Hearing Panel of the Central Regional Council:
- Frederick H. Webber, Chair
- Guenther W.K. Kleberg, Industry Representative
Alan Melamud, Enforcement Counsel for the Mutual Fund Dealers Association of Canada
Mir Amer Raza, Respondent
I. SETTLEMENT AGREEMENT
- The Mutual Fund Dealers Association of Canada (the “MFDA”) entered into a settlement agreement with the Respondent dated November 27, 2020, a copy of which is attached hereto as Appendix “A” (the “Settlement Agreement”).
- In the Settlement Agreement, the Respondent admitted that between April 20, 2018 and December 31, 2018, he engaged in personal financial dealings with client MA by soliciting and accepting $2,500 from the client, which gave rise to a conflict of interest that he failed to disclose to his Member and 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, 1.1.2, 2.5.1, and 2.1.1.
- In the Settlement Agreement the parties agreed to the following sanctions:
- a fine in the amount of $2,500, payable in instalments; and
- costs in the amount of $2,500, payable in instalments.
- MFDA Staff submitted that acceptance of this Settlement Agreement would advance the public interest. The Respondent has admitted to his misconduct, and the sanction proposed is reasonable and proportionate having regard to the nature and extent of the Respondent’s misconduct and all of the circumstances.
- The relevant facts are set out in Part IV of the Settlement Agreement.
- In a settlement hearing, there are two issues the Hearing Panel must determine:
- Do the facts admitted by the Respondent constitute misconduct in contravention of the MFDA By-law, Rules, or Policies, or provincial securities legislation?
- Does the sanction agreed to in the Settlement Agreement fall within a reasonable range of appropriateness, bearing in mind the nature and extent of the misconduct and all of the circumstances?
III. GENERAL PRINCIPLES REGARDING SETTLEMENT HEARINGS
- 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 the MFDA and respondents. As stated in British Columbia (Securities Commission) v. Seifert,  B.C.J. No. 225 at paras. 48- 49 (S.C.), aff’d,  B.C.J. No. 2186 at para. 31 (C.A):
- But the power to settle 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; and
- 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.
- Accordingly, it is generally accepted that Hearing Panels will not lightly interfere in a settlement agreement reached between the MFDA 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 the MFDA and a respondent falls within the reasonable range of appropriateness.
- 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…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.”
- Professional Investments (Kingston) Inc. (Re), 2009 LNCMFDA 9 at para. 13. [Emphasis added.]
- Ho (Re), 2018 LNCMFDA 21 at paras. 24-26
- When determining whether it would be appropriate to accept a proposed settlement, MFDA hearing panels have taken into account the following considerations:
- whether acceptance of the settlement agreement would be in the public interest and whether the sanction imposed will protect investors;
- whether the settlement agreement is reasonable and proportionate, having regard to the conduct of the respondent as set out in the settlement agreement;
- whether the settlement agreement addresses the issues of both specific and general deterrence;
- whether the proposed settlement will prevent the type of conduct described in the settlement agreement from occurring again in the future;
- whether the settlement agreement will foster confidence in the integrity of the Canadian capital markets;
- whether the settlement agreement will foster confidence in the integrity of the MFDA; and
- whether the settlement agreement will foster confidence in the regulatory process itself.
- Sterling Mutuals Inc. (Re), 2016 LNCMFDA 77 at para. 13.
IV. DO THE FACTS ADMITTED CONSTITUTE MISCONDUCT
a) Borrowing from Client
- The Respondent admitted that he borrowed $2,500 from a client. Hearing panels have repeatedly held that borrowing money from a client gives rise to a conflict of interest under MFDA Rule 2.1.4. As stated by the Hearing Panel in Gaunt (Re):
- A conflict of interest occurs when one party to a matter advances, uses or pursues his own interests in dealing with another person, to whom he has an obligation of dealing fairly, to the detriment of that other person or to his own advantage rather than the person to whom he owes the duty of fairness.
- Gaunt (Re), 2013 LNCMFDA 63 at para. 47.
- See also, Piper (Re), 2018 LNCMFDA 31 at para. 12
- MFDA Rule 2.1.4 requires that an Approved Person disclose an actual or potential conflict to the Member, and together, the Member and the Approved Person address the conflict by the exercise of responsible business judgment influenced only by the best interests of the client. The Respondent, however, did not disclose the borrowing from his client to his Member.
- Further, as stated in MFDA Member Regulation Notice 0047 dated October 3, 2005, the exercise of reasonable business judgment requires the prohibition of certain arrangements, such as borrowing from clients.
b) Policies & Procedures
- The Member’s policies and procedures prohibited its Approved Persons from borrowing monies from clients. Rule 2.5.1 requires Members to establish policies and procedures to ensure the handling of their business is in compliance with the By-laws, Rules, and Policies of the MFDA and applicable securities legislation. Approved Persons have a corresponding obligation to comply with those policies and procedures pursuant to Rule 1.1.2. As stated by the Hearing Panel in Franco (Re):
- 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.
- Franco (Re), 2011 LNCMFDA 55 at para. 38,
- Frank (Re), 2015 LNCMFDA 75 at paras. 56-58,
c) Standard of Conduct
- Borrowing from clients has also been held to be a contravention of the standard of conduct set out in MFDA Rule 2.1.1. The Respondent clearly failed to observe high standards of ethics and conduct in the transaction of business and engaged in business conduct or practice which was unbecoming or detrimental to the public interests by borrowing monies from his client.
- Piper (Re), supra at para. 12
- Rosicki (Re) (2019), MFDA File No. 201826 at paras. 63, 67, and 70.
- Accordingly, by borrowing $2,500 from his client, it is this Hearing Panel’s decision that the Respondent’s conduct contravened MFDA Rules 2.1.4, 1.1.2, 2.5.1, and 2.1.1.
V. IS THE AGREED SANCTION APPROPRIATE?
- The primary goal of securities regulation is the protection of the investing public. Disciplinary sanctions imposed in a securities regulatory context are protective and preventative, intended to be exercised to prevent likely future harm.
- Pezim v. British Columbia (Superintendent of Brokers),  2 S.C.R. 557 at para. 59
- Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission),  2 S.C.R. 132 at para. 42.
- Hearing Panels have taken into account the following factors when evaluating whether the penalties proposed should be accepted:
- the seriousness of the contraventions admitted to by the Respondent or proved against the Respondent;
- the Respondent’s past conduct, including prior sanctions;
- the Respondent’s experience and level of activity in the capital markets;
- whether the Respondent recognizes the seriousness of the improper activity;
- the harm suffered by investors as a result of the Respondent’s activities;
- the benefits received by the Respondent as a result of the improper activity;
- the risk to investors and the capital markets in the jurisdiction, were the Respondent to continue to operate in capital markets in the jurisdiction;
- the damage caused to the integrity of the capital markets in the jurisdiction by the Respondent’s improper activities;
- 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;
- the need to alert others to the consequences of inappropriate activities to those who are permitted to participate in the capital markets; and
- previous decisions made in similar circumstances.
- Sterling Mutuals Inc. (Re), supra at para. 14
- The Hearing Panel also referred to the MFDA’s Sanction Guidelines (the “Guidelines”). The Guidelines are 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. Many of the same factors that are listed above, which have been considered in previous decisions of MFDA Hearing Panels, are also reflected and described in the Guidelines.
VI. APPLICATION TO THIS CASE
- Of the factors listed above, the following are particularly pertinent to this case:
Seriousness of the Misconduct
- Borrowing from a client is serious misconduct. The Respondent used his position of trust with a client to obtain a loan at a time he was experiencing financial difficulties in order to pay personal expenses. The Respondent clearly chose to put his interests ahead of his responsibilities to his client and put the client’s monies at risk.
- Secord (Re), 2020 LNCMFDA 36 at para. 18
- Haylock (Re), 2013 LNCMFDA 37 at para. 7
- Cuthbert (Re), 2011 LNCMFDA 19 at para. 26.
Respondent’s Past Conduct
- The Respondent has not previously been the subject of a MFDA disciplinary proceeding. This is a mitigating factor.
Recognition by the Respondent of the Seriousness of the Misconduct
- The MFDA stated that it is satisfied that the Respondent recognizes the seriousness of his misconduct. By entering into the Settlement Agreement, the Respondent has accepted responsibility for his actions and avoided the time and expense of a full disciplinary hearing.
Harm Suffered by Investors and Benefits Received by the Respondent
- Although the Respondent was not initially able to repay the client and gave cheques that were returned “NSF”, the Respondent did ultimately repay the loan in full. Accordingly, there is no evidence of client loss.
- The Respondent did benefit from receipt of the loan and was able to pay his personal expenses.
- Deterrence is intended to capture both specific deterrence of the wrongdoer as well as general deterrence of other participants in the capital markets in order to protect investors. As stated by the Supreme Court of Canada in Cartaway Resources Corp. (Re),
- The Oxford English Dictionary (2nd ed. 1989), vol. XII, defines “preventive” as “[t]hat anticipates in order to ward against; precautionary; that keeps from coming or taking place; that acts as a hindrance or obstacle”. A penalty that is meant to deter generally is a penalty that is designed to keep an occurrence from happening; it discourages similar wrongdoing in others. In a word, a general deterrent is preventative. It is therefore reasonable to consider general deterrence as a factor, albeit not the only one, in imposing a sanction under s. 162. The respective importance of general deterrence as a factor will vary according to the breach of the Act and the circumstances of the person charged with breaching the Act.
- Cartaway Resources Inc. (Re), 2004 SCC 26 at para. 61
- The Hearing Panel accepts that the proposed sanction will act as a general deterrent and reinforce the message that personal financial dealings with a client are not tolerated by the MFDA and the mutual fund industry.
- The proposed sanction will also act as a specific deterrent against the Respondent engaging in such misconduct in the future should he again become registered. The proposed fine reflects the fact that the Respondent repaid the money he borrowed and the fact that the Respondent has demonstrated an inability to pay additional monies towards a fine or costs, a factor that the Guidelines say may be taken into account.
Previous Decisions Made in Similar Cases
- The proposed penalties are within the reasonable range of appropriateness with regard to other decisions by MFDA hearing panels in similar circumstances:
Between January 2017 and November 2017, the Respondent borrowed a total of $6,000 from two clients, contrary to the policies and procedures of the Member and MFDA Rules 2.1.1, 2.1.4, 2.5.1 and 1.1.2;
Commencing July 27, 2018, the Respondent failed to cooperate with MFDA Staff’s investigation into his conduct, contrary to section 22 of MFDA By-law No. 1.
Commencing in July 2015, the Respondent engaged in personal financial dealings by borrowing $7,000 from client DH, which gave rise to a conflict or potential conflict of interest that the Respondent failed to disclose to the Member or address by the exercise of responsible business judgment influenced only by the best interests of the clients, contrary to the Member’s policies and procedures, and MFDA Rules 2.1.4, 1.1.2, 2.5.1, and 2.1.1.
In March 2016, the Respondent misled the Member by falsely denying that she had borrowed money from a client, thereby interfering with the ability of the Member to supervise the Respondent’s activities, failing to observe high standards and conduct in the transaction of business, and engaging in conduct that is unbecoming and detrimental to the public interest, contrary to MFDA Rules 2.1.1, 1.1.2 and 2.5.1.
Between February 17, 2010 and November 25, 2011, the Respondent engaged in personal financial dealings with client MB by borrowing approximately $2,200 from client MB, thereby giving rise to a conflict or potential conflict of interest between the interests of the Respondent and the interests of client MB, which the Respondent failed to ensure was addressed by the exercise of responsible business judgment influenced only by the best interests of client MB, contrary to MFDA Rule 2.1.4.
Between July 2, 2006 and June 2008, the Respondent engaged in personal financial dealings with client EB by borrowing from her on two occasions a total of approximately $14,300, which the Respondent failed to repay in accordance with the terms of two promissory notes, thereby giving rise to a conflict or potential conflict of interest which the Respondent failed to address by the exercise of responsible business judgment influenced only by the best interests of the client, contrary to MFDA Rules 2.1.4 and 2.1.1.
Commencing on or about July 2, 2006, the Respondent failed to comply with the policies and procedures of the Member in respect of conflicts of interest and borrowing from clients by borrowing monies from client EB on two occasions, contrary to MFDA Rules 1.1.2 and 2.5.1, and MFDA Rule 2.1.1
- Having regard to all of the foregoing considerations and the facts of this case, including the Respondent’s admission of his contravention of the MFDA Rules, it is this Hearing Panel’s decision that the proposed sanction is reasonable and proportionate, and that it is in the public interest for the Hearing Panel to accept the settlement.
Frederick H. WebberFrederick H. WebberChair
Guenther W.K. KlebergGuenther W.K. KlebergIndustry Representative