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 s. 24.4 of MFDA By-law No. 1, a hearing panel of the MFDA Central Regional Council (the “Hearing Panel”) should accept the settlement agreement entered into between Staff of the MFDA (“Staff”) and Samuel Li (“Respondent”) (the “Settlement Agreement”).

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 accepted by the Hearing Panel.

IV. AGREED FACTS

Registration History

6. From September 16, 2011 to present, the Respondent has been registered in Ontario as a dealing representative with Investia Financial Services Inc. (“Investia” or the “Member”), a Member of the MFDA.

7. The Respondent was previously registered as follows:
   • February 2005 to September 2005: WFG Securities of Canada Inc.
   • September 2005 to September 2011: Excel Financial Growth Inc. (“Excel”)[1]

8. At all material times, the Respondent carried on business from branches located in Markham, both while he was registered with Excel, and while he was registered with Investia.

Excel’s Policies and Procedures

9. At all material times, Excel’s policies and procedures stated that where a client was implementing a leveraged investment strategy in their account, the Approved Person, including the Respondent, was required to assess the suitability of the investment strategy, inform the client of the risks associated with borrowing to invest, and have the client sign a Member risk disclosure document.

10. At all material times, Excel’s policies and procedures prohibited its Approved Persons, including the Respondent, from engaging in client communications that were:
    • untrue or misleading;
    • detrimental to the interests of clients;
    • contravened MFDA Rules, guidelines, or policies; or
    • inconsistent with, or confusing relative to, information provided by the Member.

Respondent’s Use of Waiver Documents for Clients Applying for Investment Loans

11. From in or about January 2007 to December 2009, while he was registered with Excel, the Respondent recommended to 11 clients that they obtain investment loans in order to implement a leveraged investment strategy in their mutual fund accounts.

12. At the time the 11 clients were signing the various required documents in order to obtain the investment loans, the Respondent also required the clients to sign a waiver document that he (the Respondent) had drafted (“Waiver”).

13. Among other things, the Waivers generally contained the following or substantially similar language:

“My financial advisor, Samuel Li, has fully explained all the potential risk to me. I am fully aware of the risk and consequence associated with leverage investment. Although my financial situation might not be fully suitable for this loan and I will still continue in leverage loan investments. No parties, including Excel Financial Growth or my advisor, Samuel Li will be responsible/liable for assisting me in getting the investment loan.”[2]

Investia’s Policies and Procedures

14. At all material times, Investia’s policies and procedures stated that, “[o]nly Investia prescribed or approved forms may be used when processing your mutual fund business. All non-standard forms must be approved by compliance prior to their use. The use of non-approved Investia forms is prohibited.”

Respondent’s Use of Waiver Documents for Clients Making Redemptions

15. On or about September 2, 2016 and February 13, 2017, while he was registered with Investia, the Respondent assisted two clients in making redemptions in their leveraged mutual fund accounts.

16. At the time the two clients signing the various required documents in order to redeem funds from their accounts, the Respondent also required the two clients to sign a waiver document that he (the Respondent) had drafted (“Redemption Waiver”).

17. Among other things, the Redemption Waivers generally contained the following or substantially similar language:

“My financial advisor, Samuel Li, has fully discussed the taxation implication, redemption charges of the funds and other alternative strategies, but I decide to go ahead with these redemptions. I understand that there could be impact to any income tested government benefits, while I will have to pay off any shortfall toward the investment loans with my own savings. I understand after these redemptions, all gains or losses from these accounts are finalized and no parties including Samuel Li, and Investia Financial Services Inc., will be liable for any losses arise from this leveraged plan.”[3]

Members Were Not Aware of the Waivers

18. At all material times:
    • the Members (Excel and Investia) were unaware that the Respondent had drafted the waiver documents;
    • the Members (Excel and Investia) were unaware the Respondent was requiring clients to sign waiver documents; and
    • the Respondent failed to seek or obtain the Members’ (Excel or Investia) approval prior to drafting any waiver documents or prior to requiring the clients to sign any waiver documents.

V. ADDITIONAL FACTORS

19. In or about December 2017, Investia sent a letter to all of the Respondent’s potentially affected clients, which included:
    • advising the clients that if they had signed a waiver document, it had not been approved by Investia and was not valid; and
    • requesting the clients respond to Investia if they had signed any form of waiver document, or if they had any concerns regarding their leveraged accounts.

20. Investia did not receive any responses to the letters sent to potentially affected clients.

21. Neither the Member nor Staff received any client complaints related to this matter. Staff is not aware of any client harm related to this matter.

22. The Respondent cooperated fully with Staff’s investigation, and sought an early resolution in this matter.

 VI. CONTRAVENTIONS

23. The Respondent admits that from in or about January 2007 to December 2009, and in or about September 2016 and February 2017, he drafted and required 13 of his clients to sign documents purporting to waive his and the Member’s suitability obligations, thereby failing to ensure that the acceptance of the clients’ trades were within the bounds of good business practice, contrary to MFDA Rules 2.2.1(b) and 2.1.1.

VII. TERMS OF SETTLEMENT

24. The Respondent agrees to the following terms of settlement:
    1. the Respondent shall pay a fine in the amount of $5,000, pursuant to s. 24.1.1(b) of MFDA By-law No. 1;
    2. the Respondent shall pay costs in the amount of $2,500, pursuant to s. 24.2 of MFDA By-law No. 1;
    3. the Respondent shall in the future comply with MFDA Rules 2.2.1(b) and 2.1.1; and
    4. the Respondent will attend in person on the date set for the Settlement Hearing.

VIII. STAFF COMMITMENT

25. 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 and the contraventions described in 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 facts and contraventions that are not set out in this Settlement Agreement or in respect of conduct that occurred outside the specified date ranges of the facts and contraventions set out herein, 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. 

IX. PROCEDURE FOR APPROVAL OF SETTLEMENT

26. 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 mfda.ca.

27. 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 his 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.

28. 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 MFDA By-law No. 1 for the purpose of giving notice to the public thereof in accordance with s. 24.5 of MFDA By-law No. 1.

29. 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 him.

X. FAILURE TO HONOUR SETTLEMENT AGREEMENT

30. 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 based on, but not limited to, the facts set out in 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.

XI. NON-ACCEPTANCE OF SETTLEMENT AGREEMENT

31. 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.

32. Whether or not this Settlement Agreement is accepted by the Hearing Panel, the Respondent agrees that he 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.

XII. DISCLOSURE OF AGREEMENT

33. 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.

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

XIII. EXECUTION OF SETTLEMENT AGREEMENT

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

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

[1] Effective December 20, 2011, Excel resigned from Membership in the MFDA and Excel’s assets were transferred to Investia.

[2] Errors are present in the original text.

[3] Errors are present in the original text.