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 Deryl Emerson Francis Thompson (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 section 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. From 1997 to May 2018, the Respondent was registered in the securities industry.
7. From April 1997 to April 2004, the Respondent was registered in Alberta as a dealing representative with PFSL Investments Canada Ltd. (“PFSL”). Effective January 31, 2002, PFSL became a Member of the MFDA and the Respondent became an Approved Person of PFSL.
8. From April 2004 until August 2011, the Respondent was registered in Alberta as a dealing representative with Professional Investment Services (Canada) Inc. (“PIS”), a Member of the MFDA, and its predecessors.^[1]
9. From August 2011 until May 2018, the Respondent was registered in Alberta^[2] as a dealing representative with Portfolio Strategies Corporation (“PSC”), a Member of the MFDA.
10. On May 2, 2018, PSC terminated the Respondent, and he is no longer registered in the securities industry in any capacity.
11. At all material times the Respondent conducted business in the Edmonton, Alberta area.

The Precious Metals Strategy

12. Between 2008 and at least until 2016, the Respondent recommended an investment strategy whereby clients concentrated their investment portfolio in precious metals sector mutual funds, in particular, the BMG Bullion Fund[3] and other bullion based mutual funds (the “Precious Metals Strategy”).
13. The Respondent believed that, among other things, as a result of government monetary and debt policies, the Precious Metals Strategy would provide clients with a long term safe haven for their capital.
14. In the course of recommending the Precious Metals Strategy to clients, the Respondent represented that, among other things, if a client invested in a mutual fund that held multiple types of precious metals such as gold, silver, and platinum, the client’s portfolio would be sufficiently diversified because each type of precious metal would respond differently to economic conditions. The Respondent did not inform clients of the risks of concentrating their investment portfolios in a single sector of the economy.
15. Following the implementation of the Precious Metals Strategy, the investment accounts of clients who were serviced by the Respondent were heavily concentrated in precious metals sector mutual funds. As of July 2016, the Respondent serviced 371 investment accounts owned by 174 clients. As of July 2016, approximately 98% of the $7.19 million in assets under administration held in accounts serviced by the Respondent were invested in precious metals sector mutual funds. Approximately 86% of the assets invested in precious metals were invested in a single mutual fund: the BMG Bullion Fund.
16. In November 2014, PSC conducted a branch review of the Respondent’s branch location, where PSC identified and brought to the Respondent’s attention that a high proportion of the clients serviced by the Respondent were heavily invested in precious metals sector mutual funds. No action was taken to address the concerns raised by the Member.

The Respondent Failed to Ensure Recommendations were Suitable

17. The Respondent failed to ensure that the recommendations that he made to clients to implement the Precious Metals Strategy were suitable for each client and in keeping with each client’s investment objectives.
18. In particular, the Respondent failed to ensure that the investment recommendations that he made to each client provided the clients with sufficient diversification to limit the risks of concentration that would result from investing all or substantially all of their investable assets in precious metals sector mutual funds.
19. The Respondent engaged in a practice of recommending that clients concentrate their investment holdings in precious metals sector mutual funds based upon his optimistic expectations as to how these mutual funds would perform.
20. The Respondent failed to adequately consider whether it was suitable for each client to hold a portfolio that was comprised of investments that were heavily or exclusively concentrated in the precious metals sector of the economy.

The Respondent Failed to Learn and Accurately Record Know Your Client Information

21. In the course of implementing the Precious Metals Strategy, the Respondent engaged in a practice of recording the uniform KYC information for clients. As a result of this practice:
    1. 85% of client accounts had a time horizon of “10 years” or greater;
    2. 5% of client accounts had an investment objective of “growth”;
    3. 99% of client accounts had a risk tolerance of “medium” or higher.
22. The Respondent recorded the KYC information described in paragraph 21 above, regardless of whether or not the clients genuinely had a long time horizon, a medium or greater risk tolerance, or a growth investment objective.
23. The Respondent engaged in this practice in order to ensure that the KYC information that he had recorded for each client supported his investment recommendations to concentrate all, or a substantial portion, of the clients’ investment holdings in precious metals sector mutual funds so that those funds that were purchased in each client account would appear to be suitable for the clients.

The Respondent Failed to Fully Explain the Risks of the Precious Metals Strategy

24. As described above, in the course of recommending the Precious Metals Strategy to clients, the Respondent represented that, among other things, investing in precious metals sector mutual funds and in particular, the BMG Bullion Fund, would provide sufficient investment diversification as a result of the fact that the underlying investments held in the BMG Bullion Fund included gold, silver and platinum.
25. The Respondent failed to adequately explain the risks of holding investments concentrated in precious metals sector mutual funds (i.e., a single economic sector) and the risk that the Precious Metals Strategy would not perform as well as he had represented that it would, contrary to his suitability obligations.
26. To the extent that the Respondent explained some of the risks of investing in precious metals sector mutual funds, he failed to provide a fair and balanced presentation of the risks of the Precious Metals Strategy.

Client NF

27. At all material times, client NF was a client of PIS and subsequently PSC, and her accounts were serviced by the Respondent.
28. In or around 2008 when client NF became a client of PIS, client NF had limited investment knowledge and wanted a medium risk investment that would provide a consistent source of income for her that she could rely upon when she retired.
29. In 2008, the Respondent recommended that client NF implement the Precious Metals Strategy. Based on this advice, client NF redeemed the investments that she held prior to dealing with him and invested 100% of the proceeds from the sale of the investments that were previously held in her Locked In Retirement Account (“LIRA”) into the BMG Bullion Fund.
30. In September 2011 when client NF became a client of PSC, the Respondent continued to recommend the Precious Metals Strategy and client NF continued to hold only the BMG Bullion Fund in her LIRA. When client NF transferred her LIRA to PSC in September 2011, the value of the account was $23,676.
31. In or around June 2014, client NF opened a Registered Retirement Savings Plan (“RRSP”) account at PSC.
32. Commencing in October 2014, the Respondent implemented a pre-authorized contribution plan (“PAC”) for client NF’s RRSP account to facilitate transfers of a consistent monthly contribution amount into the account, which were then invested into the BMG Bullion Fund.
33. The Respondent failed to adequately explain to client NF the risks of concentrating all of her retirement savings in a single mutual fund comprised exclusively of investments in a single economic sector rather than diversifying her portfolio so that the investments held in it included investments other than precious metals. Consequently, the Respondent failed to provide client NF with a fair and balanced presentation of the Precious Metals Strategy.
34. In 2017, in accordance with the Respondent’s recommendations, client NF continued to hold the BMG Bullion Fund in her LIRA and made monthly contributions to her RRSP account, which were also used to purchase additional units of the BMG Bullion Fund. Based upon advice received from the Respondent, client NF also made switches in her LIRA and in her RRSP from the BMG Bullion Fund into another precious metals sector mutual fund that primarily held silver (the “BMG Silver Fund”) and she also made additional monthly purchases in her RRSP into the BMG Silver Fund.
35. Up until May 2018 when PSC terminated the Respondent, in accordance with the recommendations of the Respondent, client NF held exclusively precious metals sector mutual funds in her LIRA and RRSP accounts.
36. Client NF was disappointed with the performance of her RRSP and LIRA. Between September 2011 and March 31, 2018, the total value of client NF’s combined LIRA and RRSP accounts declined by approximately 17%.
37. On or about July 2018, client NF submitted a complaint with respect to the Respondent’s conduct and the performance of her accounts.
38. In or around August 2018, a different Approved Person was assigned to service the investment accounts of client NF and the holdings in the Respondent’s RRSP and LIRA accounts were re-balanced into a global balanced fund and a broadly diversified Canadian / US equity fund.

Additional Factors

39. The Respondent has not been the subject of previous MFDA disciplinary proceedings.
40. On May 2, 2018, PSC terminated the Respondent’s mutual fund registration and he ceased to be an Approved Person of PSC. The clients that had previously been serviced by the Respondent were re-assigned to different Approved Persons of PSC.
41. Commencing in May 2018, the Member initiated a review of the Respondent’s book of business due to concerns about the suitability of the accounts that he serviced which were all heavily concentrated in precious metals sector mutual funds.
42. Following the termination of the Respondent in May 2018, PSC instructed the Approved Persons who took over responsibility for servicing client accounts that had previously been serviced by the Respondent to review KYC information with clients and encourage rebalancing of client portfolios.
43. The Respondent has cooperated fully with Staff during the course of the investigation, and by agreeing to this settlement, has avoided the time and expense of a contested hearing on the merits.
44. With the exception of client NF, no clients have complained with respect to the Respondent’s conduct.
45. The Respondent states that he is retired from the financial services industry, is primarily on a fixed income, and also contributes expenses towards a child with a medical disability, and as a result he is limited in his ability to pay financial penalties. The Respondent acknowledges that absent his limited ability to pay, it would have been appropriate for him to be subject to a penalty that included a higher fine as a consequence of the misconduct that is admitted in this Settlement Agreement.

CONTRAVENTIONS

46. The Respondent admits that:
    1. between 2008 and until at least July 2016, he failed to use adequate due diligence to ensure that investment recommendations that he made to clients were suitable when he recommended that the clients concentrate all or substantially all of their investment holdings in precious metals sector mutual funds, contrary to MFDA Rules 2.2.1^[4] and 2.1.1;
    2. between 2008 and until at least July 2016, he failed to accurately record the essential KYC factors relevant to each client and to each order and account that he accepted, but instead recorded KYC information for each client that would be consistent with his investment recommendations to those clients in order to ensure that the investments appeared to be suitable, contrary to MFDA Rules 2.2.1 and 2.1.1; and
    3. between 2008 and until at least July 2016, he failed to adequately explain to clients the risks of holding investments concentrated in precious metals sector mutual funds and thereby failed to present the investment recommendations to clients in a fair and balanced manner, contrary to MFDA Rules 2.2.1 and 2.1.1.

V. TERMS OF SETTLEMENT

47. The Respondent agrees to the following terms of settlement:
    1. the Respondent shall be permanently prohibited from conducting securities related business in any capacity while in the employ or associated with an MFDA Member, pursuant to section 24.1.1(e) of MFDA By-law No. 1;
    2. the Respondent shall pay a fine of $10,000 in accordance with the schedule set out sub-paragraph 47 d. below, pursuant to Section 24.1.1(b) of MFDA By-law No. 1;
    3. the Respondent shall pay costs in the amount of $3,750 in certified funds upon acceptance of the Settlement Agreement, pursuant to section 24.2 of By-law No. 1;
    4. the payment by the Respondent of the Fine and Costs shall be made and received by MFDA Staff as follows:
       1. $3,750 (Costs) in certified funds upon acceptance of the Settlement Agreement by the Hearing Panel;
       2. $1,668 (Fine) on or before the last business day of the first month following the date of the Settlement Agreement;
       3. $1,668 (Fine) on or before the last business day of the second month following the date of the Settlement Agreement;
       4. $1,666 (Fine) on or before the last business day of the third month following the date of the Settlement Agreement;
       5. $1,666 (Fine) on or before the last business day of the fourth month following the date of the Settlement Agreement;
       6. $1,666 (Fine) on or before the last business day of the fifth month following the date of the Settlement Agreement;
       7. $1,666 (Fine) on or before the last business day of the sixth month following the date of the Settlement Agreement; and
    5. the Respondent will attend the Settlement Hearing in person or via videoconference.

VI. STAFF COMMITMENT

48. 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.

VII. PROCEDURE FOR APPROVAL OF SETTLEMENT

49. 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.
50. 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.
51. 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 section 24.1.1 of By-law No. 1 for the purpose of giving notice to the public thereof in accordance with section 24.5 of By-law No. 1.
52. 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.

VIII. FAILURE TO HONOUR SETTLEMENT AGREEMENT

53. 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(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.

IX. NON-ACCEPTANCE OF SETTLEMENT AGREEMENT

54. 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.
55. 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.

X. DISCLOSURE OF AGREEMENT

56. 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.
57. Any obligations of confidentiality shall terminate upon acceptance of this Settlement Agreement by the Hearing Panel.

XI. EXECUTION OF SETTLEMENT AGREEMENT

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

[1] Commencing April 2004, the Respondent was registered with Generation Financial Corp., which underwent a name change to PIS on November 9, 2006.
[2] The Respondent was also registered in Ontario at various times until May 2018.
[3] The BMG Bullion Fund is currently rated high risk, but at the time of the recommendations was rated as a medium risk fund.
[4] MFDA Rule 2.2.1 was amended in December 2010 and in February 2013.  In this Settlement Agreement, all references to the MFDA Rule 2.2.1 concern the version of the Rule that was in force prior to December 2010.