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 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 the Respondent, Funds Direct Canada Inc. (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 MFDA:
   1. between October 1, 2019 and September 30, 2020, the Respondent failed to conduct or maintain evidence of tier-one trade supervision, contrary to MFDA Rules 2.2.1(c), 2.5, and MFDA Policy No. 2;[1]
   2. between October 1, 2019 and September 30, 2020, the Respondent failed to ensure that tier-one trade supervision was conducted on a timely basis, contrary to MFDA Rules 2.2.1(c), 2.5, and MFDA Policy No. 2; and
   3. between March 11, 2019 and December 2, 2020, the Respondent failed to adequately resolve supervisory queries, and resolve queries on a timely basis, contrary to MFDA Rules 2.2.1(c), 2.5, and MFDA Policy No. 2.

III. TERMS OF SETTLEMENT

5. Staff and the Respondent agree and consent to the following terms of settlement:
   1. The Respondent shall pay a fine in the amount of $30,000, pursuant to s. 24.1.2.(b) of MFDA By-law No. 1;
   2. The Respondent shall pay costs in the amount of $5,000, pursuant to s. 24.2 of MFDA By-law No. 1;
   3. The payment by the Respondent of the fine and costs shall be made to and received by MFDA Staff as follows:
      1. $5,000 (costs) in certified funds upon acceptance of the Settlement Agreement;
      2. $10,000 (fine) payable on or before the last business day of the first month following the acceptance of the Settlement Agreement;
      3. $10,000 (fine) payable on or before the last business day of the second month following the acceptance of the Settlement Agreement;
      4. $10,000 (fine) payable on or before the last business day of the third month following the acceptance of the Settlement Agreement;
   4. The Respondent shall in the future comply with all MFDA By-laws, Rules and Policies, and all applicable securities legislation and regulations made thereunder, including MFDA Rules 2.2.1, 2.5, and MFDA Policy No. 2; and
   5. A senior officer of the Respondent will attend in person via 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. The Respondent is registered as a mutual fund dealer in the province of Saskatchewan.
8. The Respondent is a small mutual fund dealer with 9 approved persons (including two licensed assistants).
9. The Respondent has been a Member of the MFDA since April 12, 2002.

Corporate Structure

10. The Respondent’s head office is located in Regina, Saskatchewan (the “Head Office”). The Respondent currently has 6 sub-branch locations.

The 2018 Sales Compliance Examination

11. MFDA Compliance Staff conducted a sales compliance examination of the Respondent’s Head Office and two sub-branch locations for the period of October 1, 2014 to September 30, 2018 (the “2018 Examination”). The 2018 Examination identified compliance deficiencies in the operations of the Respondent, including failing to adequately resolve queries, and failing to resolve queries on a timely basis, as described in this Settlement Agreement.
12. The results of the 2018 Examination were summarized and delivered to the Respondent in a report dated March 19, 2019.

The 2020 Sales Compliance Examination

13. Commencing on November 23, 2020, MFDA Compliance Staff conducted a sales compliance examination (the “2020 Examination”) at the Head Office and at three sub-branch locations of the Respondent in order to assess compliance by the Respondent with the By-laws, Rules and Policies of the MFDA during the period of October 1, 2018 to September 30, 2020.
14. The results of the 2020 Examination were summarized and delivered to the Respondent in a report dated March 26, 2021 (the “2020 Report”).
15. As described in greater detail below, the 2020 Report identified compliance deficiencies, including the deficiencies described in this Settlement Agreement.

Tier-One Trade Supervision

16. At all material times, the Member was required to conduct daily trade reviews in accordance with MFDA Policy No. 2.[2]
17. During the 2020 Examination, MFDA Compliance Staff identified deficiencies in the tier-one trade supervision that was conducted by the Respondent.
18. In particular, for the period of October 1, 2019 to September 30, 2020, MFDA Compliance Staff conducted a complete analysis of 1,563 trades conducted by the Respondent requiring a tier-one trade review in accordance with MFDA Policy No. 2. Among those trades:
    1. 640 trades had no evidence that the Respondent had conducted a tier-one trade review; and
    2. 892 trades requiring a tier-one trade review were not conducted on a timely basis.
19. In respect of the 892 of trades where tier-one trade reviews were not conducted on a timely basis:
    1. 328 trades were reviewed and approved from a range of T+2 to up to T+10 days;
    2. 272 trades were reviewed and approved from a range of T+11 to up to T+30 days;
    3. 239 trades were reviewed and approved from a range of T+31 to up to T+60 days; and
    4. 61 trades were reviewed and approved at a range of T+61 days and greater.
20. Of the 1563 trades requiring a tier-one trade review as identified by MFDA Compliance Staff in paragraph 18, above, 1511 trades involved mutual funds with a risk rating of low to medium, and none of the trades involved exempt market products or the use of leverage.
21. By failing to maintain evidence of tier-one trade supervision, as well as failing to conduct tier-one trade supervision on a timely basis, the Respondent failed to ensure that each order accepted and each recommendation made for client accounts were suitable for the clients based on the essential facts relative to the client and any investments within the accounts.

Supervisory Queries

22. During the 2020 Examination, MFDA Compliance Staff identified instances where the Respondent’s trade and account supervision was deficient where it was conducting supervisory queries of clients with investments that appeared to be inconsistent with the clients’ Know-Your-Client information.
23. MFDA Compliance Staff reviewed a sample of 20 supervisory queries conducted by the Respondent, and identified deficiencies in 17 of those queries. In particular, MFDA Compliance Staff identified the following deficiencies in the Respondent’s supervisory query process:
    1. 9 queries reviewed demonstrated instances where the Respondent failed to resolve supervisory queries either adequately or at all; and
    2. 8 queries reviewed demonstrated instances where the Respondent failed to resolve the query in a timely manner.
24. The failure to adequately resolve supervisory queries, as well as failing to resolve queries on a timely basis, is a repeat deficiency which was originally identified by MFDA Compliance Staff in the 2018 Examination.
25. By failing to adequately resolve supervisory queries, and by failing to resolve supervisory queries on a timely basis, the Respondent contravened its supervisory obligations.

Additional Factors

26. The Respondent has not previously been the subject of MFDA disciplinary proceedings.
27. There is no evidence of client complaints resulting from the Respondent’s conduct in this matter.
28. Commencing in August 2021, the Respondent has appointed a new Branch Manager, who is trained to perform trade reviews, to conduct tier-one trade supervision, supervisory queries, and follow-up as required.
29. The Respondent represents that, since it received the 2020 Report, it has implemented changes to its trade and account supervision practices to ensure compliance with MFDA rules and policies. MFDA Compliance Staff will be conducting follow-up examinations of the Respondent to determine whether its compliance deficiencies have been corrected.
30. The Respondent has cooperated with MFDA Staff’s investigation of the issues that form the subject matter of this Settlement Agreement.
31. By entering into this Settlement Agreement, the Respondent has saved the MFDA the time, resources, and expenses associated with conducting a contested hearing of the allegations.

V. ADDITIONAL TERMS OF SETTLEMENT

32. 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.
33. 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 www.mfda.ca.
34. 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.
35. 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 facts and contraventions described in this Settlement Agreement. 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, 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 section 24.1.2 of MFDA By-law No. 1 for the purpose of giving notice to the public thereof in accordance with section 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.
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, or any of its officers or directors, 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.
37. 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.
38. 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.
39. 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.