Reasons For Decision

I. INTRODUCTION

1. Effective January 1, 2023 the Mutual Fund Dealers Association of Canada (“MFDA”) and the Investment Industry Regulatory Organization of Canada consolidated to form the New Self-Regulatory Organization of Canada (“New SRO”).
2. Pursuant to Mutual Fund Dealer Rule 1A and s. 14.6 of By-law No. 1 of the New SRO, contraventions of former MFDA regulatory requirements, including its Mutual Fund Dealer Rules (“MFDA Rules”), may be enforced by the New SRO.
3. On February 1, 2023, the New SRO issued a Notice of Settlement Hearing commencing a disciplinary proceeding in respect of Megan Lynn Stokes (the “Respondent”).

II. SETTLEMENT AGREEMENT

4. We accepted the settlement agreement dated February 7, 2023 (“Settlement Agreement”) between the staff of the New SRO (“Staff”) and the Respondent at an electronic settlement hearing held in accordance with New SRO rules for an electronic hearing.
5. A copy of the Settlement Agreement is attached to these Reasons as Schedule “1”. The agreed facts are set out in Part IV of the Settlement Agreement. Some capitalized terms used in these reasons are defined in the Settlement Agreement.

III. CONTRAVENTIONS

6. The Respondent admits that between June 2019 and January 2020, the Respondent altered client contact information on the Dealer Member’s system without the knowledge or authorization of the client, which had the effect of interfering with the Member’s supervision of the Respondent and impacted its ability to communicate with clients, contrary to Mutual Fund Dealer Rules 2.1.1 and 2.1.4(2).

IV. SANCTIONS

7. The Settlement Agreement provides that the Respondent shall:
   1. pay a fine of $7,500;
   2. pay costs of $5,000;
   3. be suspended from acting as a branch manager or in any supervisory capacity for a Dealer Member registered as a mutual fund dealer (formerly Members of the MFDA) for a period of two months commencing upon the date the Settlement Agreement is accepted by the Hearing Panel; and
   4. successfully complete an industry course that is acceptable to Staff of the New SRO, within 12 months of the acceptance of the Settlement Agreement, pursuant to s. 7.4.1.1(f) of the Mutual Fund Dealer Rules.

V. CONSIDERATIONS

8. We determined that we had to be satisfied regarding three considerations before we could accept the Settlement Agreement. First, the sanctions had to be within an acceptable range taking into account similar cases. Secondly, the sanctions had to be fair and reasonable (i.e. proportional to the seriousness of the contraventions taking into consideration relevant circumstances) and should appear to be so to members of the public and industry. Thirdly, the sanctions should serve as a deterrent to the Respondent and to industry. To be satisfied on these three considerations required an understanding of the particular facts of the case, the circumstances of the Respondent, and the impact on the Respondent of the sanctions.

VI. MISCONDUCT

Standard of Conduct

9. MFDA Rule 2.1.1 (now Mutual Fund Dealer Rule 2.1.1) prescribes the standard of conduct applicable to Approved Persons of mutual fund dealers. The Rule requires, among other things, that:

“Each Member and Approved Person of a Member shall: deal fairly, honestly and in good faith with its clients; observe high standards of ethics and conduct in the transaction of business; and not engage in any business conduct or practice which is unbecoming or detrimental to the public interest.”

10. The standard of conduct establishes minimum standards of honesty and ethics that Approved Persons are required to uphold. MFDA Hearing Panels have previously held that, where an Approved Person makes changes to client information without the knowledge or authorization of the client, the Approved Person contravenes MFDA Rule 2.1.1 (now Mutual Fund Dealer Rule 2.1.1). Examples of conduct that Hearing Panels have regarded as contraventions of the standard of conduct in previous cases include:
    1. changing a client’s residential address on a Member’s back office system to prevent the client from learning about the performance of their investments;
       1. Patel (Re), [2019] Hearing Panel of the Central Regional Council, MFDA File No. 201921, Reasons for Decision dated December 4, 2019, SBA.
    2. changing a client’s address on a Member’s back office system to falsely indicate that the client was a resident of a jurisdiction where the Approved Person was registered;
       1. An (Re), [2017] Hearing Panel of the Central Regional Council, MFDA File No. 2016109, Reasons for Decision dated March 29, 2017, SBA.
    3. failing to accurately record client information which concealed from the Member that a client was no longer resident of a jurisdiction where the Approved Person was registered which would have led to restrictions on the investment services that the Respondent was permitted to provide to the client; and
       1. Collymore (Re), [2022] Hearing Panel of the Central Regional Council, MFDA File No. 202214, Reasons for Decision dated December 14, 2022, SBA.
    4. changing a client’s banking information based upon email instructions received from a third party who, without the Respondent’s knowledge, had gained unlawful access to the client’s email account.
       1. Chiu (Re), [2017] Hearing Panel of the Central Regional Council, MFDA File No. 201757, Reasons for Decision dated October 20, 2017, SBA.

11. The Respondent admits that, without the knowledge or authorization of the clients, she altered client contact information of four clients of the Member and 9 other bank clients on a back office system that was used by the Member and the bank affiliated with the Member (the “Bank”) to obtain feedback from clients in optional surveys and to promote services, which had the effect of interfering with the Member’s supervision of the Respondent and impacted its ability to communicate with clients.
12. By altering client contact information on the Client Contact Information System, the Respondent: a) prevented clients from receiving the Survey which may have affected the Customer Feedback Metric and consequently the variable compensation the Respondent and Approved Persons in her branch would receive as well as her eligibility for rewards and recognition programs maintained by the Dealer Member; b) interfered with the Dealer Member’s ability to verify the client’s identity when providing services to the client virtually; c) prevented clients from receiving notifications that their investment account statements, bank account statements, and/or confirmations of trades within their investment accounts were available; d) prevented clients from receiving promotional communications about products and services offered by the Dealer Member; and e) may have misdirected the Dealer Member’s correspondence to an email address of someone other than the client.

Conflicts of Interest

13. The version of MFDA Rule 2.1.4 that was in effect at the time of the misconduct (now Mutual Fund Dealer Rule 2.1.4(2)) prescribed the actions which Members and Approved Persons were required to take in circumstances where a conflict or potential conflict of interest with a client arose. The Rule required that:
    1. Each Member and Approved Person shall be aware of the possibility of conflicts of interest arising between the interests of the Member or Approved Person and the interests of the client. Where an Approved Person becomes aware of any conflict or potential conflict of interest, the Approved Person shall immediately disclose such conflict or potential conflict of interest to the Member;
    2. In the event that such a conflict or potential conflict of interest arises, the Member and the Approved Person shall ensure that it is addressed by the exercise of responsible business judgment influenced only by the best interests of the client and in compliance with Rules 2.1.4(c) and (d);
    3. Any conflict or potential conflict of interest that arises as referred to in Rule 2.1.4(a) shall be immediately disclosed in writing to the client by the Member, or by the Approved Person as the Member directs, prior to the Member or Approved Person proceeding with the proposed transaction giving rise to the conflict or potential conflict of interest; and
    4. Each Member shall develop and maintain written policies and procedures to ensure compliance with Rules 2.1.4(a), (b) and (c).
14. As explained by the Hearing Panel in Gaunt (Re):

“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.”

Gaunt (Re), [2013] Hearing Panel of the Atlantic Regional Council, MFDA File No. 201232, Reasons for Decision dated September 20, 2013 at para. 47, SBA.

15. A failure to address a conflict of interest by the exercise of responsible business judgment influenced only by the best interests of the client could result in client harm, give rise to civil liability, and undermine trust in the mutual fund industry. Accordingly, MFDA Rule 2.1.4 required Approved Persons to disclose conflicts of interest to the Member so that the Member could ensure that the conflict of interest was disclosed in writing to the client and addressed by the exercise of responsible business judgment influenced only by the best interests of the client.  In this case, the Respondent failed to fulfill any of the obligations triggered by the existence of a conflict or potential conflict of interest and by conducting herself in the manner in which she did without the knowledge or authorization of the client, she was clearly advancing her own interests to the potential detriment of a client.
16. As stated previously, the Respondent admits that she altered client contact information for four clients of the Member and 9 other bank clients on a back office system that was used the Member and the Bank without the knowledge or authorization of the clients. In particular, in approximately 13 instances the Respondent altered one or more characters in the individual’s email address. Such conduct was likely to interfere with the ability of the Member and the Bank to communicate with clients and could even have unintentionally resulted in communications directed to a particular client being sent to the email address of a different individual.
17. The Respondent engaged in this conduct in order to prevent customers of the bank and clients of the Member from receiving surveys soliciting feedback which could have included feedback that:
    1. negatively reflected upon her job performance;
    2. negatively affected the Customer Feedback Metric for the Respondent’s branch which in turn, could reduce the variable compensation that the Respondent and Approved Persons who worked at her branch would be eligible to receive; and
    3. detrimentally affected her eligibility for rewards and recognition programs.
18. The Respondent’s conduct had other potentially detrimental consequences for the clients and the Member including the following:
    1. interfered with the Dealer Member’s ability to verify the client’s identity when providing services to the client virtually;
    2. prevented clients from receiving notifications that their investment account statements, bank account statements, and/or confirmations of trades within their investment accounts were available;
    3. prevented clients from receiving promotional communications about products and services offered by the Dealer Member; and
    4. may have misdirected the Dealer Member’s correspondence to an email address of someone other than the client.
19. In these circumstances, the Respondent’s conduct gave rise to a conflict or potential conflict of interest because the Respondent advanced her own preference to prevent clients from communicating feedback in survey results. The Respondent did not disclose her conduct to the Member or to the clients in writing and did not ensure that the conflict or potential conflict of interest was addressed by the exercise of responsible business judgment influenced only by the best interests of the clients, contrary to the requirements of MFDA Rule 2.1.4.
20. MFDA Hearing Panels have held that, where an Approved Person advances their own interests by processing trades or changes to client accounts without the knowledge or authorization of the clients, the Approved Person’s conduct gives rise to a conflict of interest with the client which must be addressed in compliance with the requirements set out in MFDA Rule 2.1.4.

Rana (Re), [2019] Hearing Panel of the Central Regional Council, MFDA File No. 201871, Reasons for Decision dated March 19, 2019, SBA.

Leonard (Re), [2020] Hearing Panel of the Central Regional Council, MFDA File No. 201919, Reasons for Decision dated October 2, 2020, SBA.

21. In this case, the Respondent disregarded her obligations to appropriately address the conflicts or potential conflicts of interest that arose when she altered client contact information on the Client Contact Information Systems used by the Member and the Bank without the knowledge or authorization of the clients, contrary to MFDA Rule 2.1.4 (now Mutual Fund Dealer Rule 2.1.4(2)).

VII. Other CONSIDERATIONS

Nature of the Misconduct

22. The Respondent’s misconduct was serious. By altering the client email addresses of four clients of the Member and 9 other bank clients, on a back office system accessible by the Member, without the knowledge or authorization of the clients in order to advance self-serving objectives in spite of such conduct having potentially detrimental consequences for clients as described above, the Respondent engaged in deceitful conduct that contravened the standard of conduct and gave rise to conflicts or potential conflicts of interest that she failed to address in compliance with regulatory requirements.
23. In the Salina (Re) decision, the MFDA Hearing Panel discussed the seriousness of engaging conflicts of interest without meeting the requirements of MFDA Rule 2.1.4, in the context where an Approved Person had processed a purchase in a client account which subjected the client to unnecessary deferred sales charges and benefitted the Respondent. Referencing the decision in Haylock (Re), the Hearing Panel stated:

The failure to disclose and properly address conflicts or potential conflicts is serious misconduct. Such conflicts can result in harm to the client, expose the member to liability, and undermine trust in the mutual fund industry. As stated by the hearing panel in Haylock (Re) “it is always a serious matter when there is a conflict of interest between an Approved Person and her client”.

Salina (Re), [2022] Hearing Panel of the Pacific Regional Council, MFDA File No. 202081, Reasons for Decision dated August 30 2022 at para 32, SBA.

Haylock (Re), [2013] Hearing Panel of the Central Regional Council, MFDA File No. 201243, Reasons for Decision dated July 5, 2013 at para 7, SBA.

24. Furthermore, the Respondent’s misconduct was not accidental and was not based upon a lack of knowledge or training in the investment industry. The seriousness of the Respondent’s conduct is also aggravated by the fact that she was a branch manager who was entrusted with responsibility for ensuring that Approved Persons comply with their regulatory obligations.

The Respondent’s Recognition of the Seriousness of the Misconduct

25. By entering into the Settlement Agreement, the Respondent has saved the New SRO the time, resources and expenses that would have been necessary if this matter had proceeded by way of a contested disciplinary hearing.

The Respondent’s Past Conduct, Including Prior Sanctions

26. The Respondent has not previously been the subject of disciplinary proceedings commenced by the MFDA or the New SRO.

Client Harm

27. There is no evidence of financial losses to clients arising from the misconduct described in the Settlement Agreement.

Benefits to the Respondent

28. The precise impact of the Respondent’s misconduct on her compensation is not known. However, the Respondent acknowledges that she engaged in the misconduct in order to prevent clients from receiving a survey and conveying feedback which could have potentially negatively affected the Respondent’s variable compensation as well as her eligibility for rewards and recognition programs.

Sanctions Imposed by the Member

29. The Member has already imposed some disciplinary consequences on the Respondent after her misconduct came to light. The Member issued a letter of reprimand to the Respondent.  Secondly, the Member imposed a three day unpaid suspension on the Respondent and prohibited the Respondent from participating in the Member’s rewards and recognition programs in 2020 and the misconduct also negatively impacted the Respondent’s managerial assessment rating for the fiscal quarter and the remaining calendar year, which negatively affected the Respondent’s base salary for the following year.
30. The sanctions previously imposed by the Member will also promote specific deterrence in this case and were taken into account by Staff in determining the appropriate penalties to be imposed.

VIII. CONCLUSIONS

31. The sanctions are appropriate having regard to the recommendations of the MFDA Sanction Guidelines. They are within the reasonable range of appropriateness with regard to MFDA decisions submitted to us by Staff, made by MFDA Hearing Panels in similar circumstances. They are fair and reasonable and will serve as a specific and general deterrent.
32. The costs award is reasonable.