Reasons For Decision

Background

1. By Notice of Settlement Hearing, dated December 4, 2020, 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 Hearing Panel should accept a settlement agreement dated November 25, 2020, (“Settlement Agreement”) entered into by the Staff of the MFDA (“Staff”) and Carte Wealth Management Inc. (“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 Contravention

3. In the Settlement Agreement, the Respondent admits that:
   1. between June 30, 2019 and December 31, 2019, the Respondent failed to maintain a risk adjusted capital greater than zero, contrary to MFDA Rule 3.1.1.

The Facts

4. In the Settlement Agreement, Staff of the MFDA and the Respondent agreed to the existence of a series of facts, which are set out in Part IV of the said Settlement Agreement. The Settlement Agreement is attached as Appendix “A” to these Reasons.
5. As set out in the Settlement Agreement, the Respondent had, since April 20, 2007, been registered in the securities industry as a mutual fund dealer, in all the provinces of Canada, except Newfoundland and Labrador. The Respondent was designated as a Level 3 Member of the MFDA.   

Discussion

6. 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.
7. 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.  It is generally accepted that Hearing Panels will not lightly interfere in a settlement agreement reached by 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 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. 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.

MFDA By-law No. 1

Professional Investments (Kingston) Inc. (Re), 2009 LNCMFDA 9 at para. 13.

Ho (Re), 2018 LNCMFDA 21 at paras. 24-26.

Misconduct

8. The Respondent admits that for the period between June 30, 2019 and December 31, 2019, it failed to maintain a risk adjusted capital (“RAC”) greater than zero. The Respondent is a Level 3 Dealer. Therefore, pursuant to MFDA Rule 3.1.1, it is required to maintain a minimum capital of $75,000 and RAC greater than zero at all times.

MFDA Rule 3.1.1.

9. The purpose of RAC is set out in “The Form 1 Reference Manual” (the “Reference Manual”), which states the following:

In order to monitor the financial viability of mutual fund dealers, the MFDA has adopted a risk adjusted capital calculation, also known as the “capital formula”. RAC is derived from the Member’s working capital and is the primary means of financial reporting to the MFDA. RAC is a measure of the Member’s liquidity and its ability to withstand any adverse fluctuations in operations. In addition to a minimum amount of capital required by MFDA rules, certain provisions or “cushions” are taken into consideration in order to assess the Member’s capacity to manage its obligations and protect its clients. The capital formula seeks to assess the Member’s ability to continue as a going concern.

10. The Reference Manual further explains that pursuant to MFDA Rule 3.1.1, “it is the responsibility of all Members to continuously monitor and evaluate its capital to ensure RAC is positive at all times.”

The Form 1 Reference Manual, March 2014.

11. Accordingly, by failing to ensure its RAC was greater than zero between June 30, 2019 and December 31, 2019, the Respondent contravened MFDA Rule 3.1.1.

The Penalty

12. 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, and intended to be exercised to prevent likely future harm.

Pezim v. British Columbia (Superintendent of Brokers), [1994] 2 S.C.R. 557 at para. 59.

Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), [2001] 2 S.C.R. 132 at para. 42,

13. The Panel 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 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.

Sterling Mutuals Inc. (Re), MFDA File No. 200820 dated August 21, 2008

14. The Hearing Panel may also have reference to the MFDA’s Sanction Guidelines (the “Sanction Guidelines”). The Sanction 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 Sanction Guidelines.

Mutual Fund Dealers Association of Canada Sanction Guidelines, dated November 15, 2018

15. The Hearing Panel took into consideration the above factors when considering the Settlement Agreement with the Respondent. Set out below are the factors that are particularly pertinent to this case:
    1. The Respondent’s failure to maintain a RAC greater than zero is serious misconduct. As stated by the Hearing Panel in Global Maxfin Investments Inc. (Re), the requirement that members maintain a RAC greater than zero is necessary “to protect the financial integrity of individual MFDA firms, their clients, the MFDA and the securities markets”. When a Member’s financial viability is threatened, its clients are put at significant risk, and accordingly it is critical that Members maintain a positive RAC at all times.

Global Maxfin Investments Inc. (Re) 2015 LNCMFDA 65 at para. 10.

1. 2. The Respondent has not previously been the subject of an MFDA disciplinary proceeding.
   3. The Hearing Panel was satisfied that the Respondent had accepted responsibility for its misconduct. The Respondent entered into a Settlement Agreement which substantially reduced the length and complexity of the disciplinary proceeding that might have otherwise been necessary.
   4. There is no evidence that any client suffered any harm as a result of the Respondent’s misconduct, nor is there any evidence that the Respondent received any benefit as a result of the misconduct.
   5. Importantly, the Respondent had rectified the RAC deficiency and maintained a positive RAC since January 21, 2020.
   6. Additionally, the Respondent had taken substantial voluntary remedial measures, including hiring a chartered accountant who is now responsible for the Respondent’s financial affairs on a full-time basis, and made changes to its policies and procedures to ensure it maintained a RAC greater than zero.
   7. The proposed sanctions served the purpose of specific and general deterrence. Although the Hearing Panel might have preferred a larger fine, the $10,000 fine was sufficiently large to deter the Respondent from again contravening MFDA Rule 3.1.1 while taking into account the size of the Respondent, the nature of the misconduct, and the fact that this was a single financial compliance contravention which had been rectified.
   8. Additionally, the Hearing Panel understood that the sanction ought not to exacerbate the financial difficulties that the MFDA, by its prosecution, was attempting to rectify.
   9. The Hearing Panel was of the view that the proposed sanctions would also send a message to the industry of the importance of maintaining RAC greater than zero, and that Members can suffer a penalty from even a single financial compliance contravention.

16. In coming to its conclusion, the Hearing Panel considered all of the facts and circumstances of the case, the substantial case law to which it had been referred, and the Sanction Guidelines.
17. Staff proposed that costs in the amount of $5,000 be awarded against the Respondent. In the Settlement Agreement, the Respondent agreed to Staff’s proposal.  In its submissions, Staff made it clear to the Hearing Panel, that costs incurred more than justified the imposition of the above costs award. 

Result

18. 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 $10,000, pursuant to s. 24.1.2(b) of MFDA By-law No. 1;
    2. The Respondent shall pay costs in the amount of $5,000, pursuant s. 24.2 of MFDA By-Law No. 1;
    3. The Respondent shall, in the future, comply with MFDA Rule 3.1.1; and
    4. If at any time a non-party to this proceeding, with the exception of the bodies set out in s. 23 of the 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.