Reasons For Decision

I. SETTLEMENT AGREEMENT

1. We accepted the settlement agreement dated December 14, 2021 (“Settlement Agreement”) between the staff of the MFDA (“Staff”) and Paul David Gowan (“Respondent”) at an electronic settlement hearing held 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 Parts IV and V of the Settlement Agreement.

II. CONTRAVENTIONS

3. The Respondent admits that between November 2017 and April 2018, he signed or submitted account documents obtained by an unregistered individual to conduct securities related business and updated Know-Your-Client information of clients of the Member without using the necessary due diligence to learn the essential facts relative to the clients, ensuring that transactions processing in their accounts were suitable, or ensuring that the transactions were authorized, thereby facilitating stealth advising, contrary to MFDA Rules 1.1.1(c), 2.2.1, and 2.1.1.

III. PROPOSED SANCTION

4. The Settlement Agreement provides that:
   1. the Respondent shall be prohibited from conducting securities related business while in the employ of or in association with a Member of the MFDA for a period 1 year from the date the Settlement Agreement is accepted;
   2. the Respondent shall pay a fine in the amount of $15,000 upon acceptance of the Settlement Agreement;
   3. the Respondent shall pay costs in the amount of $5,000 upon acceptance of the Settlement Agreement; and
   4. The Respondent shall in the future comply with MFDA Rules 1.1.1(c), 2.2.1, and 2.1.1.

IV. APPLICABLE PROVISIONS

5. The relevant MFDA provisions in this matter are:
   • MFDA Rule 1.1.1 (Members);
   • MFDA Rule 2.1.1 (Standard of Conduct);
   • MFDA Rule 2.2.1 (“Know-Your-Client”);
   • Section 24.1.1 of MFDA By-law No. 1 (Discipline);
   • Section 24.2 of MFDA By-law No. 1 (Costs);
   • Section 24.4 of MFDA By-law No. 1 (Settlements);
   • Rule 1 of the MFDA Rules of Procedure (Interpretation and Application);
   • Rule 2 of the MFDA Rules of Procedure (Time);
   • Rule 14 of the MFDA Rules of Procedure (Settlement Agreements); and
   • Rule 15 of the MFDA Rules of Procedure (Settlement Hearings).

V. ABRIDGEMENT OF TIME

6. Staff and the Respondent requested that we exercise our discretion pursuant to Rules 2.2 and 1.5 of the MFDA Rules of Procedure to abridge the ordinary requirement set out in Rule 15.2 of the MFDA Rules of Procedure that a Settlement Hearing be heard only upon 10 days’ notice to the public.
7. We determined that it was in the public interest that the Settlement Hearing be conducted in an expeditious manner and that no prejudice would be caused to members of the public if this request was granted. First, this matter was commenced by issuance of a Notice of Hearing, which was published on December 3, 2021, and the first appearance was held on December 14, 2021.  Accordingly, the public had had adequate notice of this proceeding generally and any interested member of the public could have attended the first appearance, during which the scheduling of this appearance and the potential for it to be a Settlement Hearing was discussed.  Second, Settlement Hearings are often held in camera and therefore, even if the ordinary notice period was provided, members of the public would be excluded from the proceeding unless and until the Settlement Agreement was accepted by us.
8. At the hearing, we did not, in fact, go in camera. This was because we had reviewed all the materials and written submissions in this matter prior to the commencement of the hearing. We had no questions or need for further clarification of anything from the parties at the hearing. We had deliberated and determined before the hearing, and advised the parties at the commencement of the hearing, that we would be accepting the Settlement Agreement at the hearing.
9. This type of relief has been granted in previous disciplinary proceedings.
   1. Sun Life Financial Services (Canada) Inc. (Re), 2018 LNCMFDA 3 at para. 2.
   2. Order dated November 23, 2021, In the Matter of Quadrus Investment Services Ltd.
   3. Wilcott (Re), 2019 LNCMFDA 52.
   4. Investia Financial Services Inc. (Re), 2019 LNCMFDA 18 at para. 35.

VI. ISSUES

10. There were two key issues that we had to determine before accepting the Settlement Agreement:
    1. Did the facts admitted by the Respondent constitute misconduct in contravention of the MFDA By-law, Rules, or Policies, or provincial securities legislation?
    2. Were the sanctions agreed to in the Settlement Agreement acceptable by i) falling within a reasonable range of appropriateness, bearing in mind the nature and extent of the misconduct and all of the circumstances and in comparison to similar cases, ii) being fair and reasonable to the parties, and iii) by constituting an adequate deterrent against similar misconduct in the future by the Respondent and by other members of the industry?

VII. THE FACTS ADMITTED CONSTITUTE MISCONDUCT

(i) Stealth Advising

11. The Respondent admitted facilitating stealth advising by Michael Forsey (“Forsey”), an unregistered individual. “Stealth advising” is a practice whereby an unregistered individual services the accounts of clients of the Member and provides advice and makes recommendations to the clients.  To effect the resulting transactions, an Approved Person of the Member submits the required account forms for processing under the Approved Person’s representative code.
12. Forsey had been a former Approved Person with the Member, whose registration had been terminated by the Member. Forsey subsequently sold his book of business to the Respondent, but nonetheless continued to provide investment advice and gather Know-Your-Client (“KYC”) information from his former clients.  The Respondent signed and submitted the resulting accounts forms under his representative code to the Member for processing with respect to at least 8 clients.
13. By facilitating stealth advising by Forsey, the Respondent contravened MFDA Rule 1.1.1(c), which prohibits an Approved Person from engaging in securities related business unless the relationship between the Member and any person conducting securities related on the account of the Member is that of: (a) employer-employee; (b) principal-agent; or (c) introducing dealer-carrying dealer. Forsey had no such relationship with the Member.
14. As adopted by the Hearing Panel in Roche (Re):
    1. Rule 1.1.1(c) supports one of the fundamental pillars of the investor protection regime in that it ensures that only individuals who have met the necessary proficiency, good character and financial solvency requirements to be registered as a mutual fund dealing representative, and who remain in good standing in that regard, are allowed to engage in securities related business with clients.
       1. Roche (Re), 2014 LNCMFDA 85 at paras. 7(8), 10.
       2. Hagerman (Re), 2020 LNCMFDA 185 at para. 14.
15. The Respondent undermined this fundamental pillar of investor protection. Forsey was no longer in good standing with the registration requirements and had been deliberately excluded by the Member from its business.  The Respondent nonetheless signed and processed account forms under his representative code, knowing that Forsey had provided the investment advice and gathered the KYC information from the clients.

(ii) Know-Your-Client Obligations

16. The Respondent further admitted that when he facilitated stealth advising by Forsey, he failed to satisfy his KYC and suitability obligations with respect to at least 8 clients.
17. The KYC and suitability obligations are codified by MFDA Rule 2.2.1. In the leading case, Lamoureux (Re), the Alberta Securities Commission (“ASC”) referred to the KYC Rule as the “Cardinal Rule” and as a cornerstone obligation of an Approved Person’s dealings with clients.  The ASC further went on to find that the KYC and suitability obligations have the following three stages:
    1. Due Diligence – Involves an Approved Person engaging in due diligence to know the clients and the products involved.
    2. Applying Judgment – Involves an Approved Person using information obtained under the “Know Your Client” and “Know Your Product” obligations, and applying “sound professional judgment” to identify appropriate investment products or strategies for particular clients.
    3. Disclosure of Material Risks and Benefits – Involves an Approved Person disclosing the material negative and positive factors involved in the transaction to the client for the purpose of assisting them in making an informed decision about whether to proceed.
    1. Lamoureux (Re), [2001] ASCD No. 613 at pp. 11-12, 16-17.
    2. Wray (Re), 2017 LNCMFDA 130 at paras. 28-29.
    3. DeVuono (Re), 2012 LNCMFDA 103 paras. 52-56.
18. The Respondent processed transactions in client accounts when it had been Forsey who had made the investment recommendations and obtained the instructions from the clients. The Respondent accordingly failed to conduct the required due diligence, ensure the suitability of the transactions, or provide the clients the necessary disclosure about the features and risks of the mutual funds processed in their accounts. The Respondent therefore failed to fulfil his obligations with respect to all 3 stages of the KYC and suitability obligations and contravened MFDA Rule 2.2.1.
    1. Badasha (Re), 2015 LNCMFDA 57 at paras. 45-48.
    2. Hagerman (Re), supra at paras. 10-13.

(iii) Standard of Conduct

19. The standard of conduct codified by MFDA Rule 2.1.1 requires that Members and Approved Persons 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. The Rule is central to the MFDA mandate of enhancing investor protection and strengthening public confidence in the Canadian mutual fund industry.
    1. Breckenridge (Re), 2007 LNCMFDA 38 at para. 71.
20. By facilitating stealth advising by Forsey, the Respondent contravened all of the prongs of the standard of conduct. Clients’ accounts were serviced by an individual who was unregistered, no longer being supervised by the Member, and no longer subject to the Member’s policies and procedures. The Member, unaware that the Respondent was facilitating stealth advising by Forsey, was misled into thinking that clients had at all times been dealing with a properly qualified Approved Person who is, among other things, complying with all applicable MFDA requirements and the Member’s policies and procedures pertaining to, among other things, investment suitability.  Finally, as Forsey was still providing investment advice and able to have transactions processed, clients may have not appreciated that they were dealing with an unsupervised individual no longer subject to the requirements of the mutual fund regulatory regime.
    1. Roche (Re), supra at para. 7(9), 10.
    2. Hagerman (Re), supra.
    3. VandenBoomen (Re), 2013 LNCMFDA 78 at para. 23.
21. The Respondent’s failure to satisfy his KYC and suitability obligations also contravenes the standard of conduct, namely the requirement that the Respondent 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.
    1. Hagerman (Re), supra.
    2. VandenBoomen (Re), supra at para. 23.
    3. Guglielmi (Re), 2016 LNCMFDA 2, SBA, Tab 20.
22. Accordingly, the Respondent contravened MFDA Rule 2.1.1.

VIII. THE SANCTIONS ARE APPROPRIATE

23. The primary goal of securities regulation is the protection of the investing public. Disciplinary sanctions imposed in a securities regulatory context are protective and preventative, intended to be exercised to prevent likely future harm.
    1. Pezim v. British Columbia (Superintendent of Brokers), [1994] 2 S.C.R. 557 at para. 59.
    2. Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), [2001] 2 S.C.R. 132 at para. 42.
24. Hearing Panels have taken into account the following factors when evaluating whether the penalties proposed should be accepted:
    1. the seriousness of the contraventions 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.
25. We also had reference to the MFDA’s Sanction Guidelines (the “Sanction Guidelines”). The Sanction Guidelines are not mandatory or binding on a Hearing 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.

(i) Seriousness of the Misconduct

26. The Respondent engaged in serious misconduct. MFDA Rule 1.1.1(c) and registration in general create a closed system, intended to ensure that only those who are properly qualified, supervised, and subject to the regulatory regime may engage in securities related business with clients.  As noted above, facilitating stealth advising undermines this fundamental pillar of investor protection.
    1. Roche (Re), supra at paras. 7(8), 10.
27. Furthermore, the Respondent’s misconduct was aggravated by the fact that he facilitated stealth advising by an individual that the Member had chosen to deliberately exclude from its business.
28. Finally, the contravention of MFDA Rule 2.2.1 has been repeatedly recognized as serious misconduct. As stated by the Ontario Securities Commission,
    1. The Commission has recognized that the know-your-client and suitability requirements “are an essential component of the consumer protection scheme of the Act and a basic obligation of a registrant, and a course of conduct by a registrant involving a failure to comply with them is an extremely serious matter”.
       1. Daubney (Re), 2008 LNONOSC 338 at para. 15.
       2. Hagerman (Re), supra at para. 21.
       3. Badasha (Re), supra at para. 47.

(ii) Respondent’s Past Conduct

29. The Respondent had not previously been the subject of MFDA disciplinary proceedings.

(iii) Respondent’s Recognition of the Seriousness of the Misconduct

30. The Respondent recognized the seriousness of his misconduct. By entering into the Settlement Agreement, the Respondent accepted responsibility for his actions and avoided the time and expense of a full disciplinary hearing.

(iv) Harm Suffered by Investors

31. There was no evidence of client complaints or client loss as a result of the Respondent’s misconduct.

(v) Benefit Received by the Respondent from the Misconduct

32. The Respondent paid approximately all the trailer commissions that he earned from the accounts of the clients that were the subject of this proceeding to Forsey and therefore did not financially benefit from the misconduct.

(vi) Deterrence

33. Deterrence is intended to capture both specific deterrence of the wrongdoer as well as general deterrence of other participants in the capital markets in order to protect investors. As stated by the Supreme Court of Canada in Cartaway Resources Corp. (Re),
    1. The Oxford English Dictionary (2nd ed. 1989), vol. XII, defines “preventive” as “[t]hat anticipates in order to ward against; precautionary; that keeps from coming or taking place; that acts as a hindrance or obstacle”. A penalty that is meant to deter generally is a penalty that is designed to keep an occurrence from happening; it discourages similar wrongdoing in others. In a word, a general deterrent is preventative. It is therefore reasonable to consider general deterrence as a factor, albeit not the only one, in imposing a sanction under s. 162. The respective importance of general deterrence as [page698] a factor will vary according to the breach of the Act and the circumstances of the person charged with breaching the Act.
    2. Cartaway Resources Corp. (Re), 2004 SCC 26 at para. 61. For a more general discussion, see paragraphs 52-62.
34. The proposed sanction serves the purpose of specific and general deterrence. The sanction is preventative because it sends a message to the Respondent concerning the seriousness of his misconduct.  The Respondent is required to be out of the industry for 1 year, which is in addition to the 2 years he has been out of the industry since his termination by the Member.  The Respondent further faces the added economic penalty of a $15,000 fine.
35. Concerning general deterrence, a 1-year prohibition with a $15,000 fine undoubtedly sends a strong message to others in the capital markets that Approved Persons who act in ways that are incompatible with MFDA By-laws, Rules, and Policies will be held accountable. A prohibition in particular is a significant sanction, as it greatly affects an Approved Person’s income, both immediately because of the financial loss caused during the term of the prohibition, and in the long term because of the loss of clients that typically results from being unable to serve one’s clients during the period of prohibition.

(vii) Previous Decisions Made in Similar Cases

36. The proposed penalties are within the reasonable range of appropriateness with regard to other decisions by MFDA hearing panels in similar circumstances:

IX. COSTS

37. We determined that a costs award payable by the Respondent was reasonable and appropriate.

X. CONCLUSION

38. Having regard to the all of the foregoing considerations and the facts of this case, including the Respondent’s admission of his contravention of the MFDA Rules, we determined that the proposed sanctions were acceptable, and that it was in the public interest for us to accept the Settlement Agreement, and we did so.

[1] Order dated December 9, 2021, In the Matter of Joshua O’Brien, MFDA File No. 202078. (Reasons Not Yet Available)
[2] Order dated September 30, 2021, In the Matter of Scott Charles Nichols, SBA, Tab 27. (Reasons Not Yet Available)
[3] Guglielmi (Re), supra.
[4] Jain (Re), 2012 LNCMFDA 23.
[5] Dickson (Re), 2011 LNCMFDA 72.
[6] VandenBoomen (Re), supra.
[7] Badasha (Re), supra.