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, Paul David Gowan (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. ACKNOWLEDGMENT

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 May 19, 2006 to September 30, 2019, the Respondent was registered in Ontario as a dealing representative with Quadrus Investment Services Ltd. (the “Member”), a Member of the MFDA.
7. On September 30, 2019, the Member terminated the Respondent in connection with the matters that are the subject of this proceeding and he is not currently registered in the securities industry in any capacity.
8. At all material times, the Respondent conducted business in the London, Ontario area.

Stealth Advising

9. Former Approved Person Michael Forsey (“Forsey”) was a dealing representative with the Member until October 31, 2017, when the Member terminated Forsey in connection with matters that are not the subject of this proceeding.
10. In November 2017, the Respondent entered into an agreement with Forsey to purchase Forsey’s book of business, which comprised both Forsey’s insurance and mutual fund book of business (the “Purchase Agreement”). On or about November 30, 2017, the Member assigned to the Respondent responsibility for servicing the accounts of clients that had previously been serviced by Forsey (the “Transferred Clients”).
11. The Respondent did not schedule meetings with a number of the Transferred Clients or otherwise notify them that he had been assigned responsibility for servicing their accounts.
12. Forsey continued to have contact with the Transferred Clients following the termination of his registration. Forsey’s communications with clients included emails in which he explained that while he was unregistered, he would be managing the Transferred Clients’ portfolios through the Respondent.
13. The Respondent also retained Forsey’s long-standing unlicensed assistant, NK, who had a prior relationship with Forsey’s clients. Pursuant to the Purchase Agreement, Forsey continued to pay NK’s salary.
14. Between November 2017 and April 2018, Forsey was not registered as a dealing representative and was not an Approved Person of the Member. However, throughout this period, Forsey continued to engage in securities related business by providing advice to Transferred Clients about specific transactions that were subsequently processed in their investment accounts with the Member.  Forsey also obtained Know-Your-Client (“KYC”) information to update the Member’s records concerning the investment accounts of Transferred Clients.  The Respondent did not participate in these meetings or conversations with clients held by Forsey.
15. Forsey, or NK based on Forsey’s instructions, provided Transferred Clients with Member account forms that the clients were required to execute in order to process transactions in their accounts or update KYC information on file for their accounts. These account forms identified the Respondent as the Approved Person responsible for servicing the clients’ accounts and attributed all of the resulting transactions and KYC updates to the Respondent’s representative code.
16. After account documents were signed by the Transferred Clients, NK would collect the accounts forms and provided them to the Respondent for him to sign. NK, or another assistant at the Member, would then submit the account forms to facilitate the processing of transactions and KYC updates in the Transferred Clients’ accounts.
17. The Respondent knew that an unregistered individual was conducting securities related business by providing investment advice to Transferred Clients, accepting instructions from Transferred Clients about specific mutual fund transactions, and updating KYC information for the investment accounts of Transferred Clients.
18. The Respondent facilitated the processing of at least 10 trades and 2 KYC updates for 8 Transferred Clients. The trades had a value of at least $73,000.
19. With respect to at least 8 Transferred Clients, the Respondent failed to fulfil his obligations to:
    1. learn the essential facts relative to each client and each order or account accepted;
    2. ensure that the acceptance of each order was within the bounds of good business practice;
    3. ensure that each order accepted or recommendation made for each account was suitable for the client and in keeping with the client’s investment objectives;
    4. explain to the individuals the features and risks of the mutual fund trades being processed in their accounts; or
    5. provide the advice necessary for the clients to make an informed decision about trades and receive the trading instructions from clients necessary to authorize transactions in their accounts.
20. As noted above, Forsey was terminated by the Member on October 31, 2017 and accordingly, Forsey was not in an employer-employee relationship, a principal-agent relationship, or an introducing dealer-carrying dealer relationship with the Member, as required by MFDA Rule 1.1.1(c). Forsey was not permitted to engage in securities related business with clients of the Member following his termination.
21. The Respondent did not advise the Member that Forsey was conducting securities related business with clients of the Member.
22. The Member was not aware that the Respondent was facilitating the processing of transactions and KYC information updates on behalf of clients on the basis of instructions and information obtained from the clients by an unregistered individual.
23. By processing transactions and KYC information updates on the basis of instructions and information obtained from clients by Forsey, the Respondent facilitated stealth advising by Forsey, circumvented the Member’s exclusion of Forsey from its business, and failed to use due diligence to learn the essential facts relative to the clients and to ensure that the transactions were suitable.

Additional Factors

24. There is no evidence of client complaints or client loss as a result of the Respondent’s misconduct.
25. On April 22, 2020, a Director of the Ontario Securities Commission (“OSC”) approved a settlement agreement between Forsey and the OSC, pursuant to which Forsey admitted that between November 1, 2017 and April 2, 2018, during which time he was not registered, he provided investment advice to and received instructions from Transferred Clients.
26. Pursuant to the Purchase Agreement, the Respondent paid approximately all the trailer commissions that he earned from the accounts of the Transferred Clients to Forsey and therefore did not financially benefit from the misconduct
27. The Respondent has not previously been the subject of a MFDA disciplinary proceeding.
28. By entering into this Settlement Agreement, the Respondent has accepted responsibility for his misconduct and saved the MFDA the time, resources, and expenses associated with conducting a contested hearing on the allegations.

V. CONTRAVENTIONS

29. The Respondent admits that between November 2017 and April 2018, he signed or submitted account documents obtained by an unregistered individual to conduct securities related business and updated Know-Your-Client information of clients of the Member without using the necessary due diligence to learn the essential facts relative to the clients, ensuring that transactions processing in their accounts were suitable, or ensuring that the transactions were authorized, thereby facilitating stealth advising, contrary to MFDA Rules 1.1.1(c), 2.2.1, and 2.1.1.

VI. TERMS OF SETTLEMENT

30. 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 1 year from the date the Settlement Agreement is accepted, pursuant to section 24.1.1(e) of MFDA By-law No. 1;
    2. the Respondent shall pay a fine of $15,000 in certified funds upon acceptance of the Settlement Agreement, pursuant to Section 24.1.1(b) of MFDA By-law No. 1;
    3. the Respondent shall pay costs of $5,000 in certified funds upon acceptance of the Settlement Agreement, pursuant to section 24.2 of MFDA By-law No. 1;
    4. the Respondent shall in the future comply with MFDA Rules 1.1.1(c), 2.1.1, and 2.2.1; and
    5. the Respondent will attend in person or by videoconference, on the date set for the Settlement Hearing.

VII. STAFF COMMITMENT

31. 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 contraventions described in Part V of this Settlement Agreement, subject to the provisions of Part ix 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

32. 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.
33. 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 or appeal 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.
34. 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.
35. 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.
36. 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

37. 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.
38. 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

39. 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.
40. Any obligations of confidentiality shall terminate upon acceptance of this Settlement Agreement by the Hearing Panel.

XI. EXECUTION OF SETTLEMENT AGREEMENT

41. This Settlement Agreement may be signed in one or more counterparts which together shall constitute a binding agreement.
42. An electronic copy of any signature shall be effective as an original signature.