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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: Yeram Kwak (also known as Kaylee Kwak)

Heard: April 7, 2022 by electronic hearing in Vancouver, British Columbia
Reasons For Decision: April 26, 2022

Reasons For Decision

Hearing Panel of the Pacific Regional Council:

  • Joseph Bernardo, Chair
  • Susan Monk, Industry Representative

Appearances:

Zaid Sayeed, Enforcement Counsel for the Mutual Fund Dealers Association of Canada
Nicole Chang, Counsel for Respondent
Yeram Kwak, Respondent

I. INTRODUCTION

  1. On April 7, 2022, the Hearing Panel was asked in a closed session to consider a settlement agreement (Settlement Agreement) made between the staff (Staff) of the Mutual Fund Dealer’s Association of Canada (MFDA) and the Respondent. It is attached as Exhibit A.
  2. The Settlement Agreement concerned an Approved Person signing a client’s name to account forms and then submitting them to her employing Member for processing. The Hearing Panel accepted the Settlement Agreement for the following reasons.

II. AGREED FACTS AND LAW

Facts

  1. The parties agree that:
    1. On December 27, 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 Surrey, British Columbia.
    2. The Member’s policies and procedures prohibited its Approved Persons from signing documents for clients.
    3. In the course of a branch review, the Member discovered that on or about September 20, 2019 the Respondent had signed a client’s name on two account forms. She then used the forms to effect a transfer of the client’s assets to the Member from another financial institution. The client had authorized the transfer.
    4. There is no evidence that the client sustained any losses from the Respondent’s conduct, or that the Respondent derived any financial benefit other than normal course compensation from her actions.
    5. The Member reviewed a number of other client files maintained by the Respondent. It did not identify any further concerns.
    6. On March 25, 2020, the Respondent resigned from the Member. The Respondent is no longer registered in the securities industry in any capacity.
    7. The Respondent has not previously been the subject of MFDA disciplinary proceedings.

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. The Respondent acknowledges that she contravened MFDA Rule 2.1.1 when she signed a client’s name on two account forms on or about September 20, 2019.

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. From this, 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 proposed sanctions against the 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 core regulatory goal of protecting the investing public. 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.
      1. Seifert, supra, at paragraphs 26 and 31.

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. Where, as in this case, there is no evidence of client harm or improper gain, the most relevant factors are:
    1. The gravity of the misconduct.
    2. Whether the Respondent recognizes the significance of her misconduct.
    3. The continuing risk, if any, the Respondent may present to the investing public.
    4. Whether the proposed sanctions meet the need for both specific and general deterrence.

III. PROPOSED SANCTIONS

  1. The Settlement Agreement proposed the following penalties:
    1. $11,000 fine; and
    2. $2,500 costs.
  2. In support of this position, Enforcement Counsel referred to some relatively recent decisions involving similar misconduct:
    1. Machon (Re), MFDA File No. 2017122, October 30, 2018.
    2. Armstrong (Re), MFDA File No. 202161, November 30, 2021.
    3. Yu (Re), MFDA File No. 202170, dated October 27, 2021.
    4. Terrill, (Re), MFDA File No. 201909, May 9, 2019.
  3. The falsification of client signatures in these cases extended from a low of 2 signatures in respect of 2 clients to a high of 6 signatures in respect of 5 clients. The agreed upon fines ranged from $7,500 to $12,000, while costs ranged from $2,500 to $5,000.
  4. Machon, supra, was the only case provided to the Hearing Panel in which the sanctions included a period of prohibition. Unlike the other cases, which are all settlement decisions, Machon, supra, was a disciplinary hearing in which the respondent failed to either file a Reply or attend the hearing.
  5. As in this case, none of the respondents in the settlement precedents had a prior disciplinary history and none of their misconduct involved unauthorized trading, imposed losses on clients or conferred a financial benefit on the respondent.

IV. DECISION

  1. For the MFDA, signature falsification has been a persistent and longstanding problem.
    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 found it necessary to yet again update and re-issue #MSN-0066 to warn Approved Persons against engaging in signature falsification.
  2. The substance of this guidance is that:
    1. Signing a client’s name to a form always constitutes signature falsification, even if it is done for the sake of the client’s convenience and at their request.
    2. It is inherently risky and always inappropriate to sign a document on a client’s behalf because it undercuts the integrity and reliability of Member account documentation. Among other things, the practice:
      1. hampers the Member’s ability to audit account activity and the Approved Person’s business conduct;
      2. misleads supervisory personnel;
      3. interferes with the Member’s ability to address potential client complaints; and
      4. has the potential to enable unauthorized trading, which in turn can be exploited to misappropriate funds and perpetrate fraud.
    3. It follows that signature falsification constitutes a breach of Rule 2.1.1.
  3. This is why the Member’s policies and procedures prohibited its Approved Persons from signing documents on a client’s behalf.
  4. In other words, when the Respondent signed the client’s name to the account forms, she did so in a regulatory and operational environment in which it was unmistakably clear that signature falsification is never permissible. As in the precedents provided to the Hearing Panel, the harm caused by the two falsifications was not that they put the client directly at risk. It was that hiding the truth of the Respondent’s actions interfered with the Member’s ability to supervise her. The agreed upon facts unambiguously establish that the Respondent breached Rule 2.1.1.
  5. In each of the sanction precedents, relatively limited misconduct that did not involve client losses or the respondent receiving improper benefits nonetheless attracted a firm deterrent response. For example, in Yu, supra, the misconduct consisted of a one instance of copying and pasting a signature from a pre-existing account form and an instance of signing a client’s initials on an account form. The sanctions provided by the settlement were a $9,500 fine and $2,500 in costs.
  6. It is evident that the misconduct was the result of an isolated lapse of judgment. By contrast, the Respondent has shown some wisdom by acknowledging her mistake and accepting responsibility for it. Moreover, her admission of liability has saved the MFDA the expenditure of time and resources that would otherwise be required to conduct a contested hearing.
  7. In the Hearing Panel’s view, the proposed sanctions answer the need for specific and general deterrence as disclosed by the circumstances of this case. The Settlement Agreement is therefore accepted.
  • Joseph Bernardo
    Joseph Bernardo
    Chair
  • Susan Monk
    Susan Monk
    Industry Representative

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