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, Queen Financial Group 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 that between January 1, 2017 and April 6, 2020, the Respondent approved and allowed the sale of seven exempt products (the “Products”) without using adequate due diligence to understand the material attributes, features and risks of the Products and ensuring that the Products offered to clients were suitable, contrary to MFDA Rules2.1(c)[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 pay a fine in the amount of $30,000, payable in certified funds on the date that this Settlement Agreement is accepted by a Hearing Panel, pursuant to s. 24.1.2(b) of MFDA By-law No. 1;
   2. the Respondent shall pay costs in the amount of $7,500, payable in certified funds on the date that this Settlement Agreement is accepted by a Hearing Panel, pursuant to s. 24.2 of MFDA By-law No. 1;
   3. the Respondent shall in the future comply with MFDA Rules 2.2.1(c) and 2.1.1; and
   4. A senior officer of the Respondent will attend in person, 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 has been registered as a mutual fund dealer in Ontario and has been a Member of the MFDA since October 2006. The Respondent has been registered as a mutual fund dealer in British Columbia from February 5, 2008 to January 1, 2013 and since August 30, 2017.
8. The Respondent has been registered as a limited market dealer or exempt market dealer in Ontario, British Columbia and Quebec during the periods listed below:
   1. in Ontario since March 6, 2008;
   2. in British Columbia from October 18, 2010 to December 31, 2013 and since August 30, 2017; and
   3. in Quebec since December 3, 2014.

Corporate Structure

9. The Respondent’s head office is located in Markham, Ontario (the “Head Office”). As of November 1, 2022, 59 Approved Persons were registered with the Respondent and conduct business from head office, from 2 additional branch offices located in Richmond, British Columbia and from a sub-branch office in St. Laurent, Quebec. Based on the amount of assets under its administration, the Respondent is a small mutual fund dealer compared to other Members of the MFDA.

BACKGROUND

10. On October 31, 2005, the MFDA issued MFDA Staff Notice MSN-0048 “Know-Your-Product”[2] the purpose of which was to clarify the obligations of Members and Approved Persons with respect to the approval and sale of investment products. The Notice states, among other things, that:

Know-your-client requirements are a fundamental part of meeting basic suitability obligations.  However, these obligations can only be properly discharged if Approved Persons and supervisory staff of the Member also fully understand the products that are being recommended to clients. . . A basic level of due diligence must be completed on all products being considered for sale by the Member before the products are approved.  Member procedures should provide for different levels of analysis for different types of products.  For example, an extensive formal review may not be required for many conventional mutual funds.  However, a more comprehensive review should be performed on products that are novel or more complex in structure. . .  In determining whether to approve a product for sale, Member should not merely rely on the representations of the issuer, or on the fact that the product appears to be similar to others, or that other firms are already offering the product.  In all cases, the approval process must be independent and objective.  Members are advised that simply making inquiries will not be sufficient to discharge their responsibility to conduct due diligence.  Members must properly follow up on any questions they have raised until they have been satisfied that they have a complete understanding of the products they propose to sell. . . . It is critical that the Member develops an understanding of all features of the product.  Issues such as liquidity of the product and the nature of any underlying investments and their inherent risks must be examined before assigning a risk ranking to the product.  The Member should develop guidelines or an investor profile for which the product would be generally suitable, including risk levels, time horizon, income and net worth.  The Member should also clearly identify investors for whom the product is not suitable.  Concentration limits should be assigned to products and/or general classes of products where appropriate. . . As a best practice, a committee involving senior management of the Member should be empowered with ultimate authority in the product approval process, to ensure that all business units of the Member have signed off on the product prior to sale.

11. MSN-0048 also stated that “Members should be particularly careful when examining suitability issues in relation to exempt securities” and set out additional guidance applicable to the approval and sale of exempt products.

The 2019 Sales Compliance Examinations

12. In 2019, MFDA Compliance Staff (“MFDA Compliance”) conducted a sales compliance examination of the Respondent in order to assess compliance by the Respondent with the By-laws, Rules and Policies of the MFDA (the “2019 Sales Compliance Examination”) and issued a report to the Respondent dated April 6, 2020 at the conclusion of the 2019 Compliance Examination summarizing a list of compliance deficiencies that were identified during the compliance examination (the “2020 Sales Compliance Report”).
13. The 2019 Sales Compliance Examination of the Respondent’s operations covered the review period between January 1, 2017 and August 31, 2019.
14. During the 2019 Sales Compliance Examination, MFDA Compliance identified deficiencies with respect to the Respondent’s new product approval due diligence process. Specifically, the Respondent did not complete adequate due diligence and did not record adequate information to demonstrate its understanding of all material information relevant to the suitability of the Products that it approved for sale by Approved Persons to its clients.  Therefore, the Respondent did not fulfill its “Know-Your-Product” (“KYP”) obligations with respect to these Products.
15. After receiving the 2020 Sales Compliance Report, the Respondent proposed actions that the Respondent agreed to take to address the compliance deficiencies that had been identified in the report including the deficiencies in its KYP process (the “KYP Deficiencies”).

The Know-Your-Product Compliance Deficiencies Of The Respondent

16. MFDA Compliance had identified various KYP Deficiencies of the Respondent during previous MFDA sales compliance examinations of the Respondent dating back to 2013.
17. In some cases, the Respondent did not acquire important information necessary to evaluate the exempt products that it intended to allow its Approved Persons to sell. In other cases, the Respondent claimed that it had obtained the relevant information but did not appropriately document the due diligence that it had completed before approving the exempt products for sale by its Approved Persons. KYP Deficiencies limited the Respondent’s ability to provide the necessary direction and supervision to Approved Persons to ensure that it was fulfilling its suitability obligations with respect to the exempt products that it approved for sale to clients.
18. After being informed about KYP Deficiencies during sales compliance examinations prior to the 2019 Sales Compliance Examination, the Respondent prepared a template document that set out a list of information that should be obtained, reviewed and analyzed with respect to each exempt product that the Respondent was considering approving for sale by its Approved Persons (the “KYP Template”) in order to bring its KYP process for potential new products to an adequate standard. However, even after this KYP Template was prepared, the Respondent did not complete the KYP Template to the extent required to address the KYP Deficiencies.
19. During the 2019 Sales Compliance Examination, MFDA Compliance found that the Respondent had not completed adequate due diligence during the process of approving seven Products for sale to its clients. Among the Products were two products that had a unique and complex structure that promised investors an indirect interest in certain high profile companies that were not publicly traded at the time when the products were approved for sale. Although the Respondent had obtained a copy of a slide presentation from the issuer that summarized some of the features of the two exempt products, the Respondent did not acquire sufficient documentation from the issuers or document adequate information in the KYP Template prepared in respect of any of the Products to fulfill its KYP obligations with respect to the approval of the Products for sale to its clients.
20. The number of investors who purchased the Products and the timing of those transactions is summarized as follows:

21. The Respondent admits that prior to the issuance of the 2020 Sales Compliance Report on April 6, 2020, it failed to adequately resolve its KYP Deficiencies to an extent necessary to ensure that the Products that Approved Persons of the Respondent were authorized to sell to clients were suitable for such clients.
22. The KYP Deficiencies that were identified in the 2020 Sales Compliance Report included the following:
    1. the Respondent had not ensured that in all cases it obtained all of the critical documents necessary to understand and evaluate the Products that it approved for sale by its Approved Persons, such as offering documents, term sheets and financial statements;
    2. the Respondent had not documented the precise investment structure[3] of the Products;
    3. the Respondent had not obtained sufficient information about the Products to properly assess, determine and document:
       1. the investment objectives of some of the Products;
       2. the amount of compensation that an Approved Person was eligible to receive for selling some of the Products;
       3. the nature and extent of potential conflicts of interest associated with some of the Products;
       4. the costs to investors of holding some of the Products;
       5. the projected returns that investors could reasonably expect to receive on some of the Products;
       6. a methodology for determining a valuation of the investment interest that clients would be acquiring or holding after the date of purchase of the Products for two of the Products;
       7. an assessment of the financial position and management experience of the issuers of some of the Products; and
       8. the extent of limitations on the liquidity of investments in some of the Products and a determination of what assets (e.g.; cash or shares) investors would be eligible to receive if they wished to redeem their investments in those Products.
23. The KYP Deficiencies of the Respondent limited the ability of its Approved Persons and compliance staff responsible for conducting trade supervision to ensure that the Products were suitable for the clients to whom the products were offered, contrary to MFDA Rules 2.2.1 and 2.1.1.
24. After receiving the 2020 Sales Compliance Report, the Respondent contacted the issuer of the two unique products that it had approved for sale (as described in paragraph 19 above) and obtained the documentation and information that should have been reviewed and analyzed prior to the approval of those products for sale.
25. The Respondent states that it reviewed the sales of each of the Products to its clients by examining the KYC documents of each client to whom the Products were sold and any relevant accredited investor information in respect of those clients to ensure that each of the transactions was suitable.

Additional Factors

26. The Respondent has no previous MFDA disciplinary history.
27. The Respondent cooperated with the MFDA during the investigation process.
28. There is no evidence that the Respondent’s misconduct resulted in financial harm to clients. However, the financial position of the Products is not publicly reported.
29. No clients have submitted complaints to the Respondent or to the MFDA concerning exempt products that they purchased in investment accounts held with the Respondent. The Respondent acknowledges that if it receives any client complaints in the future, it will comply with its complaint handling obligations.
30. Investors who purchased the Products received documentation that warned them of certain risks associated with the products including general notes of caution that investments in the Products were risky and that investors could lose money and might not be able to sell their investments quickly, or at all. Investors in six of the seven products received documentation that explicitly stated that they could lose their entire investment in those products.
31. In July 2022, the Respondent engaged the services of a new compliance officer with specific experience with exempt market products in order to ensure that all new products are adequately vetted by the Respondent and that all of the Respondent’s KYP obligations are complied with.

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 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.