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IN THE MATTER OF A SETTLEMENT HEARING PURSUANT TO SECTION 24.4 OF BY-LAW NO. 1 OF THE MUTUAL FUND DEALERS ASSOCIATION OF CANADA

Re: Vanessa Doreen Sjostrom

Heard: January 20, 2021 by electronic hearing in Vancouver, British Columbia
Reasons For Decision: February 1, 2021

Reasons For Decision

Hearing Panel of the Pacific Regional Council:

  • Ian H. Pitfield, Chair
  • Darlene Barker, Industry Representative

Appearances:

Justin Dunphy, Senior Enforcement Counsel for the Mutual Fund Dealers Association of Canada
Michael Adlem, Counsel for the Respondent
Vanessa Doreen Sjostrom, Respondent

  1. At the conclusion of an electronic hearing, the Hearing Panel accepted a settlement agreement dated December 31, 2020 (the “Settlement Agreement”) pursuant to which Vanessa Doreen Sjostrom (the “Respondent”), formerly a dealing representative, was prohibited from conducting securities related business in any capacity while in the employ of or associated with a Mutual Fund Dealers Association of Canada (“MFDA”) Member for a period of three years from January 20, 2021, and ordered to pay costs of $5,000.
  2. The sanctions were imposed in respect of two admitted contraventions of the MFDA By-laws:
    1. between about January 2009 and May 2016, the Respondent failed to ensure that investment recommendations she made to 7 clients to invest in precious metals sector mutual funds were suitable having regard to the risks associated with concentrating their investment portfolio in precious metals sector mutual funds, contrary to MFDA Rule 2.2.1; and
    2. between January 2014 and October 2015, the Respondent did not fully explain the risks of investing in precious metals sector mutual funds to 5 clients, thereby failing to ensure that her recommendations were suitable for the clients and in keeping with their investment objectives, contrary to MFDA Rule 2.2.1.
  3. This proceeding is a sequel to the proceeding involving David Michael Gordon (“Gordon”) (see Re: David Michael Gordon, MFDA File No. 201849, Reasons for Decision, December 5, 2019).
  4. The Respondent’s registration history and the background to this proceeding are set forth in the Settlement Agreement attached as Appendix “A” to these Reasons. In brief, the Respondent was registered in the securities industry from 2004 until 2018. From November 2006 through May 2016, she was employed as a dealing representative with FundEX Investments Inc., and from June 2016 through June 2018, with Portfolio Strategies Corporation (“PSC”).
  5. The Respondent shared a dealer code with Gordon between 2009 and 2016. She had the primary advisor relationship for 29 of 290 clients in the relationship, and Gordon, for 261. Between 2009 and 2016, the Respondent and Gordon recommended an investment strategy to clients whereby clients would purchase precious metals (predominantly gold) sector mutual funds. The Respondent represented to clients that she recommended the gold strategy because the price of gold and other precious metals was poised to increase due to an imminent decline in the stock market, and investing in gold and precious metals sector mutual funds was a safer alternative to investing in the stock market generally.
  6. Gordon left the mutual fund industry in 2016. MFDA disciplinary proceedings followed and, in 2019, a hearing panel approved a settlement agreement pursuant to which Gordon was permanently prohibited from participation in the mutual fund industry, fined $25,000, and ordered to pay costs of $2,500.
  7. The Respondent was trained by Gordon, who was more experienced in the industry. The advice she provided to clients regarding the gold strategy was consistent with the training she received from Gordon and his recommendations to clients. The Respondent represented to her clients that in her opinion the price of gold and other precious metals was poised to increase dramatically and investments in gold and precious metals sector mutual funds were relatively low risk.
  8. For 7 of her 29 clients, the Respondent failed to ensure that the gold strategy was suitable having regard for the risks associated with the concentration of their portfolio in a single sector. Each of the 7 clients was over-concentrated in precious metals sector funds. The Respondent admits that as the primary advisor to the 7 clients she failed to ensure that the gold strategy she recommended was suitable having regard to the risks associated with concentrating their portfolio in a single sector.
  9. Between January 2014 and October 2015, at Gordon’s request the Respondent sent emails to 5 clients who were Gordon’s responsibility attached to which were articles by mutual fund managers and analysts expressing the view that the price of precious metals would increase. The emails also contained statements of the Respondent’s opinion that the price of precious metals would increase. She did not warn the recipients that the investments might not perform as described in the articles or explain the risks and benefits of investing in precious metals sector funds. She failed to provide a fair and balanced presentation of the strategy she and Gordon were recommending.
  10. In May 2016, when the Respondent assumed sole responsibility for all of Gordon’s clients, the clients jointly serviced by the Respondent and Gordon held $11,125,871 in precious metals sector funds. Beginning in August 2017, at the direction of PSC, the holdings were reduced in aggregate to $625,077 by March 2018 and no single client held more than 25% of their net investable assets in precious metals sector funds. The corrective action minimized harm or potential harm to clients. We infer from the content of the agreed statement of facts that no client incurred a loss as a result of the Respondent’s strategy.
  11. On May 27, 2018, the Respondent sold her book of business and ceased to be registered in the securities industry.
  12. Enforcement Counsel forcefully emphasized the fact that the Respondent seriously departed from the “Know-Your-Client” and “Suitability” rules codified by MFDA Rule 2.2.1:
    1. 2.2.1 “Know-Your-Client”. Each Member and Approved Person shall use due diligence:
      1. to learn the essential facts relative to each client and to each order or account accepted;
      2. to ensure that the acceptance of any order for any account is within the bounds of good business practice; and
      3. to ensure that each order accepted or recommendation made for any account of a client is suitable for the client and in keeping with the client’s investment objectives.
  13. In Re Lamoureux, [2001] ASCD No 613, pps. 11-12 and 16-17, the Alberta Securities Commission emphasized that the Know-Your-Client and Suitability requirements necessitated due diligence, the application of judgment, and the disclosure of material risks and benefits to the client for the purpose of assisting them in making an informed decision about whether to proceed [with a particular investment].
  14. MFDA hearing panels have consistently held that failure to warn a client about material risks or the failure to provide a balanced presentation about the risks of investing in a specific fund or strategy, constitutes a failure to meet the suitability obligations imposed by the MFDA rules.
  15. The Hearing Panel is mindful of the fact that other hearing panels have approved settlements providing for permanent prohibitions from industry participation and fines, while others have approved limited periods of prohibition and moderate fines. The sanctions in Gordon were more severe. In that regard it must be noted that Mr. Gordon was the principal offender in relation to this strategy and his clients incurred financial loss which is not the case in so far as the Respondent’s clients are concerned.
  16. The Respondent has recognized the seriousness of her conduct by entering into the Settlement Agreement. In conjunction with PSC, she took successful steps to extricate her clients, and the residual of the Gordon clients, from the ill-advised strategy in which the clients were involved at the behest of the advisors. The sanctions arising in this case are severe. The Respondent ceased to be registered as a dealing representative within the MFDA in May 2016. She is now subject to a 3-year prohibition from participation in the industry. We are satisfied that the sanction imposed provides specific deterrence.
  17. In accepting this Settlement Agreement, the Hearing Panel takes seriously the need for general deterrence. In all of the circumstances, the Hearing Panel concludes that the settlement in this case falls within a reasonable range and is appropriate to the circumstances with the result that it is approved.
  • Ian H. Pitfield
    Ian H. Pitfield
    Chair
  • Darlene Barker
    Darlene Barker
    Industry Representative

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