Reasons For Decision

I. BACKGROUND

1. By Notice of Settlement Hearing dated the 19^th day of November, 2021 (the “Notice of Settlement Hearing”) 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 the Settlement Agreement (the “Settlement Agreement”) entered into by the Staff of the MFDA (“Staff”) and the Respondent.
2. At the outset of the proceedings, 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.

II. THE CONTRAVENTIONS

3. In the Settlement Agreement, the Respondent admits that: During the periods:  (i) January 9, 2018 to September 27, 2018; (ii)  February 13, 2019 to April 1, 2019; and (iii) May 23, 2019 to September 3, 2019, the Respondent:
   1. without notifying the MFDA and receiving written approval prior to completing the transactions, transferred monies to, or made payments on behalf of, the Respondent’s parent company, which would have or would reasonably be expected to have the effect of causing the Respondent’s risk adjusted capital to fall to a level below zero;
   2. failed to maintain its required minimum capital of $50,000 and its risk adjusted capital at a level above zero; and
   3. failed to immediately notify the MFDA when its risk adjusted capital had fallen to a level below zero,

   contrary to MFDA Rules 3.1.1, 3.1.2, 3.4.2(c), and 2.1.1.

III. THE FACTS

4. In the Settlement Agreement, Staff and the Respondent agreed to the existence of a series of facts, which are set out in Part IV of the said Agreement. The Settlement Agreement is attached as Appendix “A” to these Reasons.
5. As set out in the Settlement Agreement, the Respondent was registered as a mutual fund dealer in Ontario and has been a member of the MFDA since November 15, 2002. At all material times, the Respondent was a wholly owned subsidiary of Progressive Financial Strategy (Canada) Inc., the parent company.  At all material times, the Respondent and the parent company’s bank accounts were controlled by the president of the Respondent.

IV. DISCUSSION

6. The Panel was aware that prior to accepting a Settlement Agreement, a Hearing Panel must be satisfied that:
   1. The facts admitted by the Respondent constitute misconduct in contravention of the By-law, MFDA Rules or policies, or provincial securities legislation; and
   2. 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.
7. 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 Inc. (Re), citing the I.D.A. Ontario District Council in Milewski (Re):
   1. 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].
   2. 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.
   3. Milewski (Re), [1999] I.D.A.C.D. No. 17 at p. 12, Ontario District Council Decision dated July 28, 1999.
8. The Panel also considered the principle that a Hearing Panel will not reject a settlement agreement unless the proposed penalty clearly falls outside the reasonable range of appropriateness. Settlements are necessary to assist the MFDA to fulfill its regulatory objective of protecting the public.  Settlements advance this regulatory objective by proscribing activities that are harmful to the public, while enabling the parties to reach a flexible remedy tailored to address the interests of both the regulator and a respondent.
   1. British Columbia (Securities Commission) v. Seifert, [2006] B.C.J. No. 225 at paras. 48-49 (S.C.), aff’d, [2007] B.C.J. No. 2186 at para. 31 (C.A) [“British Columbia (Securities Commission)”].
9. The Respondent admits that during the following periods: (i) January 9, 2018 to September 27, 2018; (ii) February 13, 2019 to April 1, 2019; and (iii) May 23, 2019 to September 3, 2019, it transferred monies to, or made payments on behalf of, the Respondent’s parent company (the “Impugned Transactions”), causing its minimum capital to fall below $50,000 and its risk adjusted capital (“RAC”) to fall to a level below zero.
10. The cash that the Respondent held, which was the subject of the Impugned Transactions, was the Respondent’s principal asset and it was necessary for the Respondent to hold securely in order to comply with its obligation to maintain the minimum financial requirements set by the MFDA. The Respondent did not notify the MFDA prior to engaging in the Impugned Transactions, which would or would reasonably be expected to cause the Respondent to become capital deficient.  The Respondent further did not immediately notify the MFDA after engaging in the Impugned Transactions when its RAC had fallen to a level below zero.
11. Pursuant to MFDA Rule 3.1.1, every Member shall have and maintain at all times RAC greater than zero, and minimum capital in the amounts referred to in the Rule for the Level in which the Member is designated, as calculated in accordance with Form 1. The Respondent is a Level 2 Dealer, and accordingly was required to maintain minimum capital of $50,000 and RAC greater than zero at all times.
    1. MFDA Rule 3.1.1.
12. The purpose of RAC is set out in “The Form 1 Reference Manual” (the “Reference Manual”), which states the following:
    1. In order to monitor the financial viability of mutual fund dealers, the MFDA has adopted a risk adjusted capital calculation, also known as the “capital formula”. RAC is derived from the Member’s working capital and is the primary means of financial reporting to the MFDA. RAC is a measure of the Member’s liquidity and its ability to withstand any adverse fluctuations in operations. In addition to a minimum amount of capital required by MFDA rules, certain provisions or “cushions” are taken into consideration in order to assess the Member’s capacity to manage its obligations and protect its clients. The capital formula seeks to assess the Member’s ability to continue as a going concern
    2. [Emphasis added.]
    3. The Form 1 Reference Manual, March 2014, p. 7.
13. The Reference Manual further explains that pursuant to MFDA Rule 3.1.1, “it is the responsibility of all Members to continuously monitor and evaluate its capital to ensure RAC is positive at all times.”
    1. The Form 1 Reference Manual, March 2014, p. 7.
14. In addition to MFDA Rule 3.1.1, the MFDA Rules also provide for additional safeguards to immediately ensure the MFDA’s involvement when there is a risk of a RAC deficiency, so that clients can be safeguarded. Two such rules are engaged in this case:
    1. MFDA Rule 3.4.2(c), which requires that a Member not enter into any transaction or take any action that would or would be reasonably expected to cause the Member to become capital deficient, without first providing written notification to the MFDA of its intention to do so and obtaining written approval from the MFDA; and
    2. MFDA Rule 3.1.2, which requires that a Member immediately notify the MFDA when, to its knowledge, its RAC falls to a level below zero.
    1. MFDA Rules 3.1.2, 3.4.2(c).
15. Accordingly, by engaging in the Impugned Transactions without notifying and obtaining approval from the MFDA, and further failing to inform the MFDA after the Respondent had engaged in the Impugned Transactions and its RAC had fallen to a level below zero, the Respondent contravened MFDA Rules 3.1.1, 3.1.2, and 3.4.2(c).
16. In addition, by engaging in transactions that caused the Respondent’s financial position to fall below the minimum financial requirements set by the MFDA and failing to inform the MFDA as required, the Respondent also contravened the standard of conduct set out in MFDA Rule 2.1.1. As set out in MFDA Rule 2.1.1(c), a Member must not engage in any business conduct or practice which is unbecoming or detrimental to the public interest.
    1. MFDA Rule 2.1.1.
    2. PDQ Financial Services Inc., 2013 LNCMFDA 100.
17. Accordingly, based on the admissions of both parties and the facts set out in the Settlement Agreement, the Panel concluded that the facts admitted by the Respondent constitute misconduct in contravention of MFDA By-law, rules, or policies or provincial securities legislation.

V. PENALTY

18. The Panel was aware that Hearing Panels have frequently considered the following factors when evaluating whether the sanction proposed should be accepted:
    1. the seriousness of the conventions admitted to by the Respondent or proved against the Respondent;
    2. the Respondent’s past conduct, including prior sanctions;
    3. the Respondent’s experience and level of activity in the capital markets;
    4. whether the Respondent recognizes the seriousness of the improper activity;
    5. the harm suffered by investors as a result of the Respondent’s activities;
    6. the benefits received by the Respondent as a result of the improper activity;
    7. the risk to investors and the capital markets in the jurisdiction, were the Respondent to continue to operate in capital markets in the jurisdiction;
    8. the damage caused to the integrity of the capital markets in the jurisdiction by the Respondent’s improper activities;
    9. 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;
    10. the need to alert others to the consequences of inappropriate activities to those who are permitted to participate in the capital markets; and
    11. previous decisions made in similar circumstances.
    1. Sterling Mutuals Inc. (Re), supra at para. 14.
19. The Panel may also have reference to the MFDA’s Sanction Guidelines (the “Sanction Guidelines”). The Sanction Guidelines are not mandatory or binding on the Panel, but provide a summary of the key factors upon which discretion can be exercised consistently and fairly.  Many of the same factors that are listed above, which have been considered in previous decisions of MFDA Hearing Panels, are also reflected and described in the Sanction Guidelines.
    1. Mutual Fund Dealers Association of Canada Sanction Guidelines, dated November 15, 2018. [Sanction Guidelines]
20. The Panel took into consideration the above factors in reaching its decision with respect to the appropriateness of the penalty. Of particular relevance to this case, were the following factors:
    1. The Respondent’s failure to maintain a RAC greater than zero is serious misconduct. As stated by the Hearing Panel in Global Maxfin Investments Inc. (Re), the requirement that Members maintain a RAC greater than zero is necessary “[t]o protect the financial integrity of individual MFDA firms, their clients, the MFDA and the securities markets”.
       1. Global Maxfin Investments Inc. (Re), 2015 LNCMFDA 65 at para. 10.
    2. When a Member’s financial viability is threatened, its clients are put at significant risk, and accordingly it is critical that Members maintain a positive RAC at all times.
    3. In addition, after repeatedly transferring its cash out, the Respondent at no time advised the MFDA either before or after engaging in the Impugned Transactions, as required by MFDA Rules 3.4.2(c) and 3.1.2.
    4. The Respondent has not previously been the subject of a MFDA disciplinary proceeding.
    5. The Panel was satisfied that the Respondent had accepted responsibility for its misconduct. The Respondent entered into this Settlement Agreement which substantially reduced the length and complexity of the disciplinary proceeding that might have otherwise been necessary.
    6. Each party to the Settlement Agreement, agreed that the misconduct stemmed from a misunderstanding by the Respondent of the MFDA’s financial requirements. The Respondent now recognizes its error, and has maintained the required amount of minimum capital and its RAC above zero since September 3, 2019.
    7. There is no evidence that any client suffered any harm as a result of the Respondent’s misconduct.
    8. There is no evidence that the Respondent received any benefit as a result of the misconduct.
    9. The proposed sanction serves the purpose of specific and general deterrence. The $10,000 fine is sufficiently large to deter the Respondent from again contravening the MFDA’s financial requirements, while taking into account the size of the Respondent and the nature of the misconduct.  It was common ground at the Hearing, that the Respondent was not a significantly sized organization, nor did the Respondent have substantial funds under management.
    10. The Panel was satisfied that the principals of both general deterrence of others in the industry and the specific deterrence to the Respondent were satisfied by the proposed sanctions.
    11. The sanctions also make clear that even in the absence of financial harm to clients, the failure by Members to maintain the financial requirements and notify the MFDA when required will not be tolerated.
21. The Panel considered the submissions of Staff in this matter and also the limited submissions made on behalf of the Respondent. The Panel also considered previous decisions made in similar cases, of which the Panel was made aware and the MFDA Sanction Guidelines to which the Panel was directed.  After full consideration of the matter of penalty, the Panel concluded that the sanctions agreed to in the Settlement Agreement fell within a reasonable range of appropriateness, bearing in mind the nature and extent of the misconduct and all of the surrounding circumstances.

VI. RESULT

22. For all the above reasons, the Panel concluded that the Settlement Agreement was reasonable and proportionate and that the Settlement Agreement should be accepted. Accordingly, the following penalties were imposed upon the Respondent:
    1. The Respondent shall pay a fine of $10,000, pursuant to section 24.1.2 of MFDA By-law No. 1.
    2. The Respondent shall pay costs of $5,000, pursuant to section 24.2 of MFDA By-law No. 1.
    3. The Respondent shall pay the fine and costs as follows:
       1. $5,000 (costs) on the date of this Order;
       2. $5,000 (fine) on or before March 31, 2022; and
       3. $5,000 (fine) on or before June 30, 2022;
    4. The Respondent shall provide monthly bank statements with its Form 1s for a period of 1 year following acceptance of the Settlement Agreement, pursuant to section 24.1.2(f) of MFDA By-law No. 1;
    5. The Respondent shall in the future comply with MFDA Rules 3.1.1, 3.1.2, 3.4.2(c), and 2.1.1; and
    6. If at any time a non-party to this proceeding, with the exception of the bodies set out in section 23 of MFDA By-law No. 1, requests production of or access to exhibits in this proceeding that contain personal information as defined by the MFDA Privacy Policy, then the MFDA Corporate Secretary shall not provide copies of or access to the requested exhibits to the non-party without first redacting from them any and all personal information, pursuant to Rules 1.8(2) and (5) of the MFDA Rules of Procedure.