were exercising its own independent judgment. Instead, a hearing panel’s role is to weigh the agreed upon sanctions solely against the objectives of protecting the investing public and the integrity of the mutual fund industry. An outcome should be rejected only if it clearly falls “outside a reasonable range of appropriateness” for the facts disclosed in the settlement. Otherwise, it is incumbent on the hearing panel to accept it.
- Sterling Mutuals Inc. (Re), 2008 MFDA 16, at para. 37, citing the reasoning in Milewski (Re),  I.D.A.C.D. No. 17 at p. 11, Ontario District Council Decision dated July 28, 1999.
- The Settlement Agreement proposed the following sanctions:
- $17,500 fine, payable in instalments; and
- $2,500 costs.
- The Respondent is a highly experienced dealing representative. At the time his misconduct was discovered, he had been registered for over 27 years. Some of his misconduct occurred after the issuance of MFDA Bulletin #0661-E. The Respondent’s disregard for Staff’s explicit guidance concerning the use of pre-signed forms and the alteration of documents can only be described as blatant.
- Enforcement Counsel referenced recent settlement decisions involving closely similar misconduct. In those cases, the fines ranged from $15,000 to $24,000 and in each case costs of $2,500 were ordered. In Williams (Re), where a new transaction was effected by altering the signature dates on a previously used pre-authorized chequing form, one of the respondents was suspended for six months.
- Simon Chi Ming Wong (Re), MFDA File No. 201848, July 23, 2018.
- Tamera Jean Williams and Todd Russell Williams (Re), MFDA File No. 201864, August 30, 2018.
- Michael Harold Mills (Re), MFDA File No. 2018103, January 25, 2019.
- The sanctions proposed by the parties fall within the middle of the range of outcomes ordered in the previous cases. Reviewing the facts of those cases, it is evident that the same can also be said about the gravity of the Respondent’s conduct.
- The Hearing Panel, therefore, was satisfied that the sanctions proposed by the parties did not fall outside the reasonable range of appropriateness, and approved the Settlement Agreement.
Joseph A. BernardoJoseph A. BernardoChair
Liz ChichkaLiz ChichkaIndustry Representative