Reasons For Decision

I. SETTLEMENT AGREEMENT

1. The Mutual Fund Dealers Association of Canada (the “MFDA”) entered into a settlement agreement dated September 18, 2020 (the “Settlement Agreement”), a copy of which is attached hereto as Appendix “A”, with Christopher Shantz (the “Respondent”), in which the Respondent admitted the following:
   1. between September 4, 2013 and July 2, 2018, the Respondent obtained, possessed, and used to process transactions, 25 pre-signed account forms in respect of 14 clients, contrary to MFDA Rule 2.1.1.
2. In the proposed Settlement Agreement, the Respondent agreed to the following sanctions:
   1. a fine in the amount of $7,500 in certified funds upon acceptance of the Settlement Agreement, pursuant to section 24.1.1(b) of MFDA By-law No. 1;
   2. costs in the amount of $2,500 in certified funds upon acceptance of the Settlement Agreement by the Hearing Panel, pursuant to section 24.2 of MFDA By-law No. 1; and
   3. the Respondent shall in the future comply with MFDA Rule 2.1.1.
3. MFDA Staff submitted that the Hearing Panel ought to accept the Settlement Agreement as the proposed terms of settlement fall inside the reasonable range of appropriateness having regard to the nature of the conduct admitted by the Respondent and the MFDA’s regulatory objective of protecting the public.

II. FACTS

4. The relevant facts are set out in section III of the Settlement Agreement.

III. MFDA RULE 2.1.1

5. MFDA Rule 2.1.1 prescribes the standard of conduct applicable to registrants in the mutual fund industry. The Rule requires that each Member and Approved Person:
   1. deal fairly, honestly, and in good faith with clients;
   2. observe high standards of ethics and conduct in the transaction of business; and
   3. refrain from engaging in any business conduct or practice which is unbecoming or detrimental to the public interest.

IV. PRE-SIGNED ACCOUNT FORMS

6. In the present case, the Respondent admitted to using pre-signed account forms, a generic term which is applied to a variety of situations where an Approved Person seeks to rely on a client’s signature on a document when the signature was not provided by the client at the time the document was completed. Most commonly, an Approved Person obtains a client’s signature on a partially or completely blank account form, such as an Order Entry Form or Know-Your-Client Form, adds additional information to the form, then uses the form to process transactions in the client’s account. Alternatively, an Approved Person may use the signature page of one form and photocopy it for use in other forms.
7. The prohibition on the use of pre-signed account forms applies regardless of whether:
   1. the client was aware of or authorized the use of the pre-signed forms; and
   2. the forms were actually used by the Approved Person for discretionary trading or other improper purposes.
   1. Byce (Re), MFDA File No. 201311, at para. 8
8. Hearing panels have consistently found that obtaining or using pre-signed account forms contravenes the standard of conduct set out in MFDA Rule 2.1.1.
   1. Dias Pereira (Re), [2017] MFDA File No. 201652
   2. Baksh (Re), [2019] MFDA File No. 201939
9. In Price (Re), [2011] MFDA File No. 200814, at paras. 122-124, the Hearing Panel explained:
   1. Pre-signed forms present a legitimate risk that they may be used by an Approved Person to engage in discretionary trading….At its worst, pre-signed forms create a mechanism for an Approved Person to engage in acts of fraud, theft or other forms of harmful conduct towards a client…Pre-signed forms also subvert the ability of a Member to properly supervise trading activity. They destroy the audit trail. The presence of the client’s signature on a trade form can no longer be taken as confirmation that the client authorized a particular trade. It also compromises the ability of the Member to subsequently investigate and respond to a client complaint concerning the propriety of trading activity in his or her account.
10. In addition to the findings of previous panels on the issue of pre-signed and altered forms, the MFDA has been warning Approved Persons against this type of conduct for a number of years through the publication of Staff Notices and Bulletins.
    1. MFDA Staff Notice #MSN-0035 dated December 10, 2004
    2. MFDA Staff Notice #MSN-0066 dated October 31, 2007, (updated March 4, 2013 and January 26, 2017)
    3. MFDA Bulletin #0661-E dated October 2, 2015
11. In Bulletin #0661-E issued October 2, 2015 (the “Bulletin”), the MFDA provided examples of the negative consequences that can arise when an Approved Person engages in Signature Falsification (a term that includes conduct like pre-signed account forms, altered account forms and the falsification of a client signature):
    • there is an adverse effect on the integrity and reliability of the documents;
    • the audit trail is destroyed
    • the Approved Person’s ability to produce valid documentation to support transactions that come into question is impacted
    • the client is prejudiced by making it appear as if the client has executed a particular document when this is not the case
    • the Member’s supervisory personnel are misled as to the circumstances as to how the document was obtained
    • the Approved Person’s credibility is negatively affected
    • Member complaint handling is negatively affected
    • The Approved Person uses the forms to facilitate further misconduct like unauthorized trading, fraud and misappropriation of monies
12. In the Bulletin and also in MFDA Staff Notice #MSN-0066, updated on January 26, 2017, Staff advised Approved Persons that it would be seeking enhanced penalties at MFDA disciplinary proceedings for Signature Falsification conduct that occurred after the publication of the Bulletin on October 2, 2015.

V. ACCEPTANCE OF SETTLEMENT AGREEMENTS

13. Pursuant to section 24.4.3 of MFDA By-law No.1, a hearing panel has two options with respect to a settlement agreement. It may either accept the settlement agreement or reject it.
14. The role of a hearing panel at a settlement hearing is fundamentally different than its role at a contested hearing. As was stated by the MFDA Hearing Panel in Sterling Mutuals Inc. (Re), quoting the reasoning in the I.D.A matter of 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 Mutuals Inc. (Re), 2008 LNCMFDA 16, at para. 37
       2. Milewski (Re), [1999] I.D.A.C.D. No. 17 at p. 11
15. The principle that a hearing panel will not reject a settlement agreement unless the proposed penalty clearly falls outside the reasonable range of appropriateness assists the MFDA to fulfill its regulatory objective of protecting the public. Settlements advance this regulatory objective by proscribing activities that are harmful to the public, while enabling the parties to reach a flexible remedy tailored to address the interests of both the regulator and a respondent.
    1. British Columbia Securities Commission v. Seifert, 2007 BCCA 484 at para. 3
16. The primary goal of securities regulation is the protection of the investor.
    1. Pezim v. British Columbia (Superintendent of Brokers), [1994] 2 S.C.R. 557 (S.C.C.) at paras. 59, 68
17. MFDA hearing panels have taken into account the following considerations when
    determining whether a proposed settlement should be accepted:
    1. whether 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 as set out in the settlement agreement;
    3. whether the settlement agreement addresses the issues of both specific and general deterrence;
    4. whether the proposed settlement will prevent the type of conduct described in the settlement agreement from occurring again in the future;
    5. whether the settlement agreement will foster confidence in the integrity of the Canadian capital markets;
    6. whether the settlement agreement will foster confidence in the integrity of the MFDA; and
    7. whether the settlement agreement will foster confidence in the regulatory process itself.
    1. Jacobson (Re) [2007] MFDA File No. 200712, at para. 68
18. This Hearing Panel agrees with the principles stated above and has followed them in making its decision in this case.

VI. FACTORS REGARDING APPROPRIATENESS OF PENALTY

19. Factors that hearing panels frequently consider when determining whether a penalty is appropriate include the following:
    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 activities;
    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 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 activities to those who are permitted to participate in the capital markets; and
    11. previous decisions made in similar circumstances.
    1. Headley (Re) [2006] MFDA File No. 200509, at para. 85
20. The MFDA Sanction Guidelines (the “Guidelines”) are an additional source of factors to be taken into account with regards to penalty. The Guidelines are not mandatory but are intended to assist hearing panels, the MFDA and Respondents in considering the appropriate penalties in MFDA disciplinary proceedings.
21. In this case, in addition to the MFDA’s disciplinary hearing and its terms of settlement, the Respondent also had sanctions imposed on him for the same misconduct by his Member. As described in paragraphs 14 and 15 of the Settlement Agreement, the Respondent was placed on strict supervision for a period of one year and, from December 29, 2018 to December 22, 2019, the Respondent paid an administrative penalty totalling $8,000 to his Member for his misconduct. This Hearing Panel considered this to be a mitigating factor as per point eight of the Guidelines.

VII. CONSIDERATIONS IN THIS CASE

22. Of the factors set out above, the following factors are particularly relevant to the Settlement Agreement and to the Hearing Panel’s decision in this case.

a) Nature of the misconduct

23. The Hearing Panel considers that the Respondent’s actions constitute a serious breach of MFDA Rule 2.1.1 for the reasons set out above in paragraphs 9-12.

b) Client harm

24. There is no evidence of client complaints, client loss or lack of authorization for the underlying transactions.

c) Benefits received by the Respondent

25. There is no evidence that the Respondent received any financial benefit from engaging in the misconduct at issue in this proceeding.

d) Respondent’s experience and level of activity in the capital markets

26. The Respondent has been an Approved Person since 2006. He ought to have known and respected the Member’s compliance requirements and those of the MFDA.

e) Deterrence

27. The proposed penalty is significant and helps the MFDA send a message to the Respondent and others in the capital markets about the seriousness of the misconduct at issue.

f) Respondent’s past conduct

28. The Respondent has not previously been subject to MFDA disciplinary proceedings.

g) Respondent’s recognition of the seriousness of his misconduct

29. By entering into this Settlement Agreement, the Respondent has accepted responsibility for his misconduct and avoided the necessity of the MFDA incurring the time and expense of conducting full disciplinary hearings.

h) Previous Decisions Made in Similar Circumstances

30. While no two cases are exactly alike, the proposed resolution is within the reasonable range of appropriateness with regard to other decisions in similar circumstances, which were reviewed with the Hearing Panel by MFDA counsel.

31. The above-referenced cases all involve serious misconduct similar to the allegation set out in the Settlement Agreement. In each of these cases, the mitigating factors of no client harm, no financial benefit to the Respondent, no lack of client authorization, no prior disciplinary history and a remorseful Respondent are present. The cases also demonstrate that the proposed penalty in this matter is within a reasonable range and is appropriate.

VIII. COSTS

32. This Hearing Panel agrees that an award of costs against the Respondent in the amount of $2,500 would be appropriate in the circumstances.

IX. CONCLUSION

33. It is in the public interest for the Hearing Panel to accept the Settlement Agreement having regard to all the foregoing circumstances. The proposed penalty is reasonable, proportionate to the misconduct in question, and is in keeping with the MFDA’s mandate to enhance investor protection and strengthen public confidence in the Canadian mutual fund industry by ensuring high standards of conduct by Members and Approved Persons.