Settlement Agreement

I. INTRODUCTION

1. By Notice of Settlement Hearing, the Mutual Fund Dealers Association of Canada (the “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 Prairie Regional Council (the “Hearing Panel”) of the MFDA should accept the settlement agreement (the “Settlement Agreement”) entered into between Staff of the MFDA (“Staff”) and the Respondent, Sentinel Financial Management Corp. (the “Respondent”).

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 X) or any civil or other proceedings which may be brought by any other person or agency, whether or not this Settlement Agreement is approved by the MFDA.

IV. AGREED FACTS

Registration History

6. The Respondent is registered as a mutual fund dealer and exempt market dealer in the provinces of Saskatchewan, Manitoba, Alberta, and British Columbia.

7. The Respondent has been a Member of the MFDA since May 10, 2002.

Corporate Structure

8. The Respondent’s head office is located in Saskatoon, Saskatchewan (the “Head Office”). Presently, the Respondent has sub-branch offices located throughout the provinces of Saskatchewan and Alberta.

Prior Disciplinary History

9. On or about May 6, 2011, the Respondent entered into a Settlement Agreement with the MFDA due to deficiencies arising out of 2007 and 2009 MFDA Compliance Examinations.[1] The Respondent admitted that it:
   1. failed to conduct proper Tier 2 trade supervision on a daily basis to:
      1. ensure that each order accepted and each recommendation made for an account of a client is suitable for the client and in keeping with that client’s investment objectives;
      2. ensure that sales of exempt securities were made in accordance with applicable exemptions and other regulatory requirements;
      3. ensure that the handling of the Respondent’s business was in accordance with the By-laws, Rules and Policies of the MFDA and applicable securities legislation; and
   2. failed to maintain adequate records of trade supervision undertaken including inquiries made, responses received and resolutions achieved following supervisory inquiries;

   contrary to MFDA Rules 2.2.1, 2.5.1, 2.5.4 and MFDA Policy No. 2.

10. On or about July 14, 2011, a Hearing Panel of the MFDA Prairie Regional Council accepted the Settlement Agreement, which required the Respondent to pay a fine in the amount of $35,000, comply with all applicable MFDA By-laws, Rules and Policies, and applicable securities legislation, and pay costs in the amount of $2,500.

The 2012 Sales Compliance Examination

11. MFDA Staff conducted a sales compliance examination of the Respondent’s Head Office and 3 sub-branch locations from the period of March 1, 2009 to June 30, 2012 (the “2012 Examination”). The 2012 Examination identified compliance deficiencies in the operations of the Respondent, including:
    1. failing to ensure that each order accepted and each recommendation made for an account of a client was suitable for the client and in keeping with that client’s documented KYC information; and
    2. the Respondent did not conduct adequate follow-up on the responses required and/or received to address issues identified in their Approved Person reviews.

The 2016 Sales Compliance Examination

12. Commencing on March 14, 2016, MFDA Compliance Staff conducted a sales compliance examination (the “2016 Examination”) at the Head Office and at three sub-branch offices of the Respondent (two sub-branches located in Saskatoon, Saskatchewan and one sub-branch located in Okotoks, Alberta) in order to assess compliance by the Respondent with the By-laws, Rules and Policies of the MFDA during the period of July 1, 2012 to January 31, 2016.

13. The results of the 2016 Examination were summarized and delivered to the Respondent in a report dated July 19, 2016 (the “2016 Report”).

14. As described in greater detail below, the 2016 Report identified compliance deficiencies including, but not limited to:
    1. the failure to perform adequate supervision in the areas of trade and account supervision and supervisory queries;
    2. the failure to adequately supervise two Approved Persons under close supervision; and
    3. the failure to conduct sub-branch and Approved Person reviews, either adequately or at all.

Inadequate Supervision of Trades and Accounts

15. During the 2016 Examination, MFDA Compliance Staff identified deficiencies in the Tier 1 trade supervision conducted by the Respondent’s Head Office.

16. The Respondent failed to perform supervisory queries to ensure that each order accepted and each recommendation made for client accounts was suitable for clients and in keeping with those clients’ investment objectives and KYC information, contrary to MFDA Rule 2.2.1(c) and MFDA Policy No. 2.

17. In particular, MFDA Compliance Staff identified instances where client accounts held investments that were inconsistent with those clients’ documented KYC information, where the Respondent failed to conduct a supervisory inquiry.

18. The Respondent also failed to adequately perform supervisory inquiries, and failed to maintain adequate records of trade supervision conducted including inquiries made, responses received, and resolutions achieved following supervisory inquiries, contrary to MFDA Rule 2.2.1(c) and MFDA Policy No. 2.

19. In particular, MFDA Compliance Staff identified the following deficiencies in the Respondent’s Tier 1 supervisory query process:
    1. instances where the Respondent’s supervisory staff did not identify all of the issues that required a query;
    2. instances where an Approved Person did not provide a response to a supervisory query and there was no evidence of follow-up from the Respondent;
    3. instances where supervisory queries were performed, but the Approved Person’s response was inadequate and the clients’ account holdings remained inconsistent with the clients’ stated KYC information;
    4. instances where supervisory queries were not conducted in a timely manner;
    5. instances where there were no records documenting the date and details of the resolutions to a supervisory query; and
    6. one instance where the Approved Person’s response to address the query was not adequately executed and the issue remained outstanding with no evidence of follow-up from the Respondent.

Failure to Adequately Supervise Activity of Approved Persons Under Close Supervision

20. During the 2016 Examination, MFDA Compliance Staff identified that the Respondent failed to adequately supervise the activity of two Approved Persons in two Saskatoon, Saskatchewan sub-branches of the Respondent, contrary to MFDA Rules 2.5.1, 2.2.1(a), 2.2.1(c), and 2.2.2.

Approved Person TM

21. MFDA Compliance Staff identified that Approved Person TM, who was located at the Respondent’s sub-branch at 300 Edson Street, Saskatoon, Saskatchewan, was placed under close supervision commencing in June 2015. MFDA Compliance Staff identified the following deficiencies with respect to Approved Person TM’s practice that the Respondent’s supervisory staff failed to query:
    1. instances where client accounts held investments that were inconsistent with the clients’ documented KYC information, as previously described in paragraph 16, above;
    2. instances where New Account Application Forms and/or KYC update forms appeared to have KYC information collected to match the holdings in the client’s account; and
    3. instances where New Account Application Forms / KYC update forms contained alterations to a client’s KYC information with no evidence the alterations were authorized or initialed by the client.

Approved Person JW

22. MFDA Compliance Staff identified that Approved Person JW, who was located at the Respondent’s sub-branch at 716-2^nd Avenue North, Saskatoon, Saskatchewan, was placed under close supervision commencing in April 2013. MFDA Compliance Staff identified the following deficiencies with respect to Approved Person JW that the Respondent’s supervisory staff either failed to query, or where queries were made, failed to adequately follow up and the deficiencies remained outstanding:
    1. instances where client accounts held investments that were inconsistent with the clients’ documented KYC information, as previously described in paragraph 16, above;
    2. instances where KYC update forms appeared to have KYC information collected to match the holdings in the client’s account; and
    3. instances where New Account Application Forms / KYC update forms contained alterations to a client’s KYC information with no evidence the alterations were authorized or initialed by the client.

Inadequate Supervision and Inadequate Due Diligence With Respect to Exempt Market Products

23. During the 2016 Examination, MFDA Compliance Staff identified deficiencies in the Respondent’s due diligence with respect to exempt market products.

24. The Respondent failed to ensure that the purchase of exempt market products was suitable for clients and in keeping with those clients’ investment objectives and KYC information, contrary to MFDA Rule 2.2.1(c), and MFDA Policy No. 2.

25. In particular, MFDA Compliance Staff identified that:
    1. the Respondent failed to perform an independent and objective review of exempt market products;
    2. the Respondent’s policies and procedures inadequately addressed concentration thresholds for exempt market products by setting thresholds in relation to the client’s net worth, but failing to set thresholds in relation to the total value of the client’s financial assets; and
    3. the Respondent’s policies and procedures contained outdated and potentially misleading information with respect to several exempt market products, where various mortgage investment corporation exempt market products were classified under the Respondent’s policies and procedures manual as “income” products, despite the fact that the Respondent considered all exempt market products to only be suitable for clients with a high risk tolerance and an aggressive growth objective.

26. The Respondent also failed to perform supervisory inquiries with respect to exempt market products, contrary to MFDA Rule 2.2.1(c), and MFDA Policy No. 2. These failures included:
    1. failing to query client accounts which held exempt market products that were inconsistent with the clients’ documented KYC information;
    2. failing to query the reasonableness of purchasing exempt market products for clients over the age of 60; and
    3. failing to query inconsistencies in the KYC information of clients holding exempt market products, including clients whose recorded KYC information included an investment objective of “100% growth” or “100% aggressive”, a risk tolerance of “100% high”, but who were over the age of 60 and had a short term time horizon of 1 – 4 years.

Failure to Conduct Sub-Branch Reviews

27. During the 2016 Examination, MFDA Compliance Staff identified that the Respondent failed to conduct sub-branch reviews, either adequately or at all, contrary to MFDA Policy 2 and MFDA Policy 5.

28. In particular, the Respondent:
    1. failed to conduct reviews of 3 newly registered sub-branches;
    2. failed to conduct reviews of 11 existing sub-branches within the time period required under MFDA Policy No. 3; and
    3. failed to conduct timely reviews of 4 existing sub-branches.

Action Taken by the Financial and Consumer Affairs Authority of Saskatchewan

29. The Respondent’s conduct, as described above, is also the subject of an investigation by the Financial and Consumer Affairs Authority of Saskatchewan (the “FCAA”). The Respondent and the FCAA agreed to terms and conditions to be placed on the Respondent’s registration status in Saskatchewan, which are as follows:
    1. the Respondent may not act as a dealer by processing any new purchases in securities that are distributed under an exemption from the prospectus requirement;
    2. the Respondent may not, without the prior written consent of Staff of the MFDA, hire or retain any new dealing representatives or open any new branch or sub-branch locations;
    3. the Respondent shall agree to retain a Monitor acceptable to the MFDA to address and correct the outstanding compliance deficiencies identified by the MFDA and to provide training to the Chief Compliance Officer (“CCO”) and other compliance staff;
    4. the Monitor shall report directly to the MFDA and the Ultimate Designated Person (“UDP”) of the Respondent; and
    5. the Respondent shall hire and maintain a minimum of two full time compliance staff, which includes the CCO.

Additional Factors

30. Since October 2016, the Respondent has ceased selling exempt market products.

31. In November 2016, the Respondent notified its former UDP and CCO that he would be transitioned out of the role of UDP and CCO as a result of the issues that are the subject of this settlement agreement.

32. Since November 4, 2016, the Respondent has had a new UDP.

33. In November 2016, the Respondent hired an interim Branch Manager to assist during the transition to a new Branch Manager and training of a new CCO, incurring a cost of approximately $18,250 in doing so.

34. In November 2016, in accordance with the terms and conditions described above, the Respondent hired an external monitor to assist in improving the Respondent’s branch and Approved Person review program. The Respondent states that the external monitor has assisted in implementing various procedural changes, updates, and enhancements to the Respondent’s policies and procedures, and has overseen the Respondent’s ongoing Approved Person reviews. The Respondent states that it has incurred a cost of approximately $49,000 to date with respect to the external monitor, who has been retained until at least December 31, 2018.

35. On June 6, 2017, the Respondent hired a new CCO. The Respondent states that it has incurred a cost of approximately $1,300 in proficiency and training courses with respect to the new CCO.

36. The Respondent has represented that it has taken steps to improve its internal processes and procedures with respect to trade suitability, as well as its trade supervision process, in order to correct the deficiencies identified during the 2016 Examination. The Respondent has also represented that it will be conducting sub-branch and Approved Person reviews as necessary in order to comply with MFDA Policy 5. The MFDA will be conducting follow-up examinations of the Respondent to determine whether its compliance deficiencies have been corrected.

37. The Respondent states the following with respect to Approved Persons TM and JW:
    1. Effective June 4, 2018, Approved Person TM is no longer registered with the Respondent; and
    2. Effective June 30, 2018, Approved Person JW has retired and is no longer registered with the Respondent.

38. In addition, the Respondent has revised its complaint handling procedures. The Respondent has resolved all client complaints where the Respondent had refused a recommendation to compensate a client issued by the Ombudsman for Banking Services and Investments. The Respondent represents that it will continue to utilize its revised complaint handling procedures to ensure that all client complaints are handled in accordance with MFDA Policy No. 3.

39. The Respondent has cooperated with MFDA Staff’s investigation of the issues that form the subject matter of this Settlement Agreement.

V. CONTRAVENTIONS

40. The Respondent admits that, between July 2012 and July 2016, it failed to adequately conduct proper Tier 1 trade supervision to:
    1. ensure that each order accepted and each recommendation made for client accounts, including client accounts holding exempt market products, were suitable for the clients and in keeping with those clients’ investment objectives and “Know Your Client” information; and
    2. perform supervisory inquiries, either adequately or at all, and failed to maintain adequate records of trade supervision conducted including inquiries made, responses received, and resolutions achieved following supervisory inquiries, including with respect to exempt market products;

    contrary to MFDA Rule 2.2.1(c), and MFDA Policy No. 2.

41. The Respondent admits that commencing in April 2013, it failed to adequately supervise the activity of an Approved Person, JW, who was under close supervision, including activity with respect to deficiencies in trade suitability and the collection of “Know Your Client” information, contrary to MFDA Rules 2.5.1, 2.2.1(a), 2.2.1(c), and 2.2.2.

42. The Respondent admits that commencing in June 2015, it failed to adequately supervise the activity of an Approved Person, TM, who was under close supervision, including activity with respect to deficiencies in trade suitability and the collection of “Know Your Client” information, contrary to MFDA Rules 2.5.1, 2.2.1(a), 2.2.1(c), and 2.2.2.

43. The Respondent admits that commencing in July 2012, it failed to complete reviews of sub-branches and their Approved Persons, either adequately or at all, contrary to MFDA Policy No. 2 and MFDA Policy No. 5.

VI. TERMS OF SETTLEMENT

44. The Respondent agrees to the following terms of settlement:
    1. The Respondent shall pay a fine in the amount of $75,000, pursuant to s. 24.1.2.(b) of MFDA By-law No. 1;
    2. The Respondent shall pay costs in the amount of $10,000, pursuant to s. 24.2 of MFDA By-law No. 1;
    3. The Respondent shall in the future comply with all MFDA By-laws, Rules and Policies, and all applicable securities legislation and regulations made thereunder, including MFDA Rules 2.2.1(a), 2.2.1(c), 2.2.2, 2.5.1, and MFDA Policies No. 2 and 5; and
    4. A senior officer of the Respondent will attend in person, on the date set for the Settlement Hearing.

VII. STAFF COMMITMENT

45. 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 contraventions described in Part V of this Settlement Agreement, subject to the provisions of Part X below. Nothing in this Settlement Agreement precludes Staff from investigating or initiating proceedings in respect of any contraventions that are not set out in Part V of this Settlement Agreement or in respect of conduct that occurred outside the specified date ranges of the contraventions set out in Part 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

46. Acceptance of this Settlement Agreement shall be sought at a hearing of the Prairie Regional Council of the MFDA on a date agreed to by counsel for Staff and the Respondent. MFDA Settlement Hearings are typically held in the absence of the public pursuant to section 20.5 of MFDA By-law No. 1 and Rule 15.2(2) of the MFDA Rules of Procedure. If the Hearing Panel accepts the Settlement Agreement, then the proceeding will become open to the public and a copy of the decision of the Hearing Panel and the Settlement Agreement will be made available at mfda.ca.

47. 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.

48. 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.

49. 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

50. If this Settlement Agreement is accepted by the Hearing Panel and, at any subsequent time, the Respondent fails to comply with any of the terms of the Settlement Agreement, Staff reserves the right to bring proceedings under section 24.3 of the By-laws of the MFDA against the Respondent and 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

51. 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.

52. 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

53. 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.

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

XII. EXECUTION OF SETTLEMENT AGREEMENT

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

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

[1] The 2007 MFDA Compliance Examination covered the Respondent’s sales practices from October 1, 2004 to January 31, 2007.  The 2009 MFDA Compliance Examination covered the Respondent’s sales practices from February 1, 2007 to February 28, 2009.