Settlement Agreement

I. INTRODUCTION

1. By Notice of Settlement Hearing, the Mutual Fund Dealers Association of Canada (“MFDA”) will announce that it proposes to hold a hearing to consider whether, pursuant to section 24.4 of By-law No. 1, a hearing panel of the Central Regional Council (“Hearing Panel”) of the MFDA should accept the settlement agreement (“Settlement Agreement”) entered into between Staff of the MFDA (“Staff”) and the Respondent, Investia Financial Services Inc.

II. JOINT SETTLEMENT RECOMMENDATION

2. Staff conducted an investigation of the Respondent’s activities. The investigation disclosed that the Respondent had engaged in activity for which the Respondent could be penalized on the exercise of the discretion of the Hearing Panel pursuant to s. 24.1 of By-law No. 1.

3. Staff and the Respondent recommend settlement of the matters disclosed by the investigation in accordance with the terms and conditions set out below. The Respondent agrees to the settlement on the basis of the facts set out in Part IV herein and consents to the making of an Order in the form attached as Schedule “A”.

4. Staff and the Respondent agree that the terms of this Settlement Agreement, including the attached Schedule “A”, will be released to the public only if and when the Settlement Agreement is accepted by the Hearing Panel.

III. ACKNOWLEDGEMENT 

5. Staff and the Respondent agree with the facts set out in Part IV herein for the purposes of this Settlement Agreement only and further agree that this agreement of facts is without prejudice to the Respondent or Staff in any other proceeding of any kind including, but without limiting the generality of the foregoing, any proceedings brought by the MFDA (subject to Part IX) or any civil or other proceedings which may be brought by any other person or agency, whether or not this Settlement Agreement is accepted by the Hearing Panel.

IV. AGREED FACTS

Registration History

6. The Respondent is registered as a mutual fund dealer and an exempt market dealer in all jurisdictions in Canada (except Nunavut). The Respondent has been a Member of the MFDA since June 7, 2002.

Overview

7. On December 15, 2011, the Respondent entered into a Settlement Agreement with MFDA Staff pursuant to which the Member admitted that, among other things, between August 2003 and July 2010, it failed to adequately supervise the outside business activities of certain Approved Persons, contrary to MFDA Rules 1.2.1(d) (now MFDA Rule 1.3), 2.4.2, 2.5, and 2.9.

8. This proceeding relates to the Respondent’s failure to effectively discharge its supervisory obligations under the Rules, Policies and By-law of the MFDA, including: (a) its duty to adequately review outside business activities conducted by its Approved Persons prior to approving such activities; and (b) its duty to conduct reasonable supervisory investigations regarding the activities of its Approved Persons.

The Respondent Failed to Adequately Review and Supervise Outside Business Activities of Approved Persons

9. The Respondent failed to adequately review and supervise the outside business activities (“OBAs”) of four of its Approved Persons, namely Bemelekot Tewahade (“Tewahade”), Russell Chang (“Chang”), ST, and Charles Albert Martin (“Martin”). Tewahade, Chang and Martin have been the subject of MFDA disciplinary proceedings.

(1) Bemelekot Tewahade

10. From May 6, 2005 to June 18, 2012, Tewahade was registered in Ontario as a mutual fund salesperson (now known as a dealing representative) with the Respondent.

11. In September 2006, Tewahade became a registered representative of a Financial Industry Regulatory Authority (“FINRA”) Member firm, Sunset Financial Services, Inc. (“Sunset Financial”), carrying on business from an office in Englewood, Colorado. Sunset Financial is a full service brokerage firm headquartered in Kansas City, Missouri and an affiliate of the Kansas City Life Insurance Company. Sunset Financial provides investment, advisory and brokerage services to clients in the United States. Tewahade did not disclose his involvement with Sunset Financial to the Respondent.

12. In August 2011, the Respondent learned that Tewahade was registered with Sunset Financial when Sunset Financial contacted the Respondent as a result of its own investigation into Tewahade’s undisclosed business activities. Sunset Financial informed the Respondent that, among other things, Tewahade had been a registered with Sunset Financial in multiple jurisdictions in the United States since September 2006 and that Tewahade was the registered representative responsible for servicing over 850 mutual fund, variable annuity and variable universal life client accounts at Sunset Financial.

13. On August 8, 2011, after learning that Tewahade was a registered representative of Sunset Financial, the Respondent conducted an emergency audit of Tewahade’s sub-branch in Mississauga, Ontario. Tewahade was not present in person for this on-site examination but another individual working at the location advised the Respondent that Tewahade resided in the United States and only visited the sub-branch office approximately once per month to service his local clients.

14. During the audit, the Respondent contacted Tewahade by telephone. Tewahade confirmed that he had maintained his permanent residence in the United States since 1993 and that he purportedly spent approximately 15 to 20 hours a week servicing his Canadian clients.  Tewahade stated that he set up a 1-800 number with a forward feature to his phone in the United States so Canadian mutual fund and insurance clients could contact him should they require assistance.

15. On August 10, 2011, Sunset Financial advised the Respondent that it was terminating Tewahade immediately for failing to disclose his association with the Respondent.

16. In September 2011, Tewahade became a registered representative of FINRA Member firm Ridgeway & Conger Inc., carrying on business in Englewood, Colorado. Tewahade did not disclose his registration with Ridgeway & Conger Inc. to the Respondent.

17. On May 16, 2012 (approximately 9 months after it became of Tewahade’s undisclosed outside business activities), the Respondent terminated Tewahade effective June 18, 2012.

(2) Russell Chang

18. From June 30, 2008 to August 1, 2012, Chang was registered in British Columbia as a mutual fund salesperson with the Respondent. Chang was also registered in Alberta as a mutual fund salesperson from February 16, 2009 to August 1, 2012.

19. In or about May 2012, Chang accepted an offer of employment, effective June 1, 2012, from Providence Preferred Financial Corp. (“Providence Preferred”). Providence Preferred is a company incorporated in British Columbia which, according to its website, is part of “a group of Diversified Holdings, strategically placed across a select group of industry verticals, with an emphasis on financial services.”

20. Chang’s responsibilities with Providence Preferred included establishing an office and infrastructure for the company in Vancouver, hiring local staff, furnishing the office and hiring a copywriter to work on marketing materials.

21. On May 31, 2012 (the day before Chang’s employment with Providence Preferred commenced), the Respondent contacted his Branch Manager at Investia to inquire about the process for obtaining the Respondent’s approval to engage in an outside business activity. Chang did not disclose his involvement with Providence Preferred to the Branch Manager. The Branch Manager instructed Chang to complete and submit an Investia Outside Business Activity/Volunteer Activity Approval Form (“OBA Approval Form”).

22. On June 14, 2012, Chang submitted a completed OBA Approval Form to the Respondent by email, wherein he disclosed the following details of his involvement with Providence: 

• Name of Employer/Business: Providence Preferred Financial Corp.
• Start Date: June 1, 2012
• Nature/Type of Business: Trade Finance
• Your Title/Position: Canadian Director
• of Hours per Week: 35
• Is this Activity Held during Normal Business Hours: Yes
• Annual Salary: $72,000.00
• Categories: Other – International Trade Finance
• Details of Activities Conducted: Helping Providence Preferred raise capital for company’s own use to expand their business in Emerging Markets. Raising capital in Hong Kong, Singapore and Suzhou, China; and
• Is there any potential conflict of interest between your duties as Investia Mutual Fund Representative and your OBA of to your clients? – No

[Bold added.]

23. By the time Chang submitted the OBA Approval Form to Investia, he had already sold $550,000 of an investment product offered by Providence Preferred called Series I-A Notes (the “Notes”) to client AC, client JL, and one other individual (the “Investors”). The Notes were not an investment product known to or approved by the Respondent for sale by its Approved Persons.

24. Chang had facilitated client AC’s purchase of the Notes by processing mutual fund redemptions on June 6, 2012 totaling $51,597.26 from the client’s accounts held with the Respondent.

26. After receiving Chang’s OBA Approval Form which disclosed that he was working as a fulltime salaried employee of Providence helping it “raise capital”, the Respondent did not take adequate steps to review Chang’s involvement with Providence until July 23, 2012, when MFDA Staff informed the Respondent of a referral it had received from Staff of the British Columbia Securities Commission relating to Chang’s activities with Providence.
27. On July 24, 2012 the Respondent scheduled an audit of Chang’s client files. Following a review of all client files in August 2012 the Respondent determined that there was no information contained in the client files in relation to Chang’s activities with Providence. On the same day, Chang  resigned from the Respondent (the resignation was effective August 1, 2012).

(3) Charles Albert Martin

27. From November 4, 2003 to September 20, 2013, Martin was registered in Ontario and British Columbia as a mutual fund salesperson with the Respondent.

28. At all material times, Martin conducted business from the Respondent’s branch located in Kitchener, Ontario (the “MWM Branch”) operating under the trade name, Martin Wealth Management Ltd. (“MWM”). The Respondent paid all commissions and fees to Martin through MWM.

29. During a visit to the MWM Branch in February 2004, the Respondent became aware that Martin owned and operated another corporation known as MWM Financial Counsel Inc. (“MWM Financial Counsel”).

30. In October 2004, Martin provided the Respondent with letters of engagement he supplied to clients in relation to MWM Financial Counsel which indicated, among other things, that Martin was charging annual fees to clients through MWM Financial Counsel for a variety of services (the “Letters of Engagement”). Martin calculated the service fees based on a percentage of the assets held in the clients’ mutual fund accounts.

31. The Respondent permitted Martin to provide the services described in the Letters of Engagement without performing the necessary due diligence required to ensure that such activities did not involve Member business or were otherwise consistent with the Respondent’s policies and procedures and the Rules, Policies and By-law of the MFDA, including MFDA Rule 2.4.1. The Letters of Engagement contained language that raised red flags as to the scope of Martin’s activities.

32. In 2009, the Respondent received a client complaint alleging that Martin had misrepresented the nature of his compensation to the client and that he had charged the client excessive fees for services provided to the client by Martin/MWM Financial Counsel. Aside from obtaining a statement from Martin as to the merits of the complaint, the Respondent did not make any further inquiries into Martin’s activities in relation to MWM and MWM Financial Counsel.

33. Between fall 2012 and May 2014, the Respondent received eight (8) additional client complaints alleging, among other things, that Martin misrepresented the nature of his compensation to them and had charged the clients excessive fees for services provided to them by Martin through MWM or MWM Financial Counsel.

34. Following receipt of these client complaints, the Respondent took steps to determine the nature and extent of Martin’s activities. As a result of these findings, on February 6, 2013, and again on April 18, 2013, the Respondent issued cease and desist letters to Martin relating to his fee for service activities.

35. On September 20, 2013, Martin resigned from the Respondent.

(4) ST

36. From November 11, 2006 to December 12, 2014, ST was registered in Ontario as a mutual fund salesperson with the Respondent.

37. On December 22, 2006, November 26, 2008, May 15, 2009, May 12, 2010 and October 18, 2010, ST completed certain Member Annual Review of Professional Acitivities and OBA questionnaires disclosing, among other things, that he provided financial planning and consulting services for clients (“Financial Planning Services”) for which he charged fees calculated as a percentage of the clients’ total assets or an annual minimum fee of $125.

38. Until October 2010, the Respondent relied solely on the declarations made by ST on his annual questionnaires and permitted ST to conduct his Financial Planning Services without specifically approving such activities and without performing the necessary due diligence required to ensure that such activities did not involve Member business or were otherwise consistent with the Respondent’s policies and procedures and the Rules, Policies and By-law of the MFDA, including MFDA Rule 2.4.1. The letter of engagement provided by ST to clients contained language that raised red flags as to the scope of ST’s activities.

39. After receiving ST’s October 18, 2010 completed annual OBA questionnaire, the Respondent questioned ST with respect to the Financial Planning Services he was providing to clients. The Respondent informed ST that his request for approval of the Financial Planning Services was “under review” and requested that ST provide the Respondent with additional information regarding the Financial Planning Services to assist it in its review. Between October 20, 2010 and March 2011, ST did not provide the Respondent with the information it had requested of him.  The Respondent did not, at any time, instruct ST to cease providing Financial Planning Services until its review was complete and the activities had been approved.  In his January 2011 audit response, ST noted that the activity was under review and would “cease very soon”.

40. In January 2014, the Respondent conducted an audit of ST’s branch office and found that he continued to provide Financial Planning Services to clients. On March 4, 2014, ST sent a written request to the Respondent for approval of his Financial Planning Services done through “Lifestyle Planning”, following which the Respondent requested and received further information from ST relevant to making its determination as to whether to approve the OBA.

41. In June 2014, the Respondent informed ST, both verbally and in writing, that he was not permitted to provide Financial Planning Services under “Lifestyle Planning” to clients and any such activity should cease. Subsequently, the Respondent contacted all of the clients whose accounts were serviced by ST to inform them that the Financial Planning Services, including the fee for service business engaged in by ST was not approved or supervised by the Respondent. The Respondent also conducted a review or an audit of those client files to ensure that all trading activity in those accounts were executed according to client instructions.

42. Prior to June 2014, the Respondent failed to adequately supervise and establish and maintain adequate internal controls pertaining to ST’s Financial Planning Services.

The Respondent Failed to Adequately Supervise the Activities of an Approved Person Who Had Altered Client Know-Your-Client Information

43. Since September 30, 2008 DM has been registered in Ontario, British Columbia, Prince Edward Island and Quebec as a mutual fund salesperson with the Respondent.

44. On March 9, 2011, the Respondent conducted an audit of DM and identified one form, for a client whose account was serviced by DM, in which alterations appeared to have been made by DM to the client’s Know-Your-Client (“KYC”) information without the client’s authorization, contrary to MFDA Rules 2.1.1, 2.5.1 and 1.1.2.

45. On January 14 and 15, 2014, the Respondent conducted a further audit of DM’s activities and identified one form, for another client whose account was serviced by DM, in which alterations appeared to have been made by DM to the client’s KYC information without the client’s authorization, contrary to MFDA Rules 2.1.1, 2.5.1 and 1.1.2.

46. In response to both the March 2011 and January 2014 findings, the Respondent requested that DM contact the affected clients and obtain updated KYC information. The Respondent, however, failed to:
    1. contact and inform the affected clients that unauthorized alterations had been made to their KYC information;
    2. conduct a full review of DM’s client files for further possible instances of unauthorized activity in client accounts;
    3. immediately ensure adequate controls were in place to ensure that unauthorized activity in client accounts was no longer carried out;
    4. take disciplinary measures against DM; and
    5. report possible regulatory contraventions by DM to the MFDA, as required by MFDA Rule 1.2.2 (now MFDA Rule 1.4) and MFDA Policy No. 6.

47. In 2016, after MFDA Staff became aware of the issues identified by the Respondent in DM’s client files in March 2011 and January 2014, the Respondent conducted a review of all of DM’s client files and identified the following:
    1. DM maintained and used at least 30 pre-signed and/or photocopied forms which were also falsified;
    2. DM falsified and used at least 3 client forms; and
    3. DM maintained and used at least 28 pre-signed and/or photocopied forms.

48. In response to these findings, the Respondent sent letters to all of its clients whose accounts were serviced by DM in order to ensure that their information was accurate and that transactions in their accounts were correct. The Respondent further placed DM under close supervision for 3 months commencing May 18, 2016 and issued him a warning letter dated September 8, 2016.

49. The supervision controls implemented by the Respondent in 2016 with respect to DM’s activities ought to have been executed as early as March 2011.

V. CONTRAVENTIONS

50. The Respondent admits that:
    1. between August 2011 and June 2012, it failed to adequately supervise, and establish and maintain adequate internal controls pertaining to, the outside business activities of Tewahade, by failing to conduct a supervisory review of Tewahade after the Member had become aware that he was engaged in undisclosed outside business activities, contrary to MFDA Rules 2.1(c) (now MFDA Rule 1.3), 2.5.1 and 2.9;
    2. between June 14, 2012 and July 23, 2012, it failed to adequately supervise, and establish and maintain adequate internal controls pertaining to, the outside business activities of Chang, contrary to MFDA Rules 1.1.1, 1.2.1(c) (now MFDA Rule 1.3), 2.5.1 and 2.9;
    3. between November 2003 and September 2013, it failed to adequately supervise, and establish and maintain adequate internal controls pertaining to, the outside business activities of Martin, by failing to conduct any follow up or supervisory review of Martin’s outside business activities already disclosed to the Respondent by Martin, contrary to MFDA Rules 1.2.1(c) (now MFDA Rule 1.3), 2.5.1 and 2.9;
    4. between 2006 and June 2014, it failed to adequately supervise, and establish and maintain adequate internal controls pertaining to, the outside business activities of ST, by failing to conduct any follow up or supervisory review of ST’s outside business activities already disclosed to the Respondent by ST, contrary to MFDA Rules 1.2.1(c) (now MFDA Rule 1.3), 2.5.1 and 2.9;
    5. between March 2011 and October 2016, it failed to adequately supervise, and establish and maintain adequate internal controls pertaining to, the activities of DM after becoming aware that DM had altered KYC information in at least 2 client accounts without the affected clients’ knowledge or authorization, contrary to MFDA Rules 2.2.1, 2.2.4, 2.5.1 and 2.9; and
    6. between March 2011 and October 2016, it failed to inform and report to at least 2 clients and the MFDA that DM had altered KYC information in the clients’ accounts without the clients’ knowledge or authorization, contrary MFDA Rule 1.2.2 (now MFDA Rule 1.4) and MFDA Policy No. 6.

VI. TERMS OF SETTLEMENT 

51. The Respondent agrees to the following terms of settlement:
    1. the Respondent shall in the future comply with MFDA Rules 1.3, 1.4, 2.2.1, 2.2.4, 2.5.1 and 2.9 and MFDA Policy No. 6;
    2. a senior officer of the Respondent will attend in person, on the date set for the Settlement Hearing;
    3. the Respondent shall pay a fine in the amount of $200,000, pursuant to section 24.1.2(b) of By-law No. 1, upon the acceptance of this Settlement Agreement; and
    4. the Respondent shall pay the costs of this proceeding and investigation in the amount of $20,000, pursuant to section 24.2 of By-law No. 1, upon the acceptance of this Settlement Agreement. 

VII. STAFF COMMITMENT

52. If this Settlement Agreement is accepted by the Hearing Panel, Staff will not initiate any proceeding under the By-laws of the MFDA against the Respondent or any of its officers or directors in respect of the facts set out in Part IV and the contraventions described in Part V of this Settlement Agreement, subject to the provisions of Part IX below. Nothing in this Settlement Agreement precludes Staff from investigating or initiating proceedings in respect of any facts and contraventions that are not set out in Parts IV and V of this Settlement Agreement or in respect of conduct that occurred outside the specified date ranges of the facts and contraventions set out in Parts IV and V, whether known or unknown at the time of settlement.   Furthermore, nothing in this Settlement Agreement shall relieve the Respondent from fulfilling any continuing regulatory obligations.

VIII. PROCEDURE FOR APPROVAL OF SETTLEMENT

53. Acceptance of this Settlement Agreement shall be sought at a hearing of the Central Regional Council of the MFDA on a date agreed to by counsel for Staff and the Respondent.

54. Staff and the Respondent may refer to any part, or all, of the Settlement Agreement at the settlement hearing. Staff and the Respondent also agree that if this Settlement Agreement is accepted by the Hearing Panel, it will constitute the entirety of the evidence to be submitted respecting the Respondent in this matter, and the Respondent agrees to waive its rights to a full hearing, a review hearing before the Board of Directors of the MFDA or any securities commission with jurisdiction in the matter under its enabling legislation, or a judicial review or appeal of the matter before any court of competent jurisdiction.

55. Staff and the Respondent agree that if this Settlement Agreement is accepted by the Hearing Panel, then the Respondent shall be deemed to have been penalized by the Hearing Panel pursuant to s. 24.1.2 of By-law No. 1 for the purpose of giving notice to the public thereof in accordance with s. 24.5 of By-law No. 1.

56. Staff and the Respondent agree that if this Settlement Agreement is accepted by the Hearing Panel, neither Staff nor the Respondent will make any public statement inconsistent with this Settlement Agreement. Nothing in this section is intended to restrict the Respondent from making full answer and defence to any civil or other proceedings against it.

IX. FAILURE TO HONOUR SETTLEMENT AGREEMENT

57. If this Settlement Agreement is accepted by the Hearing Panel and, at any subsequent time, the Respondent fails to honour any of the Terms of Settlement set out herein, Staff reserves the right to bring proceedings under section 24.3 of the By-laws of the MFDA against the Respondent or any of its officers or directors based on, but not limited to, the facts set out in Part IV of the Settlement Agreement, as well as the breach of the Settlement Agreement. If such additional enforcement action is taken, the Respondent agrees that the proceeding(s) may be heard and determined by a hearing panel comprised of all or some of the same members of the hearing panel that accepted the Settlement Agreement, if available.

X. NON-ACCEPTANCE OF SETTLEMENT AGREEMENT

58. If, for any reason whatsoever, this Settlement Agreement is not accepted by the Hearing Panel or an Order in the form attached as Schedule “A” is not made by the Hearing Panel, each of Staff and the Respondent will be entitled to any available proceedings, remedies and challenges, including proceeding to a disciplinary hearing pursuant to sections 20 and 24 of By-law No. 1, unaffected by this Settlement Agreement or the settlement negotiations.

59. Whether or not this Settlement Agreement is accepted by the Hearing Panel, the Respondent agrees that it will not, in any proceeding, refer to or rely upon this Settlement Agreement or the negotiation or process of approval of this Settlement Agreement as the basis for any allegation against the MFDA of lack of jurisdiction, bias, appearance of bias, unfairness, or any other remedy or challenge that may otherwise be available.

XI. DISCLOSURE OF AGREEMENT

60. The terms of this Settlement Agreement will be treated as confidential by the parties hereto until accepted by the Hearing Panel, and forever if, for any reason whatsoever, this Settlement Agreement is not accepted by the Hearing Panel, except with the written consent of both the Respondent and Staff or as may be required by law.

61. Any obligations of confidentiality shall terminate upon acceptance of this Settlement Agreement by the Hearing Panel. 

XII. EXECUTION OF SETTLEMENT AGREEMENT

62. This Settlement Agreement may be signed in one or more counterparts which together shall constitute a binding agreement.

63. A facsimile copy of any signature shall be effective as an original signature.