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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: Joe Ohanes Yalkezian

Heard: November 16, 2021 by electronic hearing in Toronto, Ontario
Reasons For Decision: March 3, 2022

Reasons For Decision

Hearing Panel of the Central Regional Council:

  • Paul M. Moore, Q.C., Chair
  • Michael Coulter, Industry Representative

Appearances:

Paul Blasiak, Senior Enforcement Counsel for the Mutual Fund Dealers Association of Canada
Joe Ohanes Yalkezian, Respondent

Settlement Agreement

  1. The Hearing Panel accepted the settlement agreement dated October 13, 2021 (“Settlement Agreement”) between the staff of the MFDA (“Staff”) and Joe Ohanes Yalkezian (“Respondent”) at a settlement hearing held electronically by videoconference in accordance with MFDA rules for an electronic hearing.
  2. A copy of the Settlement Agreement is attached to these Reasons as Schedule “1”. The agreed facts are set out in Sections IV and V of the Settlement Agreement.

Contraventions

  1. The Respondent admitted that:
    1. between June 2011 and June 2019, he engaged in personal financial dealings with clients when he:
      1. paid monies to three clients so that they could pay the borrowing costs of their leveraged investments;
      2. was indebted to a client at the time when he commenced servicing the client’s account and thereafter borrowed additional monies from the client; and
      3. loaned monies to nine clients;

      thereby giving rise to conflicts or potential conflicts of interest which the Respondent failed to disclose to the Member, or failed to address by the exercise of responsible business judgment influenced only by the best interests of the clients, contrary to the Member’s policies and procedures, and MFDA Rules 2.1.4, 2.5.1, 1.1.2, and 2.1.1;

    2. in October 2013, he misled the Member with regard to the source of the monies that three clients used to pay the borrowing costs of their leveraged investments, contrary to MFDA Rules 2.2.1 and 2.1.1; and
    3. between in or about 2016 and March 2020, he engaged in an unapproved outside activity, contrary to the Member’s policies and procedures and MFDA Rules 1.3.2 (formerly Rule 1.2.1(c)), 2.1.1, 2.5.1 and 1.1.2.

Agreed penalties

  1. Under the terms of the Settlement Agreement, the Respondent:
    1. will pay a fine of $25,000;
    2. will pay costs of $5,000; and
    3. will be prohibited from conducting securities related business for a period of 5 years.

Considerations

  1. The Hearing Panel determined that it had to be satisfied regarding three considerations before it could accept the Settlement Agreement. First, the agreed penalties had to be within an acceptable range taking into account similar cases. Secondly, the agreed penalties had to be fair and reasonable (i.e. proportional to the seriousness of the contravention taking into consideration relevant circumstances) and should appear to be so to members of the public and industry. Thirdly, the agreed penalties should serve as a deterrent to the Respondent and to industry. To be satisfied on these three considerations required an understanding of the particular facts of the case, the circumstances of the Respondent, and the impact on the Respondent of the agreed penalties.

Misconduct

Contravention #1 – Conflicts of Interest

Rules 2.1.4 and 2.1.1
  1. MFDA Rule 2.1.1 prescribes the standard of conduct applicable to registrants in the mutual fund industry. The Rule requires that each Member and Approved Person: deal fairly, honestly, and in good faith with clients; observe high standards of ethics and conduct in the transaction of business; and refrain from engaging in any business conduct or practice which is unbecoming or detrimental to the public interest.
  2. Pursuant to MFDA Rule 2.1.4, Members and Approved Persons must be aware of the possibility of conflicts of interest arising in connection with dealings with clients. In the event that such a conflict or potential conflict of interest arises, Rule 2.1.4 places a mandatory obligation on the Approved Person to immediately disclose the conflict to the Member, and imposes a corresponding obligation on the Approved Person and the Member to ensure that the conflict is addressed by the exercise of responsible business judgment influenced only by the best interests of the client.
  3. Previous MFDA Hearing Panels have held that where an Approved Person engages in personal financial dealings with a client, the Approved Person has breached the standard of conduct set out in Rule 2.1.1, and has entered into a conflict of interest with the client within the meaning of Rule 2.1.4.
    1. Nunweiler (Re), [2012] Hearing Panel of the Pacific Regional Council, MFDA File No. 201030, Panel Decision dated May 28, 2012, Staff’s Book of Authorities, Tab 12.
    2. Rahman (Re), [2021] Hearing Panel of the Central Regional Council, MFDA File No. 202074, Panel Decision dated June 10, 2021, Staff’s Book of Authorities, Tab 13.
    3. Phillips (Re), [2020] Hearing Panel of the Atlantic Regional Council, MFDA File No. 2018117, Panel Decision dated March 16, 2020, Staff’s Book of Authorities, Tab 14.
    4. Alam (Re), [2020] Hearing Panel of the Central Regional Council, MFDA File No. 202016, Panel Decision dated July 24, 2020, Staff’s Book of Authorities, Tab 15.
  4. In some instances, such as borrowing money from or lending money to a client, the exercise of responsible business judgement requires a prohibition on the type of transaction giving rise to the conflict.
  5. As stated by the Hearing Panel in Nunweiler (Re) with regard to borrowing from clients:
    1. Where an Approved Person borrows money from a client, or arranges investments by clients in companies in which the Approved Person has a personal interest, such conduct immediately raises a significant actual conflict of interest, a conflict that in most if not all cases will be impossible to resolve in favour of the client. It is patently obvious that facilitating investments by a client in your company, or borrowing money from a client is not the exercise of responsible business judgment in the best interests of the client.  [Emphasis added]
  6. Paying the borrowing costs of a client’s leveraged investments also results in a significant conflict of interest between the Approved Person and the client. For example, the client may be financially dependent on the Approved Person to pay the borrowing costs, and therefore may suffer substantial losses in the event that the Approved Person ceases to make the payments.  Also, the client may be unwilling to make a complaint against the Approved Person out of concern that the Approved Person will cease paying the borrowing costs.
  7. Lending to clients can also result in a significant conflict or potential conflict of interest because:
    1. An Approved Person who is owed money from a client may be hesitant to execute trades in mutual funds at all, or to execute trades in higher risk funds, even if suitable, due to a fear that the Approved Person would not be repaid;
    2. An Approved Person may persuade a client to sell Deferred Sales Charge load mutual funds early, despite the fees associated with it, in order to use the proceeds to repay the Approved Person; or
    3. An Approved Person may persuade a client to buy mutual funds that attract higher commissions for the Approved Person as part of a proposal to repay the Approved Person.
    1. Shaw (Re), [2017] Hearing Panel of the Prairie Regional Council, MFDA File No. 201749, Panel Decision dated June 28, 2017, at para. 55.
  8. The failure of an Approved Person to remain vigilant to potential or actual conflicts of interests with clients is an abdication of one of his or her most important responsibilities. When an actual or potential conflict of interest is present, it must be reported to the Member and resolved with only the best interests of the client in mind.  Failure to keep client interests first and foremost in mind is a failure of the Approved Person to deal fairly, honestly and in good faith with clients, contrary to Rule 2.1.4 and the standard of conduct demanded by Rule 2.1.1.
Rules 2.5.1 and 1.1.2 (Policies and Procedures)
  1. MFDA Rule 2.5.1 requires Members to establish, implement and maintain policies and procedures to ensure compliance with the By-laws, Rules and Policies of the MFDA and applicable securities legislation.
  2. MFDA Rule 1.1.2 requires each Approved Person who participates in any securities related business in respect of a Member, to comply with the By-laws and Rules as they relate to the Member or Approved Person.
  3. MFDA Rule 1.1.2 should be read in conjunction with MFDA Rule 2.5.1. As the Hearing Panel in Frank (Re) held with respect to the interaction between MFDA Rules 2.5.1 and 1.1.2, the requirements in Rule 2.5.1 that Members establish policies and procedures:
    1. are meaningless and cannot achieve their intended objectives if Approved Persons are not required to comply with them. MFDA Rule 1.1.2 is clear that Approved Persons share the responsibility of ensuring that obligations set out in the MFDA Rules are followed and must do their part to support the Member’s obligations to be compliant with its regulatory obligations.
    2. In the context of policies and procedures of a Member, and especially policies designed to facilitate regulatory supervision by the Member, the failure of an Approved Person to comply with the Member’s policies constitutes a regulatory violation.  [Emphasis added]
    3. Frank (Re), [2015] Hearing Panel of the Central Regional Council, MFDA File No. 201407, Panel Decision (Misconduct) dated May 5, 2015, at paras. 57-58.
  4. Other MFDA Hearing Panels have similarly held that an Approved Person’s failure to comply with the Member’s policies and procedures is conduct which is contrary to MFDA Rules 2.5.1 and 1.1.2, and also the standard of conduct set out in Rule 2.1.1.
    1. Nunweiler (Re), supra, Staff’s Book of Authorities, Tab 12.
    2. Phillips (Re), supra, Staff’s Book of Authorities, Tab 14.
    3. O’Connor (Re), [2018] Hearing Panel of the Prairie Regional Council, MFDA File No. 201756, Panel Decision dated October 31, 2018, at paras. 139-144, Staff’s Book of Authorities, Tab 19.

Contravention #2 – Misleading the Member and Preventing the Member from Ensuring Suitability of Investments

Rules 2.2.1 and 2.1.1
  1. As noted above, MFDA Rule 2.1.1 prescribes the standard of conduct applicable to registrants in the mutual fund industry.
    1. MFDA Rule 2.1.1, Staff’s Book of Authorities, Tab 2.

    MFDA Rule 2.2.1 (“Know-Your-Client”) states:

    1. Each Member and Approved Person shall use due diligence: […]
      1. to ensure that the suitability of the use of borrowing to invest is assessed:
        1. whenever the client transfers assets purchased using borrowed funds into an account at the Member; […]

        and, where the use of borrowing to invest by the client is determined to be unsuitable, the Member or Approved Person so advises the client and makes recommendations to address the inconsistency between the use of borrowed funds and the essential facts relative to the client and the Member or Approved Person maintains evidence of such advice and recommendations.

  2. When an Approved Person misleads the Member with regard to the source of the monies used by a new client to pay for leveraged investments, the Approved Person engages in conduct which is contrary to Rule 2.2.1, and the standard of conduct set out in Rule 2.1.1.
  3. Not only is such conduct fundamentally dishonest, it also prevents the Member from assessing the suitability of the leveraged investments as mandated by Rule 2.2.1. As a result, the client is exposed to the risk of financial loss from potentially unsuitable investments, and the Member is exposed to the risk of litigation and reputational harm should such losses materialize.

Contravention #3 – Unapproved Outside Activity

Rules 1.3.2, 2.1.1, 2.5.1 and 1.1.2
  1. MFDA Rule 1.3.2 states that an Approved Person may have, and continue in, an outside activity provided that, among other things: the Approved Person discloses the outside activity to the Member; and the Approved Person obtains written Member approval of the outside activity prior to engaging in such outside activity.
  2. The rationale for the prohibition on unapproved outside activities is to guard against conflicts of interest and ensure that the activities of the Approved Person do not compromise the regulation of the securities industry.
    1. Sarang (Re), [2016] Hearing Panel of the Pacific Regional Council, MFDA File No. 201535, Panel Decision dated March 21, 2016, at para. 12.
  3. MFDA Hearing Panels have held that engaging in an undisclosed outside activity is a serious offence, as:
    1. The need for a Member to know what other occupations and businesses its employee might be engaged in is obvious.  There are many reasons why a Member must know what its employees are doing.  We will mention only two of what seem to us to be the most important reasons.  The first is that a failure to know about an employee’s other commercial activities impinges upon the Member’s ability to properly supervise its employee. The second reason is that the Member could be exposed to litigation alleging that the AP’s activity was within the scope of his/her employment with the Member.
    2. Vitch (Re), [2011] Hearing Panel of the Central Regional Council, MFDA File No. 201103, Panel Decision dated September 22, 2011, at para. 53.
  4. When an Approved Person fails to disclose to the Member all material aspects of an outside activity, the Approved Person exposes the Member to the same risks as if there had been no disclosure at all.
  5. As a result, it is imperative that Approved Persons disclose to the Member complete details of their outside activities. Otherwise, the Member is prevented from protecting its interests and the interests of clients by, for example, assessing the proposed activity for potential conflicts of interest and the risk of investor harm.
  6. Further, as described above, the failure of an Approved Person to respect and comply with the Member’s policies and procedures is a regulatory violation which is contrary to MFDA Rules 2.5.1, 1.1.2 and 2.1.1.

Conclusion

  1. In conclusion, we determined that the alleged misconduct was in contravention of the MFDA Rules cited above.

Other considerations in determining acceptability of agreed penalties

Nature of the Misconduct

  1. The Respondent’s misconduct was very serious. The MFDA Rules concerning conflicts of interest and outside activities exist to protect clients, both by placing requirements on Approved Persons themselves and ensuring notification and involvement of Members.
  2. An aggravating factor is that the Respondent’s misconduct was not isolated. Rather, it was part of a larger pattern of conduct, which occurred over a period of almost 9 years, involved numerous contraventions of the MFDA’s Rules (i.e. paying clients’ borrowing costs, borrowing from a client, lending to clients, misleading the Member, and having an unapproved outside activity), and included personal financial dealings with a total of 13 clients.
  3. Another aggravating factor is that the client from whom the Respondent borrowed monies (client RB) was a senior, and was therefore a vulnerable client by virtue of his age. The issue of protection of seniors and vulnerable persons remains a priority for regulators, including the MFDA. Seniors are a growing demographic group. Senior investors may be a vulnerable group due to concerns relating to capacity and other health issues, social isolation, and the high level of trust placed in financial advisors.
  4. In addition, by misleading the Member with regard to the source of the monies that three clients used to pay the borrowing costs of their leveraged investments, the Respondent inhibited the Member’s supervisory function and engaged in fundamentally dishonest conduct which has no place in the mutual fund industry.

Benefits Received by the Respondent

  1. The Respondent benefited from his conduct by obtaining access to capital through loans obtained from client RB. The Respondent owed $50,000 to client RB at the time when he commenced servicing his account, and thereafter borrowed an additional $60,000 from client RB.  The Respondent benefited from the use of these funds for a period of approximately 4 years prior to fully repaying client RB.

The Respondent’s Past Conduct including Prior Sanctions

  1. The Respondent has not previously been the subject of MFDA disciplinary proceedings.

The Respondent’s Recognition of the Seriousness of the Misconduct

  1. By entering into this Settlement Agreement, the Respondent has accepted responsibility for his misconduct and has saved the MFDA the time, resources, and expenses associated with conducting a full hearing of the allegations.

Costs

  1. The costs award is reasonable.

Conclusion

  1. The agreed penalties are within the recommendations of the MFDA Sanction Guidelines and the reasonable range of appropriateness with regard to MFDA decisions submitted to us by Staff, made by MFDA Hearing Panels in similar circumstances. They are fair and reasonable and will serve as a specific and general deterrent.
  2. We concluded that the Settlement Agreement was in the public interest and, consequently, we accepted it.
  • Paul M. Moore, Q.C.
    Paul M. Moore, Q.C.
    Chair
  • Michael Coulter
    Michael Coulter
    Industry Representative

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