Settlement Agreement

I. INTRODUCTION

1. The Mutual Fund Dealers Association of Canada (the “MFDA”) will announce that it proposes to hold a hearing (the “Settlement Hearing”) to consider whether, pursuant to section 24.4 of MFDA 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, James Michael Lewis (the “Respondent”).
2. Staff and the Respondent consent and agree to the terms of this Settlement Agreement.
3. Staff and the Respondent jointly recommend that the Hearing Panel accept the Settlement Agreement.

II. CONTRAVENTIONS

4. The Respondent admits to the following violations of the By-laws, Rules or Policies of the Mutual Fund Dealers Association of Canada (“MFDA”):
   1. between November 2017 and July 2018, he signed or submitted account documents obtained by an unregistered individual to conduct securities related business and update Know-Your-Client (“KYC”) information of clients of the Member without using due diligence to learn the essential facts relative to the clients, ensuring that transactions processed in their accounts were suitable, or ensuring that the transactions were authorized, thereby facilitating stealth advising, contrary to MFDA Rules 1.1.1(c), 2.1, and 2.1.1.

III. TERMS OF SETTLEMENT

5. Staff and the Respondent agree and consent to the following terms of settlement:
   1. the Respondent shall be prohibited from conducting securities related business while in the employ of or in association with a Member of the MFDA for a period of 30 months from June 7, 2022, pursuant to section 24.1.1(e) of MFDA By-law No. 1;
   2. the Respondent shall pay a fine of $20,000, pursuant to section 24.1.1(b) of MFDA
      By-law No. 1;
   3. the Respondent shall pay costs of $5,000, pursuant to section 24.2 of MFDA By-law No. 1
   4. the Respondent shall pay the fine and costs in instalments as follows:
      1. $5,000 (fine) and $5,000 (costs) payable in certified funds upon acceptance of the Settlement Agreement;
      2. $3,750 (fine) payable on or before January 24, 2023;
      3. $3,750 (fine) payable on or before April 24, 2023;
      4. $3,750 (fine) payable on or before July 24, 2023; and
      5. $3,750 (fine) payable on or before October 24, 2023;
   5. the Respondent shall in the future comply with MFDA Rules 1.1.1(c), 2.2.1, and 2.1.1; and
   6. the Respondent will attend by videoconference on the date set for the Settlement Hearing.
6. Staff and the Respondent agree to the settlement on the basis of the facts set out in this Settlement Agreement herein and consent to the making of an Order in the form attached as Schedule “A”.

IV. AGREED FACTS

Registration History

7. From March 28, 2012 to November 19, 2018 in Ontario, and from April 19, 2018 to November 19, 2018 in Alberta, the Respondent was registered as a dealing representative with Quadrus Investment Services Ltd. (the “Member”), a Member of the MFDA.
8. On November 19, 2018, 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.
9. At all material times, the Respondent conducted business in the Strathroy, Ontario area.

Stealth Advising

10. Former Approved Person Trevor Rosborough (“Rosborough”) was registered as a dealing representative with the Member until October 31, 2017 when the Member terminated Rosborough in connection with matters that are not the subject of this proceeding.
11. On or about November 1, 2017, the Respondent entered into an agreement with Rosborough to purchase Rosborough’s book of business, which comprised both Rosborough’s insurance and mutual fund book of business (the “Purchase Agreement”).
12. On or about November 20, 2017, the Member assigned to the Respondent responsibility for servicing the accounts of clients that had previously been serviced by Rosborough (the “Transferred Clients”). The Respondent did not schedule meetings with these clients or otherwise notify them that he had been assigned responsibility for servicing their accounts.
13. Rosborough continued to have contact with the Transferred Clients following the termination of his registration. Rosborough’s communications to clients included emails, in which he minimized the significance of the fact that the Respondent was now the Approved Person of the Member responsible for servicing their accounts, and informed them that he would continue to provide investment advice to them and accept trading instructions from them as he had prior to his termination.  The Respondent states that he was unaware of this correspondence from Rosborough to the Transferred Clients.
14. After entering into the Purchase Agreement, the Respondent began to regularly attend and conduct business from the office that Rosborough had conducted business from prior to his termination. The Respondent also retained one of Rosborough’s long-standing unlicensed assistants,^[1] DA, to assist him to service the Transferred Clients. He also obtained approval from the Member to permit DA to access the Member’s back office system and the Member’s account forms so that DA could provide the support that she was retained to provide to the Respondent.  Rosborough continued to pay DA’s salary.
15. Between November 2017 and July 2018, Rosborough was not registered as a dealing representative and was not an Approved Person of the Member. However, throughout that period Rosborough continued to conduct securities related business by providing advice to Transferred Clients and accepting instructions from Transferred Clients about specific mutual fund transactions.  Rosborough also obtained KYC information to update the Member’s records concerning the investment accounts of Transferred Clients.
16. Rosborough, or one of Rosborough’s assistants, provided the 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.
17. After account documents were signed by the Transferred Clients, Rosborough or his unlicensed assistants collected the account forms and left them at Rosborough’s office where the Respondent would regularly attend, sign the account forms as the Approved Person of record, and submit the forms for processing or arrange for an unlicensed assistant to do so.
18. The Respondent did not meet with or communicate with Transferred Clients about the content or purpose of the account forms before signing and submitting the account forms to facilitate the processing of transactions and KYC updates in their accounts.
19. The Respondent facilitated the processing of at least 55 trades and 4 KYC updates for 31 clients that he had not met or obtained instructions from. The trades had an approximate value of $995,000.
20. 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; and
    5. provide the advice necessary for the Transferred Clients to make an informed decision about KYC updates and trades in their accounts or meet or communicate with the Transferred Clients to receive instructions from Transferred Clients that were necessary to authorize transactions and KYC updates in their accounts.
21. As noted above, Rosborough was terminated by the Member effective October 31, 2017 and accordingly, he 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). Rosborough was therefore not permitted to engage in securities related business with clients of the Member following his termination.
22. 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.
23. 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.
24. By processing transactions and KYC information updates on the basis of instructions and information obtained from clients by an unregistered individual, the Respondent facilitated stealth advising by an unregistered individual 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

25. The Respondent received approximately $3,000 per month pursuant to the Purchase Agreement, which consisted of commissions earned from both mutual fund and insurance clients that the Respondent did not pay over to Rosborough. In addition, as a result of becoming the advisor responsible for servicing the accounts of the Transferred Clients, the Respondent received an increase in his bonus from 25% to 68% of the trailer fees received by the Member that were attributable to client accounts that the Respondent was responsible for servicing.
26. On July 17, 2018, one client complained to the Member about deferred sales charges (“DSC”) of approximately $3,000 that the client incurred due to the redemption of an investment in a leveraged account that the client held at the Member. The client identified Rosborough, who was not registered with the Member at the time, as the individual who advised him about the redemption.  At the time, the Respondent was the Approved Person responsible for servicing the client’s account.  The Member compensated the client for the DSCs.
27. The Member received no other complaints and there is no other evidence of client harm related to the conduct described above.
28. The Respondent has not previously been the subject of a MFDA disciplinary proceeding.
29. By entering into this Settlement Agreement, the Respondent has accepted responsibility for his misconduct and saved the MFDA the time, resources, and expenses that would have been necessary to conduct a contested hearing of the allegations.

V. ADDITIONAL TERMS OF SETTLEMENT

30. This settlement is agreed upon in accordance with section 24.4 of MFDA By-law No. 1 and Rules 14 and 15 of the MFDA Rules of Procedure.
31. The Settlement Agreement is subject to acceptance by the Hearing Panel. At or following the conclusion of the Settlement Hearing, the Hearing Panel may either accept or reject the Settlement Agreement. 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.
32. The Settlement Agreement shall become effective and binding upon the Respondent and Staff as of the date of its acceptance by the Hearing Panel. Unless otherwise stated, any monetary penalties and costs imposed upon the Respondent are payable immediately, and any suspensions, revocations, prohibitions, conditions or other terms of the Settlement Agreement shall commence, upon the effective date of the Settlement Agreement.
33. Staff and the Respondent agree that if this Settlement Agreement is accepted by the Hearing Panel:
    1. the Settlement Agreement will constitute the entirety of the evidence to be submitted at the settlement hearing, subject to rule 15.3 of the MFDA Rules of Procedure;
    2. the Respondent agrees to waive any 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;
    3. except for any proceedings commenced to address an alleged failure to comply with this Settlement Agreement, Staff will not initiate any proceeding under the By-laws of the MFDA against the Respondent in respect of the contraventions described in this Settlement Agreement. Nothing in this Settlement Agreement precludes Staff from investigating or initiating proceedings in respect of any contraventions that are not set out in this Settlement Agreement, 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;
    4. the Respondent shall be deemed to have been penalized by the Hearing Panel pursuant to s. 24.1.1 of 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; and
    5. 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 the Respondent.
34. 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 this 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.
35. If, for any reason, this Settlement Agreement is not accepted 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 the Settlement Agreement or the settlement negotiations.
36. 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. The terms of the Settlement Agreement, including the attached Schedule “A”, will be released to the public if and when the Settlement Agreement is accepted by the Hearing Panel.
37. The Settlement Agreement may be signed in one or more counterparts which together shall constitute a binding agreement. A facsimile or electronic copy of any signature shall be as effective as an original signature.

[1] Rosborough had 3 assistants.