Reasons For Decision

I. INTRODUCTION

1. Between February 6, 1991 and May 23, 2018, Sergio Salina (the “Respondent”) was registered as a dealing representative in British Columbia with Investors Group Financial Services Inc. (the “Member”). At various times between 2004 and 2018 the Respondent was also registered with the Member in other Territories and Provinces in Canada. On May 23^,, 2018 the Respondent’s registration was terminated by the Member.
2. On December 20, 2021 the Mutual Fund Dealers Association of Canada ( the “MFDA”) commenced a disciplinary proceeding against the Respondent alleging that he:
   1. In July 2014 recommended for the account of a 95 year old client (“the Client”) a switch of approximately $498,511.00 from a no-load mutual fund to the same mutual fund which was subject to a 7 year deferred sales charge schedule, without ensuring that the recommendation was suitable having regard to the Know Your Client, factors contrary to the Member’s policies and procedures and MFDA Rules 2.2.1, 2.5.1, 1.1.2, 2.1.1, or 2.1.4.
   2. Between March and November 2016, failed to immediately disclose to the Member that he had been named a beneficiary in a deceased client’s will and continued to act as an Approved Person responsible for servicing the estate’s account, thereby failing to disclose a conflict or potential conflict of interest to the Member, or otherwise ensure that it was addressed by the exercise of responsible business judgement influenced only by the best interests of the client, contrary to the Member’s policies and procedures and MFDA Rules 2.1.4, 2.1.1, 1.1.2,and 2.5.1.
   3. Between 2010 and 2018, obtained and possessed 24 pre-signed account forms in respect of 13 clients and altered 1 account form without obtaining the client’s initials, contrary to the Member’s policies and procedures and MFDA Rule 2.1.1.
3. A first appearance took place on February 22, 2022 and a hearing on the merits was scheduled for 3 days commencing July 25, 2022.
4. On July 12, 2022 a settlement agreement (the “Settlement Agreement”) was made between the MFDA and the Respondent and the matter now comes before this panel as a Settlement Hearing in which we are required to approve or reject the Settlement Agreement. The Settlement Agreement is attached hereto as Schedule “1”. The relevant facts are set out in Part IV of the Settlement Agreement.

II. CONTRAVENTION

5. The Respondent admits that he recommended for the account of the Client a switch of $498,511 from a no-load mutual fund to the same mutual fund, but which was subject to a 7 year deferred sales charge schedule as a result of the switch, generating a commission of $18,943 to the Respondent to which he would not otherwise have been entitled. This gave rise to a conflict or potential conflict of interest that the Respondent did not address by the exercise of responsible business judgement influenced only by the best interests of the client. By failing to address this conflict or potential conflict of interest the Respondent admits he failed to act in accordance with the Member’s policies and procedures, contrary to MFDA Rules 2.1.4, 2.1.1, 1.1.2, and 2.5.1.
6. The Respondent also admits that between March and November 2016 he failed to disclose to the Member that he had been named a beneficiary in the Client’s will, thereby also failing to disclose a conflict or potential conflict of interest to the Member contrary to the Member’s policies and procedures and the same Rules as described in paragraph 5 hereof.
7. Finally the Respondent admits that between 2010 and 2018, he obtained and possessed 24 pre-signed account forms in respect of 13 clients, contrary to the Member’s policies and procedures and MFDA Rule 2.1.1.

Proposed Sanctions should Settlement Agreement be Approved

8. The Respondent has agreed to the following sanctions for his misconduct upon approval of the Settlement Agreement by the panel:
   1. He shall pay a fine of $30,000 in certified funds pursuant to section 24.1.1(b) of MFDA By-Law No.1, and
   2. He shall pay costs in the amount of $5,000 in certified funds pursuant to section 24.2 of MFDA By-Law No.1.

III. ISSUES

9. Counsel for the MFDA submits and the panel agrees that there are 2 issues to determine;
   1. Do the facts admitted by the Respondent constitute misconduct in contravention of the MFDA By-Laws, Rules or Policies or provincial securities legislation?
   2. Do the sanctions contained in the Settlement Agreement fall within the reasonable range of appropriateness, bearing in mind the nature and extent of the misconduct and all of the circumstances?

General Principles Regarding Settlement Hearings

10. Section 24.4.3 of MFDA By-Law No. 1 provides that hearing panels may only accept or reject a Settlement Agreement in its entirety. We are not to determine the correct sanction but only to ascertain whether the proposed sanction falls within the reasonable range of appropriateness
    1. Professional Investments (Kingston) Inc. (Re), 2009 LNCMFDA 9 at para. 13
    2. Ho (Re), 2018 LNCMFDA 21 at paras. 24-26
11. Some of the factors considered by hearing panels in determining whether to approve a Settlement Agreements are;
    1. whether its approval would be in the public interest and whether the proposed sanction will protect investors;
    2. whether it is reasonable and proportionate having regard to the conduct of the Respondent;
    3. whether it addresses the issues of both specific and general deterrence;
    4. whether it will prevent the type of conduct described from occurring again ;
    5. whether it will foster confidence in the integrity of the Canadian capital markets;
    6. whether it will foster confidence in the MFDA; and
    7. whether it will foster confidence in the regulatory process itself.
    1. Sterling Mutual Funds Inc. (Re), 2016 LNCMFDA 77 at para. 13

IV. RESPONDENT’S MISCONDUCT

A. Switch to Deferred Sales Charge Mutual Fund

12. There can be no doubt that the facts admitted by the Respondent constitute misconduct.
13. He admits that by switching the Client from a no load mutual fund to the deferred charge series he earned commission of $18,943 which he would not have otherwise earned. His explanation was that she wished for her intended beneficiaries to remain clients of the Member serviced by him and that he believed changing to the deferred charge series would discourage the beneficiaries from redeeming the fund. He also stated that based on his review of her finances he believed she would not require the monies invested in the deferred charge series to pay for her living expenses during her lifetime.
14. However, the Respondent now admits that switching the Client from a no load to a deferred charge series mutual fund was not an appropriate way to have her beneficiaries become clients of the Member. In fact, it would result in a penalty in the form of deferred sales charges to her beneficiaries on any redemptions by them or to her should she require the monies during her lifetime.
15. MFDA Rule 2.1.4 requires Approved Persons be aware of any actual or potential conflicts of interest and. disclose them to the Member and to address any conflicts of interest with the Member by the exercise of responsible business judgement influenced only by the best interests of the client.
16. A previous hearing panel has held that a conflict of interest occurred
    1. 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.
       1. Gaunt (Re), 2013 LNCMFDA at para. 47
17. The Respondent did not inform the Member of his recommendation to switch funds and failed to address the conflict of interest by the exercise of reasonable business judgement influenced only by the best interests of the Client. On the contrary the recommendation was to the Respondent’s benefit and her detriment. She died approximately 18 months after the switch and her estate redeemed the mutual fund resulting in a penalty of $24,380 for which the Member ultimately compensated the estate. Since the Respondent failed to inform the Member of the conflict, it was unable to intercede at the appropriate time to satisfy its obligation to guard against the conflict and resolve it.
18. By making an inappropriate recommendation and failing to address the conflict of interest the Respondent contravened MFDA Rule 2.1.1 which requires inter alia that an Approved Person deal fairly, honestly and in good faith with clients and refrain from any business conduct or practice which is unbecoming or detrimental to the public interest. We find that the switch contravened MFDA Rules 2.1.4 and 2.1.1.

B. Failure to Disclose Being Named a Beneficiary

19. Previous hearing panels have found that being named a beneficiary of a client’s will or account gives rise to a conflict or potential conflict of interest under MFDA Rule 2.1.4.
    1. Sukman (Re), 2016 LNCMFDA 48
    2. Karasik (Re), 2015 LNCMFDA 64
    3. Taylor (Re), 2019 LNCMFDA 134
20. The Respondent first learned on March 9, 2016 that the Client had bequeathed a share of her estate to him in the amount of $185,000 following her death. Attached to her will was a letter which stated:
    1. I have decided to leave my friend [the Respondent] part of my estate.  I have left him a bequest of one quarter of the residue of my estate in my will. I want anyone who may be concerned about this to know that I am doing this of my own free will and without any encouragement or coercion from [the Respondent]. To the contrary, he would be cross with me if he knew I have done this and I have instructed my solicitor not to tell him until after my death.
    2. I am writing this letter in the hope that [the Respondent] will be free to accept this bequest without any negative consequences.
21. After receiving and reviewing the Client’s will the Respondent continued to act as the Approved Person responsible for servicing the accounts of the estate at the Member. He was aware of his obligation to disclose to the Member that he had been named a beneficiary in the Client’s will but chose instead to inquire outside the Member whether he could accept the bequest. It was not until November 2016 during an internal audit that he informed the Member of the bequest.
    1. Settlement Agreement, paras. 33-40
22. Although the Respondent did not know he had been named a beneficiary in the Client’s will until after her death he was still the Approved Person servicing the accounts of the estate at the Member and he was clearly subject to the provisions of MFDA Rule 2.1.4. In Sukman (Re) Supra, the Respondent had transferred the accounts to another firm before he became the beneficiary but the hearing panel still found a conflict of interest and a contravention of MFDA Rules 2.1.4 and 2.1.1.
23. Furthermore the letter from the Client attached to the will confirming the Client was acting of her own free will does not absolve the Respondent. Indeed, in cases involving conflicts of interest clients are often not mislead and act willingly. In Karasik (Re), the Client willingly made the Approved Person a beneficiary of her account at the Member and did so with the involvement of her own legal counsel. Nevertheless, the hearing panel found a contravention of MFDA Rules 2.1.4 and 2.1.1.
24. The Respondent did eventually verbally disclose the bequest to the Member approximately 8 months after learning of it and then only during an internal audit. He also disclaimed the benefit at the Member’s direction and thereby did not benefit from it. However, this does not cure his failure to act in accordance with MFDA Rules 2.1.4 and 2.1.1. The panel has noted and considered as a mitigating factor, that upon receiving a copy of the will the Respondent provided a copy to the Member’s Estate Department. However, he did not apparently speak to anyone in the Estate Department to draw their attention to the conflict or potential conflict, or to anyone else at the Member until the internal audit.

C. Pre-Signed Account Forms

25. The Respondent admits that he obtained and possessed 24 pre-signed account forms in respect of 13 clients. Hearing panels have frequently held that obtaining and possessing pre-signed account forms even if not used is a contravention of MFDA Rule 2.1.1.
    1. Baksh (Re), 2019 LNCMFDA 130 at paras. 11-2, 22
    2. Milne (Re), 2022 LNCMFDA 44 at para. 17
    3. Wong (Re), 2021 LNCMFDA 23 at paras. 22-23
26. The Member’s policies and procedures also prohibited its Approved Persons from obtaining or possessing pre-signed account forms. By doing so the Respondent contravened the provisions of MFDA Rule 2.1.1.

V. POLICIES AND PROCEDURES

27. The Member’s policies and procedures at all material times required that its Approved Persons :
    1. Report any conflict or potential conflict of interest to their branch manager;
    2. Not permit a client to name them as a beneficiary of the client’s estate; and
    3. Not receive a gift (other than a non-monetary gift of token value from a client).
28. While there is no evidence the Respondent knew the Client was going to name him as a beneficiary before he saw the will, he had an obligation to report this as a conflict of interest or potential conflict of interest as soon as he found out. By failing to specifically report this for 8 months he contravened the Member’s policies and procedures outlined in paragraphs 27. a and c above.
29. Approved persons have an obligation to comply with the policies and procedures of a Member pursuant to MFDA Rule 1.1.2. The Respondent was in breach of that Rule.

Are the Penalties Proposed in the Settlement Agreement Appropriate?

30. Hearing panels have taken into account a number of factors when considering whether the penalties proposed should be accepted including:
    1. The seriousness of the contraventions admitted by or proved against a Respondent;
    2. The Respondent’s past conduct including prior sanctions;
    3. The harm suffered by investors as a result of the Respondent’s activities;
    4. The benefits received by the Respondent as a result of the impugned activities;
    5. 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;
    6. Whether the Respondent recognizes the seriousness of the improper activity;
    7. Previous decisions made in similar circumstances.
    1. Sterling Mutuals Inc., (Re), supra at para. 14
31. The panel has considered the following factors to be the most pertinent to this case.

Seriousness of the Misconduct

32. The failure to disclose and properly address conflicts or potential conflicts is serious misconduct. Such conflicts can result in harm to the client, expose the member to liability, and undermine trust in the mutual fund industry. As stated by the hearing panel in Haylock (Re) “it is always a serious matter when there is a conflict of interest between an Approved Person and her client”.
    1. Haylock (Re), 2013 LNCMFDA 37 at para. 7
33. Obtaining and possessing pre-signed account forms has also been held to constitute serious misconduct. In the present case the misconduct is aggravated since the Respondent obtained some of the pre-signed forms after the MFDA issued MFDA Bulletin #0661-E, on October 2, 2015 (the “Bulletin”).
    1. Milne (Re), supra at para. 17
34. In the Bulletin, MFDA Staff reminded Members and Approved Persons that “signature falsification” is not permissible under MFDA Rules. This term includes obtaining pre-signed account forms. In the Bulletin and in MFDA Staff Notice # MSN-0066 updated on January 26, 2017, Staff advised Members and Approved Persons that Staff would be seeking enhanced sanctions at MFDA disciplinary proceedings for conduct that occurred after publication of the Bulletin on October 2, 2015.

Past Conduct

35. The Respondent has not previously been the subject of an MFDA disciplinary proceeding.

Benefits Received by the Respondent and Harm Suffered by the Client

36. As a result of the switch from a no load mutual fund to the deferred sales charge fund the Respondent earned a commission of $18,943. The Client’s estate also incurred deferred sales commissions of $24,380 when it redeemed the mutual funds. However, the Member subsequently clawed back the Respondent’s sales commission and compensated the estate for the deferred sales charges.
37. As stated earlier the Respondent was also bequeathed a share in the Client’s estate amounting to $185,000 but ultimately disclaimed it as a result of the Member’s direction.
38. As a result of the foregoing the Respondent received no benefit from the enhanced sales commission of $18,943 or the bequest of $185,000. The Client’s estate did not suffer harm since it was compensated for the deferred sales charges.
39. There is no evidence the Respondent received any financial benefit from the pre-signed account forms and there is no evidence of client complaints or loss as a result of providing pre-signed account forms to the Respondent.

Deterrence

40. The Respondent has agreed to a fine of $30,000 despite having received no personal benefit from his improper activities, and despite the fact that the Client’s will contained a letter stating that the Respondent was unaware of the bequest of $185,000 and that it had been made of her own free will. The panel is satisfied that under all of these circumstances and despite some mitigating factors, the penalties agreed upon will reinforce the message that the type of misconduct engaged in by the Respondent will not be tolerated by the MFDA and the mutual fund industry.

Respondent’s Recognition of the Seriousness of his Misconduct

41. By entering into the Settlement Agreement the Respondent has accepted responsibility for his actions and avoided the time and expense of a contested hearing.

Previous Decisions in Similar Cases

42. Counsel referred us to the following decisions of previous MFDA panels involving improper recommendations to clients and unreported conflicts of interest.
    1. Davidson (Re), supra
    2. Lumbers (Re), (2019) MFDA File No. 201825
    3. Sukman (Re), supra
    4. Karasick (Re), supra
43. We were also referred to the following decisions concerning wrongfully obtaining or possessing pre-signed account forms.
    1. Baksh (Re), supra
    2. Rosborough (Re), 2018 LNCMFDA 163
    3. Simard (Re), 2018 LNCMFDA 91
44. After a review of these decisions we find that the penalties outlined in the Settlement Agreement are appropriate and we approve it.