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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: Xiao Feng Xin

Heard: April 13, 2022 by electronic hearing in Vancouver, British Columbia
Reasons For Decision: July 11, 2022

Reasons For Decision

Hearing Panel of the Pacific Regional Council:

  • Joseph A. Bernardo, Chair
  • Barbara Fraser, Industry Representative

Appearances:

Brendan Forbes, Enforcement Counsel for the Mutual Fund Dealers Association of Canada
Stefan Kruse, Counsel for Respondent
Xiao Feng Xin, Respondent

I. INTRODUCTION

  1. On April 13, 2022, the Hearing Panel was asked in a closed session to consider a settlement agreement dated February 28, 2022 (the “Settlement Agreement”) made between the staff (“Staff”) of the Mutual Fund Dealer’s Association of Canada (the “MFDA”) and Xiao Feng Xin (the “Respondent”). The Settlement Agreement is attached as Schedule “1”.
  2. The Settlement Agreement concerned an Approved Person signing a client’s name to account forms and engaging in account related activities without client authorization. The Hearing Panel accepted the Settlement Agreement for the following reasons.

II. AGREED FACTS AND LAW

Facts

  1. The parties agree that:
    1. On March 2, 2017, the Respondent became registered as a dealing representative with TD Investment Services Inc., a Member of the MFDA (the “Member”), and commenced conducting business in and around New Westminster, British Columbia.
    2. The Member’s policies and procedures prohibited its Approved Persons from:
      1. placing mutual fund trade orders without client authorization; or
      2. falsifying documentation in any way, including by signing or initialling documents on the behalf of clients.
    3. The Respondent serviced a Tax Free Savings Account (“TFSA”) that belonged to one of the Member’s clients (“Client”).
    4. On or around May 8 and 9, 2018, the Respondent without the Client’s authorization:
      1. signed the Client’s name to an account transaction form and submitted it to the Member for processing, causing the Client’s TFSA to be closed and the investments held in the account to be redeemed for approximately $16,679;
      2. signed the Client’s name on an account opening application form, causing a new TFSA to be opened in the Client’s name;
      3. caused the new TFSA to purchase $16,780 of the same mutual funds that had been held in the original TFSA; and
      4. registered the Client to make supposedly pre-authorized contributions to the new TFSA in the amount of $50 per month.
    5. The mutual fund repurchases resulted in an over contribution to the new TFSA, and as a consequence the Client incurred a tax penalty of approximately $1,593.
    6. The Respondent was eligible to receive a semi-annual bonus in January 2019, subject to his meeting certain performance indicators. By opening the new TFSA and enrolling the Client to make monthly contributions, the Respondent earned 0.2% of the total credits he needed to receive the bonus.
    7. On May 28, 2018 the Member terminated the Respondent, and he did not receive the bonus.
    8. In July 2019, the Client complained to the Member that the account redemption and opening of the new TFSA had both occurred without his knowledge or authorization. The Member reversed the unauthorized transactions and compensated the Client for the tax penalty.
    9. The Respondent has not previously been the subject of MFDA disciplinary proceedings. He is not currently registered in the securities industry in any capacity.

III. LAW

  1. MFDA Rule 2.1.1 obligates an Approved Person to observe high ethical standards. This includes refraining from business conduct that is unbecoming or detrimental to the public interest.
  2. This broad ethical obligation is informed by the specific requirements imposed by the other Rules, including:
    1. Rules 1.1.2 and 2.5.1, which obligate an Approved Person to follow their employing Member’s supervisory policies and procedures.
    2. Rule 2.1.4, which obligates an Approved Person who becomes aware of any conflict or potential conflict of interest to immediately address it in a specifically prescribed manner.
  3. The Respondent acknowledges that in May 2018 he:
    1. contravened Rule 2.1.1, when he signed the Client’s name on two account forms and submitted them to the Member for processing; and
    2. contravened Rules 2.1.1, 1.1.2, 2.5.1, and 2.1.4 (as it was prior to its amendment on June 30, 2021), when he redeemed the holdings in the original account, opened a new TFSA, and set up a monthly purchase account all without the Client’s authorization.

IV. APPLICABLE STANDARD

  1. Under MFDA By-Law 24.4, a settlement hearing panel’s jurisdiction is defined narrowly: a panel’s discretion is limited to either accepting or rejecting a settlement agreement; it has no authority to impose its own preferred outcome on the parties.
  2. It follows that a hearing panel ought not to assess a settlement agreement against the outcome the panel might itself order if it were free to do so. Instead, a panel’s role is to take the agreed upon facts at their face value and weigh the sanctions proposed in the settlement against the MFDA’s core objectives of protecting the investing public and the integrity of the mutual fund industry. An outcome that clearly falls “outside a reasonable range of appropriateness” may properly be rejected. Otherwise, it is incumbent on the hearing panel to accept it.
    1. Sterling Mutuals Inc. (Re), MFDA File No. 20080, September 3, 2008, at paragraph 37, citing the reasoning in Milewski (Re), [1999] I.D.A.C.D. No. 17 at p.11, Ontario District Council Decision dated July 28, 1999.
  3. The rationale for this deferential approach is the well-established policy that settlements are to be encouraged and supported because they enable the efficient allocation of limited enforcement resources, which in turn serves to advance the MFDA’s protective mission. Moreover, emerging as a negotiated compromise between the competing perspectives of the litigants, a settlement necessarily represents a pragmatic and nuanced resolution of the facts and issues arrived at by the persons best situated to assess them.
    1. B.C. Securities Commission v. Seifert [2007] B.C.J. No. 2186, at paragraph 49.
  4. As the British Columbia Court of Appeal stated with respect to a settlement involving the British Columbia Securities Commission:
    1. Settlements assist the Commission to ensure that its overriding objective, the protection of the public, is met. Settlements proscribe activities that are harmful to the public. In so doing, they are effective in accomplishing the purposes of the statute. They provide means of reaching a flexible remedy that is tailored to address the interests of both the Commission and the person under investigation.
    2. Seifert, supra, at paragraphs 26 and 31.

V. ASSESSING APPROPRIATENESS

  1. The appropriateness of a settlement outcome depends on whether it can reasonably be said to satisfy the overarching principles that inform sanctioning generally.
  2. Penalties in securities regulatory proceedings are required to be forward looking and preventative in orientation, not retrospective or punitive. Regardless of whether the context is a contested disciplinary hearing or a settlement, the appropriateness of proposed sanctions turns on whether their deterrent effect is both necessary to protect the investing public from future harm and proportional to the misconduct. As the Supreme Court of Canada stated in Cartaway Resources Corp., the importance of deterrence when “imposing a sanction… will vary according to the breach… and the circumstances of the person charged”.
    1. Pezim v. British Columbia (Superintendent of Brokers), [1994] 2 S.C.R. 557, at paras. 59 and 68.
    2. Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65 at paras. 14, 85.
    3. Cartaway Resources Corp. (Re), [2004] 1 S.C.R. 672 at para. 61.
  3. This requires a case specific assessment of the objective risk the misconduct presents to the investing public. In this regard the key factors to be considered are summarized in the MFDA’s Sanction Guidelines, and the relative importance to be placed on any single factor will depend on the nature and scope of the misconduct. In this case, the most relevant factors are:
    1. The gravity of the misconduct.
    2. The harm to the Client and the benefit to the Respondent, if any, arising from the misconduct.
    3. Whether the Respondent recognizes the significance of his misconduct.
    4. The continuing risk, if any, the Respondent may present to the investing public.
    5. Whether the proposed sanctions meet the need for both specific and general deterrence.

VI. PROPOSED SANCTIONS

  1. The Settlement Agreement proposed the following penalties:
    1. 12 month prohibition against conducting securities related business;
    2. $10,000 fine; and
    3. $5,000 costs.
  2. In support of this position, Enforcement Counsel referred to some relatively recent decisions involving similar or analogous misconduct:
    1. Subzwari (Re), MFDA File No. 202159, March 7, 2022.
    2. Rana (Re), MFDA File No. 201871, March 19, 2019.
    3. Wu (Re), MFDA File No. 201863, May 24, 2019.
    4. Cummins (Re), MFDA File No. 201645, June 8, 2017.
    5. MacDonald (Re), MFDA File No. 201506, September 21, 2016.
  3. In all of these cases, the respondent had prepared and submitted account documentation for processing without proper client authorization. The misconduct typically involved some combination of falsifying the client’s signature in account documents, completing or altering a previously signed account document, and opening accounts without the client’s knowledge. The precedents are all settlement decisions, except for MacDonald, supra, which was decided on the basis of an agreed statement of facts.
  4. In keeping with sanctioning principles, the relative severity of the outcomes in the precedents reflects the gravity of the underlying misconduct: breaches that imposed losses on clients or served to benefit the respondent financially correspondingly resulted in sanctions at the higher end. In Subzwari, supra, the respondent received an 18 month prohibition after setting up “pre-authorized” recurring contributions for 22 accounts in order to meet bonus requirements, all without the clients’ knowledge or approval. In MacDonald, supra, the respondent received a 12 month prohibition and a fine of $10,000 after falsifying a client’s signature to satisfy an emailed redemption direction, thereby enabling the unknown persons who had hacked the email account to defraud the client of about $8,400.
  5. Costs of $2,500 were ordered in each precedent, except in Rana, supra, where the amount was $5,000. As in the present case, none of the respondents in the previous cases had a prior disciplinary history.

VII. DECISION

  1. There are no circumstances under which it is permissible to sign a client’s name to a form. The MFDA has been emphatic in stating that this always constitutes signature falsification.
    1. On December 10, 2004, the MFDA issued Staff Notice — Recording and Maintaining Evidence of Client Trade Instructions #MSN-0035, cautioning mutual fund dealers and salespersons that using pre-signed trade order forms, falsifying client signatures, and photocopying client signatures to engage in discretionary trading is contrary to both the MFDA Rules and securities legislation.
    2. On October 31, 2007, the MFDA issued Staff Notice — Signature Falsification #MSN-0066, explaining why the practice is deleterious and to warn Approved Persons there are no circumstances under which it is acceptable.
    3. On March 4, 2013, the MFDA updated and re-issued #MSN-0066 to remind Approved Persons that signature falsification is strictly prohibited.
    4. On October 2, 2015, the MFDA issued Bulletin #0661-E cautioning Approved Persons that going forward it would seek increased penalties in all signature falsification cases.
    5. On January 26, 2017, the MFDA updated and re-issued #MSN-0066 to yet again warn Approved Persons against engaging in signature falsification.
  2. Signature falsification is prohibited because the practice is inherently risky. Regardless of an Approved Person’s purpose, it is always wrong to sign a document in a client’s name because doing so undercuts the integrity and reliability of the Member’s account documentation. This in turn hampers the Member’s ability to audit account activity, misleads its supervisory personnel, and interferes with the Member’s ability to address potential client complaints. It also opens the door to unauthorized trading and its potential to enable fraud.
  3. It follows that by signing the Client’s name to two account forms the Respondent contravened Rule 2.1.1.
  4. The version of Rule 2.1.4 that was in place in May 2018 required an Approved Person, among other things, to be aware of potential conflicts of interest and, should one arise in connection with a proposed transaction, to immediately disclose it in writing to the client before proceeding with the transaction.
  5. Reconstituting the Client’s portfolio in a new TFSA and registering him to make monthly contributions to it were in the Respondent’s economic interest, because they had the effect of earning the Respondent credits towards his next bonus. Instead of informing the Client of those transactions beforehand, the Respondent instead proceeded to undertake them without the Client’s knowledge. By definition, this was a contravention of Rule 2.1.4 and a violation of the Member’s supervisory policies and procedures contrary to Rules 1.1.2 and 2.5.1.
  6. The Settlement Agreement does not disclose the Respondent’s motive for engaging in the misconduct. As a matter of strict logic, it is indisputable that he stood to gain financially from the improper transactions. As a practical matter, however, it is not reasonable to infer that the Respondent engaged in a single episode of misconduct for the purpose of earning a 0.2% credit towards his semi-annual bonus. Whatever the reason for the misconduct, on the available facts it was limited to an isolated instance from which the Respondent could not realistically expect to gain a meaningful financial benefit. This suggests the risk he presents to the investing public going forward is limited.
  7. As with all settlements, that the Respondent has elected to enter into the Settlement Agreement is by itself a factor that deserves to be given significant weight. The Respondent’s unqualified admission of liability not only saves the MFDA the resources that would otherwise be required to conduct a contested hearing, but objectively confirms that the Respondent has recognized the seriousness of his misconduct.
  8. The 12 month prohibition and financial penalties proposed by the parties can be fairly characterized as being at the upper end of the reasonable sanction range for similar misconduct. In the Hearing Panel’s view, they represent a proportionate response to the need for specific and general deterrence in this case, and the Settlement Agreement was accepted for that reason.
  • Joseph A. Bernardo
    Joseph A. Bernardo
    Chair
  • Barbara Fraser
    Barbara Fraser
    Industry Representative

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