Reasons For Decision

I. BACKGROUND

1. By Notice of Settlement Hearing dated the 25^th day of May, 2022 (“Notice of Settlement Hearing”) a Hearing Panel of the Central Regional Council 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. 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

2. In the Settlement Agreement, the Respondent admits that:
   1. between March 2020 and August 2020, he misappropriated $114,481 from two elderly clients, contrary to MFDA Rule 2.1.1;
   2. between March 2020 and November 2020, he engaged in personal financial dealings with two clients by soliciting and accepting $200,000 from the clients, which gave rise to a conflict or potential conflict of interest that he failed to disclose to the Member or otherwise 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, 1.1.2, 2.5.1, and 2.1.1; and
   3. on or around March 23, 2020, he processed a switch of $330,081 in a client’s account without the client’s authorization, contrary to the Member’s policies and procedures and MFDA Rules 2.1.1, 1.1.2, and 2.5.1.

III. THE FACTS

3. 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 Settlement The Settlement Agreement is attached as Appendix “A” to these Reasons.
4. As set out in the Settlement Agreement, the Respondent was registered in Ontario as a dealing representative commencing on March 14, 2003.
5. From November 1, 2003 to September 21, 2020, the Respondent was registered with Royal Mutual Funds Inc. (the “Member”), a member of the MFDA. At all material times, the Respondent was also an employee of the Royal Bank of Canada (the “Bank”), the bank affiliate of the Member.  On September 21, 2020, the Respondent resigned from the Member and is no longer registered in the securities industry in any capacity.

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-laws, 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 was aware that settlements play an important and necessary role in facilitating the MFDA’s principal goal of protecting the investing public. An administrative tribunal cannot adjudicate every matter that comes before it.  Settlements provide an efficient and effective way for the MFDA to proscribe conduct that is harmful to the public, while providing a flexible remedy that can be tailored to address the interests of Staff and respondents.
   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).
8. The Panel was further aware that, it is generally accepted that hearing panels will not lightly interfere in a settlement agreement reached between Staff and a respondent. Section 24.4.3 of MFDA By-Law No. 1 provides that hearing panels may only accept or reject a settlement in its entirety.  A hearing panel’s role is therefore not to determine the correct sanction, but instead to ascertain whether the sanction agreed to between Staff and a Respondent falls within a reasonable range of appropriateness:
   1. In a contested Hearing, the Hearing Panel attempts to determine the correct penalty.  In a Settlement Hearing, the Hearing Panel takes into account the settlement process itself and the fact that the parties have agreed to the penalties set out in the Settlement Agreement.  In our view, a Hearing Panel should not interfere lightly in a negotiated settlement and should not reject a Settlement Agreement unless it views the penalty as clearly falling outside a reasonable range of appropriateness.  As has been said: “The settlement process is one of negotiation and compromise and the penalty imposed following a settlement will often be less onerous than one imposed following a Hearing where similar findings are made.
      1. MFDA By-law No. 1.
      2. Professional Investments (Kingston) Inc. (Re), 2009 LNCMFDA 9 at para. 13. [Emphasis added.]
      3. Ho (Re), 2018 LNCMFDA 21 at paras. 24-26.
9. When determining whether it would be appropriate to accept a proposed settlement, MFDA, hearing panels have taken into account the following considerations:
   1. whether acceptance of the settlement agreement would be in the public interest and whether the sanction imposed will protect investors;
   2. whether the settlement agreement is reasonable and proportionate, having regard to the conduct of the respondent as set out in the settlement agreement;
   3. whether the settlement agreement addresses the issues of both specific and general deterrence;
   4. whether the proposed settlement will prevent the type of conduct described in the settlement agreement from occurring again in the future;
   5. whether the settlement agreement will foster confidence in the integrity of the Canadian capital markets;
   6. whether the settlement agreement will foster confidence in the integrity of the MFDA; and
   7. whether the settlement agreement will foster confidence in the regulatory process itself.
   1. Sterling Mutuals Inc. (Re), 2016 LNCMFDA 77 at para. 13.

V. MISAPPROPRIATION

10. The Respondent admits that between March 2020 and August 2020, he misappropriated $114,481 from two elderly clients of the Member, clients KL and CK. The Respondent used his position as an Approved Person and as an employee of the Bank affiliate of the Member, to redeem mutual funds from the clients’ accounts and direct the proceeds to bank accounts in the clients’ names that he was able to control using online banking.  Both clients were vulnerable on account of their age, 74 years old and 90 years old, respectively.  The Respondent misappropriated the monies to satisfy margin calls on his personal trading account and to pay other personal expenses.  After this conduct came to light, the Respondent fully repaid the amounts misappropriated through the Bank.  Hearing Panels have repeatedly found that the misappropriation or failure to account for client monies is a contravention of MFDA Rule 2.1.1.
11. MFDA Rule 2.1.1 codifies the standard of conduct, which 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. MFDA Rule 2.1.1.
    2. Breckenridge (Re), 2007 LNCMFDA 38 para. 71.
12. The misappropriation of client funds is antithetical to the standard of conduct. It is an egregious form of misconduct, which involves a significant breach of trust, causes serious harm to the clients affected, and shakes public confidence in the Canadian mutual fund industry.
    1. Ng (Re), 2016 LNCMFDA 81 at paras. 89, 106.
    2. Palumbo (Re), 2020 LNCMFDA 16 at paras. 37-40.
    3. Solis (Re), 2017 LNCMFDA 147 at para. 17.
    4. Douglas (Re), 2018 LNCMFDA 216 at para. 24.
13. The Respondent therefore contravened MFDA Rule 2.1.1. The Respondent used his position as a mutual fund adviser to gain access to his clients’ mutual fund accounts in order to misappropriate $114,481.

Personal Financial Dealings

14. The Respondent admitted that between March 2020 and November 2020, he borrowed a total of $200,000 from 2 clients of the Member, clients JK and WS, the latter of whom was the Respondent’s sister. The Respondent did not disclose the borrowing to the Member.  Following the discovery of the Respondent’s misconduct, the Respondent repaid the loans in full, save for $10,000 that was forgiven by client WS.
15. Hearing panels have repeatedly held that borrowing money from a client gives rise to a conflict of interest under MFDA Rule 2.1.4. As stated by the Hearing Panel in Gaunt (Re):
    1. A conflict of interest occurs when one party to a matter advances, uses or pursues his own interests in dealing with another person, to whom he has an obligation of dealing fairly, to the detriment of that other person or to his own advantage rather than the person to whom he owes the duty of fairness.
       1. Gaunt (Re), 2013 LNCMFDA 63 at para. 47.
       2. Tonnies (Re), 2005 LNCMFDA 7 at para. 31.
       3. MFDA Rule 2.1.4.
16. MFDA Hearing Panels have also consistently held that where an Approved Person engages in personal financial dealings with a client, he contravenes MFDA Rule 2.1.1. Accordingly, by borrowing $200,000 from two clients, the Respondent contravened MFDA Rule 2.1.4 and 2.1.1.

The Switch

17. The Respondent admitted that on March 23, 2020, he processed a switch in client CK’s account, totalling $330,081.63, which the client had not authorized. MFDA Hearing Panels have repeatedly held that Approved Persons are not permitted to process a trade without complete instructions from the client on all elements of the trade.  As stated by the Hearing Panel in O’Brien (Re):
    1. … mutual fund salespersons are not permitted to conduct discretionary trades and must always contact the client prior to making any transactions. Where an Approved Person fails to obtain client instructions prior to executing a trade, he engages in discretionary trading beyond the terms of his or her registration as a mutual fund salesperson.
       1. O’Brien (Re), 2008 LNCMFDA 17.
       2. Wallace (Re), 2017 LNCMFDA 7 at para. 33.
18. Indeed, as a consequence of the unauthorized switch, the client suffered a loss of $52,450.54 in unrealized gains, which was ultimately compensated by the Bank. Accordingly, by engaging in unauthorized trading, the Respondent contravened all of the requirements of the standard of conduct codified in MFDA Rule 2.1.1.
    1. Wallace (Re), supra at para. 35.
    2. Del Plavignano (Re), 2019 LNCMFDA 28 at para. 7.
    3. Briske (Re), 2019 LNCMFDA 93 at para. 28.
19. Accordingly, the Panel unanimously concluded that all three of the alleged contraventions had been made out.

VI. PENALTY

20. A Hearing Panel should also consider the MFDA Sanction Guidelines. The Guidelines are not mandatory or binding on the Hearing Panel, but provide a summary of the 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 Guidelines.
    1. Mutual Fund Dealers Association of Canada Sanction Guidelines, dated November 15, 2018.
21. Hearing Panels have also previously considered the following factors when determining whether a sanction is appropriate:
    1. The seriousness of the allegations 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 by those who are permitted to participate in the capital markets; and
    11. Previous decisions made in similar circumstances.
    1. Tonnies (Re), supra at para. 48.
    2. Breckenridge (Re), supra at para. 77.
22. All three contraventions admitted by the Respondent constituted extremely serious misconduct. This is particularly so here, where the Respondent misappropriated the monies by processing redemptions in the clients’ accounts without their knowledge or authorization, thereby concealing his misconduct.  The misconduct is also further aggravated by the fact that it was directed at clients who were vulnerable by virtue of their age.
    1. Ng (Re), supra at paras. 106-107.
    2. Palumbo (Re), supra at para. 40.
    3. Sanction Guidelines, p. 3(#3).
23. Second, even in the absence of client harm, borrowing from clients and the resulting conflicts of interest has been held to cause real harm to the securities industry. Approved Persons hold a position of trust with clients, which is abused when that position is used to obtain a benefit for the Respondent to the detriment of the clients.  The Respondent borrowed the monies at a time when he faced significant financial difficulties.
    1. Palumbo (Re), supra at para. 43.
    2. Raza (Re), 2021 LNCMFDA 45 at para. 21.
24. Finally, unauthorized trading undermines the ability of a client to make decisions for and control his or her account, thereby causing harm to the position of trust held by mutual fund advisors in the securities industry.
    1. Wallace (Re), supra at paras. 47-48.
25. Clients KL and CK undoubtedly suffered serious and significant harm. The clients suffered the loss of the $114,481 misappropriated by the Respondent, the unrealized gains arising from the unauthorized redemptions from their mutual fund accounts and the unauthorized switch in the case of client CK, and the profound breach of trust that arises from their mutual fund advisor taking advantage of them and of his access to their accounts.
26. The Respondent benefitted from the use of the $114,481 and the additional $200,000 that he borrowed from clients JK and WS.
27. As described further below, the amounts misappropriated were repaid by the Respondent. The unrealized gains were compensated by the Bank.
28. As set out in the Sanction Guidelines, voluntary acts of compensation should be considered a mitigating factor. Whether through the Bank or directly, the Respondent fully returned the amounts misappropriated from clients KL and CK and repaid the amounts borrowed from clients JK and WS (except for the $10,000 forgiven by client WS).  While it is relevant that such restitution was only made after the Respondent’s misconduct was discovered as a result of a complaint from client CK’s daughter, it is nonetheless a significant mitigating factor that the Respondent repaid all of the above noted amounts.
29. The Respondent has demonstrated that he fully recognizes the seriousness of the misconduct. In addition to the compensation paid by the Respondent described above, the Respondent fully cooperated with the MFDA’s investigation, admitted his misconduct, and sought to settle this matter during the course of the MFDA’s investigation.  By entering into the Settlement Agreement, the Respondent has saved the MFDA the time, resources, and expense associated with conducting a contested hearing of the allegations.
30. The Respondent had not previously been the subject of a MFDA disciplinary proceeding. This mitigating factor is of limited significance given the gravity of the misconduct.
31. The Panel was satisfied that the proposed penalty set out in the Settlement Agreement also satisfied the requirements of deterrence, both general and specific.

VII. RESULT

32. For all the above reasons, the Panel concluded that the contraventions committed by the Respondent are extremely serious. Accordingly, the following penalties were imposed upon the Respondent:
    1. The Respondent is permanently prohibited from conducting securities related business while in the employ of or in association with a Member of the MFDA, pursuant to section 24.1.1(e) of MFDA By-law No. 1.
    2. The Respondent shall pay a fine in the amount of $50,000 in certified funds on the date of this Order, pursuant to section 24.1.1(b) of MFDA By-law No. 1.
    3. The Respondent shall pay costs in the amount of $5,000 in certified funds on the date of this Order, pursuant to section 24.2 of MFDA By-law No. 1.
    4. 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.