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 Central 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, Dorothy Jean Gabrysz.

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. Between May 2, 2008 and May 6, 2019, the Respondent was registered in Ontario as a mutual fund salesperson (now known as a dealing representative)^[1] with WFG Securities Inc. (“WFG”), a Member of the MFDA.
7. On May 6, 2019, the Respondent retired and voluntarily terminated her registration with WFG. She has not worked in the securities industry since that time.
8. At all material times, the Respondent conducted business in Richmond Hill, Ontario.

False, Incorrect or Misleading NAAFs and Loan Application

9. At all material times, client SR was a client of WFG and the Respondent was the Approved Person responsible for servicing her accounts.
10. The Respondent recommended and facilitated the implementation of a leveraged investment strategy, whereby client SR would borrow $100,000 to purchase mutual funds.
11. The Respondent prepared a WFG New Client Account Form (“NCAF”) dated November 17, 2009 and a B2B Trust loan application (“Loan Application”) dated November 17, 2009 that client SR signed.
12. The Respondent submitted the NCAF and Loan Application to open a new account at WFG and obtain investment loans from B2B Trust for client SR.
13. The NCAF stated that client SR held assets of $650,000, had liabilities of $132,000, and had a net worth of $518,000.
14. The Loan Application contained the following breakdown of client SR’s assets and liabilities:

15. Both the Loan Application and NCAF falsely stated that client SR’s annual income was $60,000.
16. At the time that the Respondent submitted the NCAF and Loan Application, client SR held assets of approximately $307,500 (not $650,000), had liabilities of approximately $153,000 (not $132,000) and earned an annual income of approximately $50,000 (not $60,000).
17. The Respondent knew that the NCAF and Loan Application contained false and misleading information. Among other things, the NCAF and Loan Application:
    1. inflated client SR’s assets by $342,500 (more than 110%);
    2. failed to disclose the full amount of client SR’s liabilities (reduced the value of client SR’s liabilities by 21,000 or 13.7%); and
    3. inflated client SR’s income by $10,000 per year (20%).
18. Client SR has advised that she had no knowledge or involvement in the Respondent’s conduct to provide false and misleading information to WFG and B2B Trust.
19. On or about November 17, 2009, B2B Trust approved the loan.
20. The proceeds of the loan from B2B Trust were used to purchase mutual funds.
21. Approximately one week after the Respondent submitted the Loan Application to B2B Trust, client SR received a copy of the Loan Application from the Respondent, which was identical to the copy sent to B2B Trust with the exception of the assets section. As summarized below, the copy of the Loan Application provided to client SR stated that the client held assets totaling $302,000, while the copy of the Loan Application submitted to B2B Trust stated that the client held assets of $652,000:

22. The Respondent did not inform client SR, and client SR has advised that she was not aware, that the copy of the Loan Application provided to B2B Trust was different from the copy provided to client SR.
23. WFG and B2B Trust were not aware that the NCAF and Loan Application contained false and misleading information with respect to client SR’s assets, liabilities or income.

Failure to Comply with the Member’s Suitability Requirements

24. At all material times, WFG’s policies and procedures required its Approved Persons, including the Respondent, to assess and determine whether a leveraged investment recommendation was suitable for a client having regard to certain criteria. In particular, WFG’s policies and procedures stated:
    1. the total borrowed funds must not exceed 30% of the client’s verifiable net worth and 50% of the client’s verifiable liquid net worth; and
    2. the client’s total debt payments must not exceed 35% of the client’s Total Debt Service Ratio (“TDSR”).
25. As stated above, the Respondent submitted the NCAF and Loan Application, which stated that client SR held assets of approximately $650,000, had liabilities of approximately $132,000 and earned an annual income of approximately $60,000. Based upon this false and misleading information, client SR’s loan to net worth ratio appeared to be 19% and her TDSR appeared to be 33%, which satisfied WFG’s leverage suitability requirements in its policies and procedures.
26. WFG approved the loan based upon the false and misleading information that the Respondent prepared and submitted to WFG in the NCAF and Loan Application.
27. However, at the time that the Respondent submitted the NCAF and Loan Application, client SR actually held assets of approximately $307,500, had liabilities of approximately $153,000 and earned an annual income of approximately $50,000. Therefore, client SR’s actual loan to net worth ratio was 64% and her debt service ratio was 40%, which would not have satisfied WFG’s leverage suitability requirements.

Failing to Report a Client Complaint

28. MFDA Policy No. 6, subsection 4.1(a) requires an Approved Person to report to his or her current Member, within 2 business days, whenever the Approved Person is the subject of a client complaint in writing.
29. At all material times, WFG’s policies and procedures required its Approved Persons to report a complaint to the Member within 2 days.
30. On December 7, 2015, client SR emailed the Respondent inquiring about the leveraged investment. Among other things, client SR questioned the Respondent about the decrease in the value of the investments, the benefits of the investment and the redemption fees that client SR would incur if she decided to unwind the leveraged investment strategy.
31. On December 8, 2015, the Respondent responded by email explaining that the account value was low as a result of the markets being down and that, “there are no redemption fees as you are not redeeming [the investments]”.
32. On December 10, 2015, client SR emailed the Respondent stating that the Respondent did not make her aware of the deferred sales charge fees that applied to her investments and the leveraged strategy had “set [her] back financially”.
33. On the same date, the Respondent responded by email stating:
    1. …first let me explain fees….currently you have what is called DSC (deferred sales charge) It runs for a 7 year depleting % amount. This was done so their [sic] were no cost to you when we purchased the funds. So yes if you were to sell now there would be a cost, after 7 years from time of purchase…no redemption fee.
    2. One of the reasons for your fund being down is the distribution you receive monthly. The fund was positioned to pay distribution but when markets are not doing well, it does start to deplete your values. As I said this changes constantly…This type of strategy was for the long term.
34. On the same date, client SR sent an email to the Respondent stating, “I want to stop using the investment to pay down the loan, instead I want to pay it from my bank account”. Client SR also asked the Respondent to calculate the redemption fees and taxes that would be payable if she decided to unwind the leveraged investment strategy and transferred the proceeds from the investments out of her accounts at WFG.
35. On the same date, the Respondent responded to client SR:
    1. You are upset, first of all why would you take advice from your Accountant, it’s like asking a mechanic how to cut your hair? The investment is working just fine, called today and your balance of your loan is $80,336.57 with your mutual funds at $77,807.37. As I mentioned the markets are down, it will go up. …
    2. This investment has not cost you anything and you are upset????
36. On December 11, 2015, client SR emailed the Respondent again requesting the amount of the redemption fee and the taxes payable if she transferred the investments.
37. On the same date, the Respondent responded by email stating:
    1. Ok …you are not hearing me so the only information you want is the DSC (deferred sales charge) which is $1,978.50 these funds will fully mature on November 23, 2016 when there would be no charge to move to another company…
    2. At this point there seems to be no trust and I would recommend you looking for another advisor you can trust.
38. Client SR’s emails to the Respondent constituted a complaint subject to the requirements contained in MFDA Policy No. 6, subsection 4.1(a) and WFG’s policies and procedures.
39. The Respondent did not report to WFG that she had received a complaint from client SR. The Respondent states that she did not believe this amounted to a formal complaint, but now realizes that her understanding was incorrect and that this amounted to a complaint, which ought to have been reported.

Financial Impact of the Investment Strategy

40. As of the date of this agreement, there is no evidence that client SR has suffered a financial loss by participating in the leveraged investment strategy recommended and facilitated by the Respondent.

V. CONTRAVENTIONS

41. The Respondent admits to the following contraventions of the Rules, Policies and By-law of the MFDA:
    1. In November 2009, the Respondent prepared and submitted client account forms and a loan application for client SR which the Respondent knew contained false and misleading information, thereby failing to observe high standards of ethics and conduct in the transaction of business and engaging in conduct unbecoming an Approved Person, contrary to MFDA Rule 2.1.1.
    2. In November 2009, the Respondent failed to perform the necessary due diligence to learn the essential facts relative to client SR to ensure that the leveraged investment recommendations she made to client SR satisfied the Member’s leverage suitability requirements in its policies and procedures, contrary to MFDA Rules 2.2.1, 1.1.2, 2.5.1, and 2.1.1.
    3. After receiving a complaint from client SR in December 2015, the Respondent failed to report the complaint to the Member, contrary to the Member’s policies and procedures, MFDA Policy No. 3 subsection 9-2, MFDA Policy No. 6, subsection 4.1(a), and MFDA Rules 1.1.2, 1.4(b), 2.5.1, and 2.1.1.

VI. TERMS OF SETTLEMENT

42. The Respondent agrees to the following terms of settlement:
    1. The Respondent shall be prohibited from conducting securities related business in any capacity while in the employ of or associated with any MFDA Member for a period of 2 years from the date that this Settlement Agreement is accepted by a Hearing Panel, pursuant to section 24.1.1(e) of the MFDA By-law No.1;
    2. The Respondent shall pay a fine in the amount of $20,000, pursuant to s. 24.1.1(b) of MFDA By-law No. 1, which shall be payable on the date this Settlement Agreement is accepted by a Hearing Panel;
    3. The Respondent shall pay costs to the MFDA in the amount of $5,000, pursuant to s.24.2 of MFDA By-law No. 1 on the date that this Settlement Agreement is accepted by a Hearing Panel;
    4. If the Respondent becomes registered again in the future, she shall comply with MFDA Rules 2.1.1, 2.2.1, 1.1.2, 2.5.1, 1.4(b), MFDA Policy No. 3 and MFDA Policy No. 6; and
    5. The Respondent will attend in person, on the date set for the Settlement Hearing.

VII. STAFF COMMITMENT

43. 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 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 Part’s 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

44. 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. 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 www.mfda.ca.
45. 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 her 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.
46. 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. 24.1.1 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.
47. 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 her. 

IX. FAILURE TO HONOUR SETTLEMENT AGREEMENT

48. 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 MFDA By-law No. 1 against the Respondent 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

49. 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 MFDA By-law No. 1, unaffected by this Settlement Agreement or the settlement negotiations.
50. Whether or not this Settlement Agreement is accepted by the Hearing Panel, the Respondent agrees that she 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

51. 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.
52. Any obligations of confidentiality shall terminate upon acceptance of this Settlement Agreement by the Hearing Panel.

XII. EXECUTION OF SETTLEMENT AGREEMENT

53. This Settlement Agreement may be signed in one or more counterparts which together shall constitute a binding agreement.
54. A facsimile copy of any signature shall be effective as an original signature.

[1] On September 28, 2009, as a result of the implementation of National Instrument 31-103, the registration category “mutual fund salesperson” was changed to “dealing representative”.