Hearing Panel of the Central Regional Council:
- Frederick W. Chenoweth, Chair
- Melody Potter, Industry Representative
Brendan Forbes, Enforcement Counsel for the Mutual Fund Dealers Association of Canada
Qanoot Subzwari, Respondent
- By Notice of Settlement Hearing, dated September 29, 2021, 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 Panel should accept a settlement agreement dated the 21st day of February, 2022, (“Settlement Agreement”) entered into by the Staff of the MFDA (“Staff”) and the Respondent.
- At the outset of the proceeding, the Panel considered a joint motion by Staff and the Respondent to move the proceedings “in camera”. The Panel granted the motion. The Panel then considered the provisions of the Settlement Agreement, aided by submissions as to the applicable law, which should guide the Panel in determining whether or not to accept or reject the Settlement Agreement. The Panel unanimously accepted the Settlement Agreement and issued an Order accordingly. These are the Panel’s reasons for doing so. The Panel also made an Order at the end of the hearing, declaring the hearing open to the public.
II. THE CONTRAVENTIONS
- In the Settlement Agreement, the Respondent admits that:
- between February 2019 and May 2019, the Respondent set up pre-authorized contributions in the accounts of clients without the knowledge or authorization of the clients in order to meet sales targets or to qualify for a bonus based on Member sales incentives, thereby failing to deal fairly, honestly and in good faith with clients, failing to observe high standards of conduct in the transaction of business and engaging in conduct which is unbecoming and detrimental to the public interest, contrary to MFDA Rule 2.1.1; and
- between February 2019 and May 2019, the Respondent entered false or misleading information on account forms submitted to the Member which falsely indicated that the clients authorized the implementation of pre-authorized contributions in the clients’ accounts, contrary to MFDA Rule 2.1.1.
III. THE FACTS
- In the Settlement Agreement, the Staff and the Respondent agreed to a series of facts, which are set out in Part IV of the said Settlement The Settlement Agreement is attached as Appendix “A” to these Reasons.
- From April 11, 2018 to October 9, 2019, the Respondent was registered in Ontario as a dealing representative with Scotia Securities Inc. (the “Member”), a member of the MFDA. At all material times, the Respondent conducted business in a branch of the Member in Milton, Ontario. The Respondent was also employed by the Bank of Nova Scotia (“the Bank”) which is affiliated with the Member which operated a bank branch at the same premises as the Branch.
- The Member and the Bank terminated the Respondent on October 9, 2019 after discovering the conduct described in the Settlement Agreement. The Respondent is not currently registered in the Securities Industry in any capacity.
- The Panel was aware that prior to accepting a Settlement Agreement, a Hearing Panel must be satisfied that:
- The facts admitted by the Respondent constitute misconduct in contravention of the By-laws, MFDA Rules or policies, or provincial securities legislation; and
- 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.
- The Panel accepted that the role of a Hearing Panel at a settlement hearing is fundamentally different than its role at a contested hearing. As stated by the MFDA Hearing Panel in Sterling Mutuals (Re), citing the I.D.A. Ontario District Council in Milewski (Re):
- We also note that while in a contested hearing the Panel attempts to determine the correct penalty, in a settlement hearing the Panel “will tend not to alter a penalty that it considers to be within a reasonable range, taking into account the settlement process and the fact that the parties have agreed. It will not reject a settlement unless it views the penalty as clearly falling outside a reasonable range of appropriateness.” [Emphasis added].
- Sterling Mutual Inc. (Re), MFDA File No. 200820, Hearing Panel of the Central Regional Council, Decision and Reasons dated August 21, 2008 at para. 37.
- Milewski (Re),  I.D.A.C.D. No. 17 at p. 12, Ontario District Council Decision dated July 28, 1999.
- MFDA Rule 2.1.1 prescribes the standard of conduct applicable to registrants in the mutual fund industry. The Rule requires, among other things, that:
- “Each Member and Approved Person of a Member shall: deal fairly, honestly and in good faith with its clients; observe high standards of ethics and conduct in the transaction of business; and not engage in any business conduct or practice which is unbecoming or detrimental to the public interest.”
- MFDA Rule 2.1.1(a)-(c)
- A pre-authorized contribution (“PAC”) is a type of trade authorized by a client wherein the client arranges for recurring contributions to be made from the client’s bank or similar account to the client’s investment account at the Member and instructs the Member to use the contributions to purchase one or more pre-selected mutual funds in the client’s investment account.
- These contributions and subsequent purchases usually occur at pre-set intervals (I.E. weekly or monthly) and involve both a deposit into the client’s investment account as well as an immediate purchase of pre-selected mutual funds.
- As with all mutual fund trades, a PAC transaction must always be completed at the direction or with the authorization of the client.
- As stated within the Settlement Agreement, the Respondent entered 22 PAC transactions into the Member’s sales back-office system in respect of 20 clients without the knowledge or authorization of the clients.
- The Respondent cancelled each of these PAC transactions before any contributions into the investment accounts of the clients began.
- Settlement Agreement, para. 19.
- The Respondent established the false PACs in client accounts in order to obtain additional sales revenue credited towards achieving his sales targets and which would also be used to calculate his annual bonus.
- Settlement Agreement, para. 20.
- Prior MFDA Hearing Panels have held that creating and cancelling PAC transactions in client accounts, without the clients’ knowledge or approval and for the purpose of meeting sales goals, is a contravention of MFDA Rule 2.1.1
- Pattenden (Re),  Hearing Panel of the Central Regional Council, MFDA File No. 201354, Reasons for Decision dated August 18, 2014 at para 9.
- Prior MFDA Hearing Panels have also held that similar misconduct, such as falsification of client signatures and discretionary trading, is prohibited under MFDA Rule 2.1.1.
- Boutilier (Re),  Hearing Panel of the Atlantic Regional Council, MFDA File No. 202108, Reasons for Decision dated October 4, 2021.
- Arena (Re),  Hearing Panel of the Central Regional Council, MFDA File No. 202047, Reasons for Decision dated December 7, 2020.
- By establishing false PACs in the accounts of clients, and subsequently cancelling the PACs in order to obtain credit towards achieving sales targets, the Respondent failed to deal fairly, honestly and in good faith with clients, failed to observe high standards of conduct in the transaction of business and engaged in conduct which is unbecoming and detrimental to the public interest.
- The Panel considered in detail the agreed facts set out in the Settlement Agreement, and having done so, concluded that both allegations admitted by the Respondent had been proven and constitute misconduct in contravention of the MFDA By-laws, Rules or policies, or provincial securities legislation.
- The Panel then proceeded to consider the appropriateness of the proposed penalty as set out in the Settlement Agreement. In doing so, the Panel considered the submissions of Staff, the submissions of the Respondent, the MFDA Sanction Guidelines and the substantial case law to which it was referred.
- The Panel was mindful that the primary goal of securities regulation is the protection of the investor. The Panel was further mindful that in addition to protection of the public, the goals of securities regulation also include fostering public confidence in the capital markets and the securities industry.
- Pezim v. British Columbia (Superintendent of Brokers),  2 S.C.R. 557.
- Breckenridge (Re), MFDA File No. 200718, Hearing Panel of the Central Regional Council, Decision and Reasons dated November 14, 2007 at para. 71.
- Factors which Hearing Panels frequently consider when determining whether a penalty is appropriate, including the following:
- The seriousness of the allegations 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 activity;
- 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 activity in the capital markets; and
- Previous decisions made in similar circumstances.
- Headley (Re),  Hearing Panel of the Pacific Regional Council, MFDA File No. 200509, Reasons for Decision dated February 21, 2006, at para. 85.
- The Panel also referred to the MFDA’s Sanction Guidelines which came into effect on November 15, 2018. The Guidelines are not mandatory or binding on Hearing Panels but provide a summary of the key factors upon which discretion can be exercised consistently and fairly. The Guidelines recommend consideration of many of the same factors that have been applied in previous cases and are listed and applied above.
- MFDA Sanction Guidelines.
- The Panel agreed with Staff submissions that emphasis should be placed upon the following factors:
- The creation of 22 false PACs in the accounts of clients without their knowledge or approval and the entering of false or misleading information on account forms submitted to the member are serious breaches of MFDA Rule 2.1.1.
- The Respondent has acknowledged that his conduct constitutes a serious contravention of the MFDA rules. By entering into the Settlement Agreement, the Respondent has accepted responsibility for his misconduct and has saved the MFDA the time, resources and expenses associated with a full discipline hearing.
- The Respondent has not previously been the subject of an MFDA discipline proceeding.
- There is no evidence of client loss resulting from the Respondent’s conduct described in the Settlement Agreement.
- There is no evidence that the Respondent received any financial benefit from his conduct in that commissions were not paid at an elevated commission rate because the improper conduct of the Respondent was discovered prior to the payment of commissions.
- The proposed penalties are significant enough to act as both a general and specific deterrent warning that the use of falsified or altered forms and the creation of improper unauthorized PAC accounts will not be tolerated within the mutual fund industry.
- The Respondent had provided Staff with a demonstrated inability to pay a greater fine. As stated within the Settlement Agreement, the Respondent no longer worked in the financial services industry and worked in several jobs in unrelated industries. The Respondent is also the sole earner for his family as well as his parents, due to the Respondent’s father having sustained a serious injury in a motor vehicle accident. The Respondent’s employment income is less than the expenses which he incurs for his own family and his parents. Due to these additional costs associated with supporting his family and his parents, the Respondent carried debt of over $140,000, has minimal assets and no savings.
- For the above reasons, the Panel concluded that the Settlement Agreement was reasonable and proportionate. Accordingly, the following penalties were imposed upon the Respondent:
- The Respondent shall be prohibited from conducting securities related business in any capacity while in the employ of or associated with any MFDA Member for a period of 18 months commencing from the date of this Order, pursuant to s. 24.1.1(e) of MFDA By-law No. 1;
- The Respondent shall pay a fine in the amount of $4,000 in certified funds on the date of this Order, pursuant to s. 24.1.1(b) of MFDA By-law No.1;
- The Respondent shall pay costs in the amount of $2,500 in certified funds on the date of this Order, pursuant to s. 24.2 of MFDA By-law No. 1; and
Frederick W. ChenowethFrederick W. ChenowethChair
Melody PotterMelody PotterIndustry Representative