Hearing Panel of the Pacific Regional Council:
- Michael Carroll, Chair
- Nova Aitchison, Industry Representative
Zaid Sayeed, Enforcement Counsel for the Mutual Fund Dealers Association of Canada
Tracey M. Cohen, Counsel for the Respondent
Kosal Vibhav Sunkara, Respondent
- This matter comes before us as a result of a Notice of Settlement Hearing issued by the Mutual Fund Dealers Association of Canada (the “MFDA”) pursuant to section 24.4 of MFDA By-law No.1 in respect of the Respondent Kosal Vibhav Sunkara (the “Respondent”).
- The parties initially appeared before the Panel on September 17, 2021 for approval of a Settlement Agreement dated August 20, 2021. After hearing submissions from counsel the Panel advised that it was not prepared to accept the Settlement Agreement as proposed and that it would be obliged to reject it. As set out in section 24.3 of MFDA By-Law No.1 Hearing Panels must either accept or reject Settlement Agreements. They have no jurisdiction to change their terms. With this in mind the Panel offered the parties the opportunity to consider alternate terms before reaching a final decision.
- As a result, counsel for the parties requested an adjournment until September 20, 2021, which was granted.
- On September 20, 2021, the parties requested that the Panel approve a Settlement Agreement reached on that day (the “September 20, 2021 Settlement Agreement”). A copy of the September 20, 2021 Settlement Agreement is attached hereto as Schedule “A”.
- The Respondent admits that:
- On or about February 20, 2019, he opened an account for a client and processed transactions in the client’s account without obtaining the client’s authorization, and recorded the client’s Know-Your-Client (“KYC”) information without communicating with the client, contrary to the Member’s policies and procedures and MFDA Rules 2.1.1, 2.2.1, 2.2.2(b), 1.1.2 and 2.5.1;
- Since March 12, 2018, he has been registered in British Columbia as a dealing representative with Scotia Securities Inc. (the “Member”); and
- At all material times, he conducted business in the Vernon British Columbia area.
- At all material times, client LL and KL were spouses and clients of the Member whose accounts were serviced by the Respondent.
- On January 31, 2019, the Respondent discussed with LL the opportunity to open a Tax Free Savings Account (“TFSA”). Arrangements were made for LL and KL to attend at the branch to meet the Respondent and discuss the opening of a TFSA for each of them.
- On February 20, 2019, KL met with the Respondent at the branch where the Respondent worked. KL advised the Respondent that LL was unable to attend. KL and the Respondent then discussed opening a TFSA for herself and her husband LL.
- At the meeting on February 20, 2019, the Respondent opened a TFSA for LL. He obtained KYC information relating to LL from KL, including LL’s risk tolerance, time horizon, and investment objectives. He also processed an initial trade for the $500 purchase of a mutual fund in LL’s TFSA and set up a monthly pre-authorized contribution (“PAC”) of $1,000 in LL’s TFSA.
- The Respondent did not obtain LL’s authorization to open a TFSA, purchase a mutual fund, or set up a PAC on his behalf. However, the Respondent states that it was his understanding that LL would come to the branch the next morning to sign the documents required to authorize the account opening and transactions. That never happened.
- The Respondent was required to obtain LL’s signature on the TFSA application, a Scotia Investment Selector Form, and an Investment Directions Form before opening his TFSA account and processing the above noted transactions. In failing to do so he contravened the Member’s policies and procedures contrary to MFDA Rules 2.5.1 and 1.1.2 and the standard of conduct set out in Rule 2.1.1.
- Roche (Re)  Hearing Panel of the Prairie Regional Council, MFDA File No. 201420 Decision dated November 17, 2014
- Scott (Re)  Hearing Panel of the Central Regional Council, MFDA File No. 201647, Decision dated April 12, 2017
- On March 13 and 16, 2019, LL contacted the Member and complained that he had not authorized the opening of the TFSA, the $500 trade, or the setting up of the PAC.
- On March 21, 2019, the Member reversed the $500 trade and cancelled the PAC. On March 31, 2019, the Member closed LL’s TFSA account as instructed by LL and on June 13, 2019, the Member issued a warning letter to the Respondent and placed him under close supervision.
IV. MITIGATING FACTORS
- There is no evidence that the Respondent received any financial benefit from engaging in the conduct described above.
- As a result of the actions taken by the Member, LL has not incurred any kind of financial harm resulting from the Respondent’s conduct.
- At the time of the transactions described above the Respondent was 25 years old and had not been the subject of any previous MFDA disciplinary proceedings.
V. APPLICABLE RULES AND PROVISIONS
- MFDA Rule 1.1.2 requires each Approved Person who participates in any securities related business in respect of a Member to comply with MFDA By-Laws and Rules as they relate to the Member or Approved Person.
- Previous Hearing Panels have held that an Approved Person’s failure to comply with a Member’s policies and procedures is conduct contrary to MFDA Rules 2.5.1 and 1.1.2 and the standard of conduct set out in Rule 2.1.1 (see paragraph 11 above).
- The Respondent contravened MFDA Rules and Member policies by opening a TFSA account for LL and processing a transaction in that account without obtaining his authorization and by recording his KYC information without communicating with him.
- Previous MFDA Hearing Panels have also held that where an Approved Person opens a client account, updates the client’s KYC information and/or processes trades in the client’s account without communicating directly with the client, the Approved person has contravened the KYC obligation in Rule 2.2.1 and the standard of conduct in Rule 2.1.1.
- Badasha (Re)  Hearing Panel of the Pacific Regional Council, MFDA File No. 201424, Decision dated June 9, 2015
- Wray (Re)  Hearing Panel of the Central Regional Council, MFDA File No. 201661, Decision dated June 8, 2017
- As stated in Badasha, supra, obtaining KYC information from a spouse who is not a joint account holder and who has not been formally granted authority to provide instructions with respect to the account does not satisfy the obligations imposed by Rule 2.2.1 and is inconsistent with the standard of conduct required by the mutual fund industry.
- Similarly in several previous cases MFDA Hearing Panels have held that an Approved Person is not permitted to accept trade instructions for a client account from a third party if that party does not have formal trading authority or a power of attorney to act on behalf of the client. Such conduct has been found to contravene MFDA Rule 2.1.1 and 2.3.1. See inter alia
- Wray, supra
- Griffith (Re)  Hearing Panel of the Central Regional Council, MFDA File No. 201329, Decision dated August 19, 2014 at para. 7
- Wallace (Re)  Hearing Panel of the Atlantic Regional Council, MFDA File No. 201683, Decision dated January 13, 2017
- The prohibition on unauthorized trading advances investor protection and guards against potential abuses by ensuring that an Approved Person always obtains instructions from a client or a formally authorized individual before processing transactions in a client’s account.
VI. TERMS OF THE SETTLEMENT AGREEMENT
- The September 20, 2021 Settlement Agreement proposes the following penalties;
- Payment of a fine in the amount of $7,500 in certified funds upon acceptance of the Settlement Agreement; and
- Payment of costs in certified funds in the amount of $2,500 upon acceptance of the Settlement Agreement;
- Undertaking by the Respondent to comply in the future with MFDA Rules 2.1.1, 2.2.1, 2.2.2(b), 1.1.2 and 2.5.1.
VII. FACTORS CONCERNING THE APPROPRIATENESS OF THE PENALTY
- Included in the factors that Hearing Panels frequently consider in determining whether a penalty is appropriate include:
- the seriousness of the allegations proved or admitted;
- the Respondent’s past conduct, including prior sanctions;
- the level of experience and activity in the capital markets;
- the harm suffered by the investor as a result of the Respondent’s activities
- the benefits received by the Respondent as a result of an improper activity;
- the risk to investors and the capital markets were the Respondent to continue such improper activity or continue in the capital markets in the jurisdiction where the improper activity occurred;
- 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; and
- previous decisions made in similar circumstances.
VIII. NATURE OF RESPONDENT’S MISCONDUCT
- The KYC Rule is a fundamental obligation of a registrant that is often referred to as the cardinal rule in the securities industry and failure to comply with it is serious misconduct.
- Badasha, supra, para. 47
- Processing a trade without authorization from the client is also serious misconduct as it undermines the ability of clients to make decisions for and control of their accounts and allows for the victimization of clients as a result of the investment decisions of Approved Persons in their accounts. However, in the present case only one client was affected by the Respondent’s conduct and only one unauthorized trade occurred. The fact that the conduct was isolated and limited to one client is a mitigating factor as is the fact that the client did previously discuss the opening of a TFSA for himself and his wife with the Respondent.
IX. PREVIOUS DECISIONS
- Counsel referred us to the following decisions
- Badasha, supra
- Tobac (Re), Manitoba Securities Commission, December 21, 2018
- Gill (Re)  Hearing Panel of the Central Regional Council, MFDA File No. 2017124, Decision dated April 16, 2018
- Mahendran (Re)  Hearing Panel of the Central Regional Council, MFDA File No. 201911, Decision dated June 20, 2019
- Wray, supra
- In Badasha, the Respondent had been in the securities industry for 15 years at the time he opened new accounts for 16 separate individuals whom he had never met or spoken to. He was also a branch manager of the Member. He also obtained and used 7 pre-signed account forms and secured client signatures on account documentation for 8 clients by sending only the signature pages to the clients. He also altered 2 account forms. A Settlement Agreement was approved by the Hearing Panel which assessed a 2 year prohibition, a $5,000 fine, and costs of $3,500. However, at the time, the Respondent was no longer registered in the securities industry and had been terminated by the Member.
- In Mahendran, a colleague of the Respondent requested him to redeem investments in the account of the Respondent’s client who was the colleague’s father. The colleague told the Respondent that he needed the funds urgently to pay his school tuition and that his father had agreed. The Respondent subsequently processed trades in the father’s account resulting in four redemptions for a total of $20,000 leaving a nominal balance in the father’s RRSP account. In addition, withholding taxes of $2,000 were assessed. The Respondent did not discuss the implications of the withholding taxes with the father. The Respondent did provide her colleague with trade documentation specifying details of the trades and asked him to obtain his father’s signature on the documents. A signature was provided which was later deemed a forgery and not resembling the father’s signature on other records signed by him. It was later learned that the monies redeemed were used to pay personal debts of the colleague and not his tuition.
- The Hearing Panel approved a Settlement Agreement of $10,000 and costs of $2,500. A mitigating factor similar to the present case was that the Respondent was only 22 years of age and had no prior disciplinary history with the MFDA.
- In Tobac, an appellate Hearing Panel of the Manitoba Securities Commission reduced a fine imposed by an MFDA Hearing Panel from $20,000 to $10,000. The facts as reported in the decision of the appellate Hearing Panel are limited save to say that the Respondent apparently redeemed securities in the client’s account based on instructions from a third party. Similar to the present case there was no gain by the Respondent and no previous history of disciplinary hearings.
- The Panel has concluded that the penalties proposed in the September 20, 2021 Settlement Agreement are within the range outlined in the above cases. We have also considered the other factors outlined in paragraph 25 above. We have noted in particular the Respondent’s undertaking to comply in the future with MFDA Rules 2.1.1, 2.2.1, 2.2.2(b), 1.1.2 and 2.5.1. As a result we approve the September 20, 2021 Settlement Agreement.
Michael CarrollMichael CarrollChair
Nova AitchisonNova AitchisonIndustry Representative