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 Stefano Arena (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 XI) 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. Since July 1999, the Respondent has been registered in Ontario as a mutual fund salesperson (now known as a dealing representative)[1] with Sun Life Financial Investment Services (Canada) Inc. (the “Member”), a Member of the MFDA.
7. At all material times, the Respondent conducted business in the Scarborough, Ontario area.

Discretionary Trading

8. At all material times, the Member’s policies and procedures prohibited Approved Persons from engaging in discretionary trading.
9. Specifically, the Member’s policies and procedures required Approved Persons to obtain specific instructions relating to all elements of a trade from a client prior to the execution of a trade. The elements of a trade include:
   1. The selection of the investment to be purchased or sold;
   2. The amount of the investment to be purchased or sold; and
   3. The timing of the trade.
10. Between June 2016 and May 2018, the Respondent engaged in discretionary trading by processing approximately 1062 switches from money market to equity mutual funds on behalf of 36 clients when he determined the timing and amount of the switches without obtaining specific instructions of the clients for these elements of the transaction at the time of processing the transactions.
11. At initial meetings with the clients, the Respondent completed Know-Your-Client (“KYC”) documents and Investor Profile Questionnaires (“IPQs”).
12. The completed IPQs and KYC documents provided risk tolerances and investment objectives for each client. The Respondent recommended a portfolio of equity mutual funds to the clients, based on the risk tolerances and investment objectives for each client found in the clients’ IPQs and KYC documents. The Respondent states that, at the time of recommending the portfolio of equity mutual funds to the clients, he provided fund facts for each mutual fund purchased to the clients which included the price of the funds chosen on the date the fund facts were provided.
13. The Respondent also states that he discussed with the clients which equity mutual funds were to be purchased as part of the portfolio of equity mutual funds, and that the total amount the clients invested in money market mutual funds would be invested in the equity mutual funds the clients had chosen, periodically, through a series of switches by the Respondent. The Respondent states the clients instructed him to proceed in this manner. The Respondent did not maintain sufficient notes of these discussions with the clients.
14. The Respondent placed all initial client monies transferred into the Member from other financial institutions into money market mutual funds on behalf of the clients in accordance with the clients’ instructions obtained during the initial meetings with the clients.
15. The Respondent then periodically processed a total of approximately 1062 switches from the money market mutual funds into the equity mutual funds in the client accounts using his discretion to determine the timing and the amount of the switches without further discussing these elements of the transactions with the clients prior to processing the switches in each instance.
16. The Respondent states that the clients received a further fund facts from the Member along with their trade confirmation shortly after the switches from money market mutual funds to equity mutual funds.
17. The Respondent also states that he exercised discretion regarding the switches as described in paragraphs 14 to 16 above, within each client account in order to achieve a lower average cost for the equity mutual fund units purchased on behalf of the clients by attempting to purchase the equity mutual funds at times where the market price for the mutual funds had decreased.

The Member’s Investigation

18. In May 2018, the Member’s compliance department conducted trade reviews of the switches from money market mutual funds to equity mutual funds made by the Respondent on behalf of two clients. Based on the findings from its review, the Member began an investigation into the Respondent’s conduct which is the subject of this Settlement Agreement.
19. The Respondent states that, as of May 2018, he has ceased engaging in discretionary trading.
20. In July 2018, after a review of the Respondent’s conduct, the Member placed the Respondent under close supervision.
21. On August 10, 2018, the Member sent audit letters to all clients whose accounts were serviced by the Respondent. The audit letter asked the clients to verify, among other things, that all transactions within the account had been authorized by the client. The letter further provided clients with an opportunity to raise any concerns regarding their account to the Member. The Member did not receive any responses from any clients which indicated that the Respondent had placed trades in the client accounts without the authorization of the clients or raised concerns regarding the transactions in their accounts.
22. In December 2018, the Member removed the Respondent from close supervision and placed him under enhanced supervision.
23. In December 2019, the Member removed the Respondent from enhanced supervision.
24. The Member’s close supervision and enhanced supervision did not give rise to compliance concerns regarding the Respondent.
25. The Respondent paid the Member approximately $17,786 for costs related to the Member’s close supervision and enhanced supervision of the Respondent.

Additional Factors

26. There is no evidence that the Respondent received any financial benefit from engaging in the misconduct described above beyond any commissions and fees that he would ordinarily be entitled to receive had the transactions been carried out in the proper manner.
27. The Respondent states that he mistakenly believed that the Limited Trading Authorization provided by clients permitted him to exercise discretion to process the switches as described in paragraph 14 to 16 above. The Respondent has expressed remorse for his actions.
28. There is no evidence of any client loss or additional costs to any clients relating to the Respondent’s misconduct.
29. The Respondent has not been the subject of any client complaints related to the misconduct in this Settlement Agreement.
30. The Respondent has not previously been the subject of MFDA disciplinary proceedings.
31. By entering into this Settlement Agreement, the Respondent has saved the MFDA the time, resources, and expenses associated with conducting a full hearing of the allegations.

V. CONTRAVENTIONS

32. Between June 2016 and May 2018, the Respondent processed switches on behalf of clients using his discretion to determine the timing and amount of the switches, contrary to the Member’s policies and procedures and MFDA Rules 2.3.1(b), 2.1.1, 1.1.2 and 2.5.1.

VI. TERMS OF SETTLEMENT

33. The Respondent agrees to the following terms of settlement:
    1. the Respondent shall be suspended from conducting securities related business in any capacity while in the employ of or associated with any MFDA Member for a period of 2 months commencing from the date the Settlement Agreement is accepted by the Hearing Panel, pursuant to s. 24.1.1(e) of MFDA By-law No. 1;
    2. the Respondent shall pay a fine in the amount of $35,000, in certified funds upon acceptance of the Settlement Agreement by the Hearing Panel, pursuant to s. 24.1.1(b) of MFDA By-law No. 1;
    3. the Respondent shall pay costs in the amount of $5,000 in certified funds upon acceptance of the Settlement Agreement by the Hearing Panel, pursuant to s. 24.2 of MFDA By-law No. 1;
    4. the Respondent shall in the future comply with MFDA Rules 2.1.1, 2.3.1, 1.1.2 and 2.5.1.
    5. the Respondent will attend in person, on the date set for the Settlement Hearing.

VII. STAFF COMMITMENT

34. 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 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

35. 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.
36. 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.
37. 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.
38. 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.

IX. FAILURE TO HONOUR SETTLEMENT AGREEMENT

39. 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 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 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

40. 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.
41. 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.

XI. DISCLOSURE OF AGREEMENT

42. 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.
43. Any obligations of confidentiality shall terminate upon acceptance of this Settlement Agreement by the Hearing Panel.

XII. EXECUTION OF SETTLEMENT AGREEMENT

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

[1] In September 2009, the registration category mutual fund salesperson was changed to “dealing representative” when National Instrument 31-103 came into force