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, Scotia Securities 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. Prior to April 2020, the Respondent failed to implement adequate policies and procedures and an adequate system of controls and supervision to ensure that its Approved Persons processed certain transactions as switches, rather than as redemptions and purchases, which resulted in the Approved Persons receiving increased performance credits which counted toward their sales targets, contrary to MFDA Rules 2.5.1 and 2.1.1 and MFDA Policy No. 2;
   2. Prior to January 2021, the Respondent failed to implement adequate policies and procedures and an adequate system of controls and supervision to prevent its Approved Persons from establishing and subsequently cancelling pre-authorized contribution plans without adequate evidence of client authorization, which resulted in some of the Approved Persons receiving increased performance credits which counted toward their sales targets, contrary to MFDA Rules 2.5.1 and 2.1.1 and MFDA Policy No. 2;
   3. Prior to July 2021, the Respondent failed to implement adequate policies and procedures and an adequate system of controls and supervision to prevent its Approved Persons from manually adjusting their sales results, which resulted in some of the Approved Persons receiving increased performance credits which counted toward their sales targets, contrary to MFDA Rules 2.5.1 and 2.1.1;
   4. Between March 2020 and July 2020, at the onset of the COVID-19 pandemic, the Respondent failed to implement adequate policies and procedures and an adequate system of controls and supervision to ensure that it provided redemption cheques to clients in a timely manner, contrary to MFDA Rules 2.5.1 and 2.1.1;
   5. Prior to April 13, 2021, the Respondent failed to implement adequate policies and procedures and an adequate system of controls and supervision to ensure that clients did not purchase certain mutual funds in non-registered accounts which, according to the funds’ simplified prospectuses and fund facts documents, were not suitable to be held in such accounts, contrary to MFDA Rules 2.2.1[1], 2.5.1 and 2.1.1; and
   6. Between November 24, 2021 and February 9, 2022, the Respondent failed to ensure that some client account transfer requests that were sent to one of its fax servers were processed in a timely manner, contrary to MFDA Rules 2.5.1 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 $1,000,000 in certified funds upon acceptance of the Settlement Agreement, pursuant to s. 24.1.2(b) of MFDA By-law No.1;
   2. the Respondent shall pay costs in the amount of $75,000 in certified funds upon acceptance of the Settlement Agreement, pursuant to s. 24.2 of MFDA By-law No.1;
   3. the Respondent shall in the future comply with MFDA Rules 2.5.1, 2.2.1, 2.1.1 and MFDA Policy No. 2; and
   4. a senior officer of the Respondent who is authorized to appear on behalf of 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. The Respondent is registered in all provinces and territories in Canada as a mutual fund dealer and has been a Member of the MFDA since November 2001. At the material times described below, there were approximately 5,500 Approved Persons registered with the Respondent.
8. The Respondent’s head office is located in Toronto, Ontario.

Overview

9. As described in this Settlement Agreement, the Respondent failed to implement and maintain adequate policies and procedures and an adequate system of controls and supervision to ensure that the handling of its business is in accordance with the MFDA’s By-law, Rules and Policies.
10. The Respondent self-identified the extent of each of the contraventions.
11. As a result of contraventions #1-3 described in further detail below, some Approved Persons registered with the Respondent received performance credits from the Respondent which they were not otherwise entitled to receive. The performance credits counted toward the Approved Persons’ sales targets. If an Approved Person achieved their sales target, he or she would be eligible to receive increased compensation from the Respondent.
12. As described below, the Respondent has and is developing substantial widespread process and governance enhancements to prevent contraventions similar to those addressed in the Settlement Agreement from occurring in the future and to ensure sufficient training of its Approved Persons (the “Control Remediation”).
13. In addition to the Control Remediation, the Respondent has also developed a comprehensive remediation plan to identify all clients who may have been adversely impacted by the contraventions described herein. The scope of that remediation is particularized below (the “Client Remediation”). The Respondent’s general approach to Client Remediation has been to provide remediation for all transactions that fit within certain criteria in order to ensure the broadest approach to addressing potential client harm.

Contravention #1 – Processing Transactions as Redemptions and Purchases Rather than as Switches

Background

14. At all material times, the Respondent did not award performance credits to its Approved Persons for transactions processed as switches.[2]
15. When a transaction is processed as a redemption and purchase, rather than as a switch, the client is exposed to the risk of a change in value of the client’s investments while the client is out of the market between the time of redemption and the time when the purchase trade is placed.
16. In 2019, the Respondent became aware that one of its Approved Persons had processed transactions in client accounts as redemptions and purchases, rather than as switches, and had received performance credits from the Respondent for the transactions. Had the Approved Person processed the transactions as switches, he would not have been eligible to receive any performance credits from the Respondent.
17. The Respondent then commenced an internal investigation to determine whether other Approved Persons had engaged in similar conduct.

The Respondent’s Investigation

18. During the Respondent’s internal investigation, the Respondent identified additional Approved Persons who processed redemptions and purchases in a short time frame as opposed to switches. The Respondent conducted a thorough and in-depth investigation of those Approved Persons including reviewing relevant documents and interviewing the Approved Persons and their supervisors, where appropriate.
19. The investigation revealed that:
    1. between November 1, 2017 to January 31, 2020, 46 Approved Persons registered with the Respondent processed approximately 757 transactions as redemptions and purchases rather than switches, which resulted in the Approved Persons receiving increased performance credits;
    2. some transactions were processed as redemptions and purchases pursuant to the instructions of the client, and therefore, the Approved Persons properly received performance credits for the transaction;
    3. a small number of the Approved Persons processed transactions as redemptions and purchases rather than as switches for the purpose of increasing their performance credits;
    4. the predominant response from the Approved Persons as to why they were engaging in the practice was that they misunderstood the procedures for when transactions ought to be processed as switches; and
    5. some clients suffered losses as a result of the delay caused by processing these transactions as redemptions and purchases rather than as switches (conversely, some clients also benefitted from gains).
20. Based on the findings described above, the Respondent admits that deficiencies existed in its policies and procedures and controls relating to transactions that ought to be processed as switches, including:
    1. the Respondent did not adequately train its Approved Persons to ensure that they understood that certain transactions ought to be processed as switches so that clients are not exposed to the risk of market loss while the trade settles; and
    2. the Respondent awarded performance credits to its Approved Persons when they processed transactions as redemptions followed by purchases, thereby incentivizing Approved Persons to process transactions as redemptions and purchases, rather than as switches, without implementing adequate controls and supervision to ensure that the transactions were processed in the best interests of the clients.

Approved Person Discipline

21. Of the 46 Approved Persons referred to in paragraph 19(a) above, 8 had resigned prior to the investigation. The Respondent determined that the remaining 38 Approved Persons had engaged in conduct warranting internal discipline, as they were determined to have breached the Respondent’s Code of Conduct (a policy which outlines the Respondent’s ethical standards and values to abide by).
22. The Respondent developed a matrix for the discipline of Approved Persons under investigation. This matrix provided for three levels of discipline which depended upon the severity of the misconduct:
    1. Misconduct: This level of discipline was imposed when there was a low level of misconduct (e.g. an honest misunderstanding or mistaken belief of the appropriate procedure for processing the transaction). The Approved Persons received a Written Warning and were required to successfully complete the IFSE Institute (the educational arm of Investment Funds Institute of Canada (“IFIC”))’s Ethics and Professional Conduct Course within six months;
    2. Serious Misconduct: This level of discipline was imposed when there was a moderate level of misconduct (e.g. some level of understanding of the appropriate procedure, but no clear intention to process the transaction in a certain manner for the purposes of increasing sales credit, and provided reasonable explanations for some transactions). The Approved Persons received a Final Warning for Serious Misconduct, were required to successfully complete IFIC’s Ethics and Professional Conduct Course within six months, were placed under strict supervision for 1 year, and received a financial penalty; or
    3. Egregious Misconduct: This level of discipline was imposed when there was a high level of misconduct (e.g. initiated transactions for the purposes of increasing sales credit).These Approved Persons received Termination of Employment for Cause.
23. Of the 38 Approved Persons who were determined to have engaged in conduct warranting internal discipline for processing transactions as redemptions and purchases as opposed to switches, the discipline breakdown was as follows:
    1. 22 Approved Persons were determined to have engaged in Misconduct;
    2. 14 Approved Persons were determined to have engaged in Serious Misconduct; and
    3. 2 Approved Persons rose to the level of Egregious Conduct and were therefore terminated.
24. The Respondent has provided the results of its investigation to Staff. Staff will independently determine any enforcement action that will be taken against Approved Persons who engaged in such conduct.

Control Remediation

Procedure and Training Enhancements

25. Upon discovery of the issue, the Respondent established and implemented an ongoing educational campaign to ensure that all Approved Persons are aware of the circumstances in which it would be appropriate to process transactions by way of switch as opposed to a redemption and purchase. Among other things, on July 26, 2019, the Respondent sent a communication to all Approved Persons advising them when it is appropriate to execute transactions by way of switch.
26. In early 2020, the Respondent sent a communication to all Approved Persons which stated that if any performance credit was received for transactions processed as redemptions and purchases that should have instead been processed as a switch, it would be reversed effective from November 1, 2019.
27. In July 2019, the Respondent posted a communication on its internal website with respect to when it is appropriate to conduct transactions by way of switch as opposed to a redemption and purchase. In March 2020, the Respondent updated its training materials to particularize the circumstances in which transactions are to be processed by way of switch. In January 2022, additional training was prepared for Approved Persons respecting when a transaction should be processed by way of a switch, as opposed to a redemption and purchase.

System Enhancements

28. In addition, the Respondent took the following steps:
    1. In April 2020, the Respondent made a system enhancement to prevent its Approved Persons from receiving any performance credit in circumstances where a redemption and subsequent purchase occurred within 30 days;
    2. In May 2020, the Respondent reversed any performance credit applied since November 1, 2019 (FY20) which had been advanced to an Approved Person for a redemption and subsequent purchase which occurred within 30 days; and
    3. In April 2021, the Respondent implemented a system enhancement to improve record keeping and provide an automated system prompt which reminds Approved Persons that when a client intends to redeem or purchase a fund in the same fund family, and in the same currency, the transaction must be executed by way of switch.

Client Remediation

29. In order to ensure that clients did not suffer a loss as a result of transactions processed as redemptions and purchases in circumstances where they should have been processed by way of switch, the Respondent engaged Deloitte LLP (“Deloitte”) to assist it with assessing which clients were impacted and to determine the quantum of   When assessing impact to clients, the Respondent and Deloitte reviewed transactions that occurred during a 6 year period between June 1, 2014 and May 31, 2020.  In doing so, the Respondent and Deloitte did not determine whether or not the client had instructed the Approved Person to proceed with the transaction in this manner, but rather assumed that a transaction processed by way of a redemption and purchase when it could have been processed by way of switch, was in scope for remediation with certain reasonable assumptions to account for client choice.  As a result of this review, 9,982 clients have received remediation totaling $3,747,242.92.[3]

Contravention #2 – Cancelled PACs

Background

30. A pre-authorized contribution plan (“PAC”) is a type of plan whereby an Approved Person arranges for withdrawals to be made from a client’s bank or similar account at regular intervals (e.g. bi-weekly or monthly) in order to purchase one or more pre-selected mutual funds in the client’s investment account.
31. In August 2018, two clients (spouses) complained to the Respondent that an Approved Person registered with the Respondent had, without the clients’ knowledge or authorization, established PACs in their accounts and then cancelled the PACs prior to when the first contribution was scheduled to be processed.
32. After receiving the complaint described above, the Respondent commenced an internal investigation to determine the extent to which its Approved Persons had established and cancelled PACs without client authorization, and whether the rationale for this activity may have been to generate performance credits from the Respondent which the Approved Persons were not otherwise entitled to receive.

The Respondent’s Investigation

33. During the Respondent’s internal investigation, the Respondent identified Approved Persons who had a high number of PACs that were set up but cancelled prior to the first contribution. In relation to those Approved Persons, the Respondent manually reviewed a sample of the identified transactions in order to determine whether or not there was adequate evidence that the Approved Person secured client authorization in relation to both setting up the PAC and the cancellation of the PAC.
34. The Respondent also reviewed any client complaints received during the six years preceding the investigation that concerned potentially unauthorized PACs.
35. Similar to contravention #1, the Respondent reviewed documents related to these transactions and interviewed Approved Persons where it appeared that they may not have had sufficient client authorization to set up a PAC.
36. The Respondent’s internal investigation revealed that:
    1. between November 1, 2017 to October 31, 2020, approximately 2,421 PACs were set up and subsequently cancelled.  For the sample reviewed, in the large majority of those instances there was no documentary evidence of client authorization for the PAC set up and/or cancellation. Approved Persons involved in these transactions received performance credits when they set up the PACs even though, in most instances, the PACs were cancelled prior to when the first contribution was scheduled to be processed;
    2. upon further investigation, some PACs were set up and subsequently cancelled pursuant to the instructions of the client;
    3. 19 of the Approved Persons set up and subsequently cancelled PACs without client authorization specifically for the purpose of increasing their performance credits;
    4. the majority of Approved Persons failed to record adequate evidence of client authorization for the PAC set up and/or cancellation; and
    5. 56 Approved Persons were determined to have engaged in conduct warranting discipline.
37. Based on the findings described above, the Respondent admits that deficiencies existed in its policies and procedures and controls relating to establishing PACs for clients, including:
    1. the Respondent awarded performance credits to Approved Persons who set up a PAC or increased the contribution amount of a PAC, even if the PAC was subsequently cancelled without any contributions having been processed, without implementing adequate controls and supervision to ensure that the PACs were set up and cancelled in the best interests of the clients; and
    2. when an Approved Person cancelled a PAC, the Respondent did not require the Approved Person to document the reason for the PAC cancellation.

Approved Person Discipline

38. 127 Approved Persons registered with the Respondent were identified for further investigation in relation to this issue. Of the 127 Approved Persons, 31 had resigned prior to the investigation. Of the 96 remaining Approved Persons that were investigated, 56 Approved Persons were determined to have engaged in conduct warranting internal discipline, as they were determined to have breached the Respondent’s Code of Conduct.
39. As described above in paragraph 22, the Respondent developed a discipline matrix for the discipline of Approved Persons under investigation.
40. The discipline breakdown for the 56 Approved Persons referenced above was as follows:
    1. 25 were determined to have engaged in Misconduct;
    2. 17 were determined to have engaged in Serious Misconduct; and
    3. 14 were determined to have engaged in Egregious Misconduct and were therefore terminated.
41. The Respondent has provided the results of its investigation to Staff. Staff will independently determine any enforcement action that will be taken against Approved Persons who engaged in such conduct.

Control Remediation

42. The Respondent took the following steps to prevent this issue from occurring in the future:
    1. in April 2020, the Respondent sent a communication to all of its Approved Persons which stated that any performance credit received for PACs cancelled prior to the first contribution will be reversed effective from November 1, 2019;
    2. in October 2020, the Respondent sent a communication to all of its Approved Persons that effective November 1, 2020, performance credits for PACs will only be granted when the initial contribution is activated within 90 calendar days of the PAC set-up/increase date;
    3. the Respondent reversed all performance credits for all PACs in FY2020 (starting November 1, 2019) that were either: (1) set up and cancelled prior to first contribution; or (2) were set up to start more than 90 days in the future;
    4. in January 2021, the Respondent made a system enhancement to only provide performance credits where the first PAC payment occurred within 90 days of set up/increase;
    5. as of May 2021, the Respondent had reversed all performance credits for all PACs in FY2021 (first quarter) that were either: (1) set up and cancelled prior to first contribution; or (2) were set up greater than 90 days in the future;
    6. in June 2021, the Respondent implemented enhanced record keeping requirements related to non-face to face trading instructions, including the set up of PACs and all these trades are subject to review by Tier 1 Supervision;
    7. as of November 2021, the Respondent enhanced its system to require Approved Persons to document on their internal system a reason for PAC cancellation and the cancellation date. This field has been retained in the Respondent’s database and monitoring of the reasons was developed and implemented in 2022;
    8. in November 2021, the Responded provided training for Approved Persons regarding the requirement to take more detailed notes of telephone instructions; and
    9. in January 2022, the Respondent provided training for Approved Persons regarding best practices for PAC transactions, including guidance regarding recording the reasons for PAC cancellation and PAC cancellation date.

Client Remediation

43. In order to ensure that clients did not suffer a loss as a result of transactions in which the Approved Person did not have sufficient evidence of client authorization to set up a PAC, the Respondent engaged Deloitte to assist it with assessing which clients were impacted and to determine the quantum of loss. When assessing the impact to clients, the Respondent and Deloitte reviewed transactions that occurred during the 6 year period between November 1, 2014 to October 31, 2020.  In so doing, the Respondent and Deloitte did not determine whether or not the client had instructed the Approved Person to proceed with the transaction, but rather assumed that, in the absence of adequate evidence of client authorization, the client should be remediated for any losses suffered. A small number of these transactions led to a client loss because the PAC was not cancelled prior to the client’s first contribution and the market decreased after purchase. As a result of this review, 7 clients have received remediation totaling $426.64.[4]

Contravention #3 – Adjustments to Sales Results

Background

44. In July 2019, the Respondent detected that one of its Approved Persons had manually adjusted his sales results on the Respondent’s sales tracking system in some instances in order to receive performance credits that he was not otherwise entitled to receive.
45. The Respondent then commenced an internal investigation to determine whether other Approved Persons had engaged in similar conduct.

The Respondent’s Investigation

46. During the Respondent’s internal investigation, the Respondent identified 73 Approved Persons, which included 8 Branch Managers, who appeared to have engaged, or who supervised Approved Persons who engaged, in similar conduct during the period November 1, 2017 to October 31, 2020. However, 13 of these Approved Persons or Branch Managers had resigned prior to the investigation.
47. Of the remaining 60 Approved Persons or Branch Managers who had not resigned prior to the investigation, those who engaged (or supervised an Approved Person who engaged) in manual self-adjustments in FY2018 and FY2019, or who engaged (or supervised an Approved Person who engaged) in manual self-adjustments after the Respondent issued a communication in FY2020 to Approved Persons which cautioned against making manual self-adjustments, were interviewed. The remaining Approved Persons or Branch Managers who made (or supervised an Approved Person who made) manual self-adjustments in FY2020, but prior to the communication, were not interviewed, and instead completed questionnaires.
48. The Respondent’s internal investigation revealed that the 65 Approved Persons performed a total of approximately 8,734 manual sales adjustments. However, the Respondent was unable to reasonably determine the number of these manual sales adjustments that were adjusted for legitimate and appropriate reasons, as compared to those that were adjusted to receive performance credits that the Approved Person was not otherwise entitled to receive.
49. Based on the findings described above, the Respondent admits that deficiencies existed in its policies and procedures and controls relating to sales adjustments made by Approved Persons, insofar as the Respondent permitted its Approved Persons to manually adjust their sales results on the Respondent’s sales tracking system without receiving prior managerial approval, thereby failing to prevent Approved Persons from adjusting their sales results for the sole purpose of receiving increased performance credits.

Approved Person Discipline

50. The Respondent determined that the 60 Approved Persons and Branch Managers who had not resigned prior to the investigation had engaged in conduct warranting internal discipline, as they were determined to have breached the Respondent’s Code of Conduct.
51. As described above in paragraph 22, the Respondent developed a discipline matrix for the discipline of Approved Persons under investigation.
52. The discipline breakdown for the 60 Approved Persons and Branch Managers referenced above was as follows:
    1. 14 were determined to have engaged in Misconduct;
    2. 28 were determined to have engaged in Serious Misconduct; and
    3. 18 were determined to have engaged in Egregious Misconduct and were therefore terminated.
53. The Respondent has provided the results of its investigation to Staff. Staff will independently determine any enforcement action that will be taken against Approved Persons who engaged in such conduct.

Control Remediation

54. In September 2020, the Respondent introduced a pilot project in Atlantic Canada to centralize the approval of manual adjustments and the full country was moved to a centralized approval model by the end of July 2021. The network is concurrently being monitored to identify any transactions taking place outside of the centralized approval model.
55. The Respondent implemented a system enhancement to its sales tracking software on April 17, 2022 which removed the ability for Approved Persons to make manual adjustments in branches.
56. There was no client loss or impact in respect of this contravention.

Contravention #4 – Delays in Issuing Redemption Cheques to Clients

Background

57. In or around the fall of 2020, the Respondent received client complaints concerning the fact that clients were not receiving redemption cheques in a timely manner.
58. After receiving the complaints, the Respondent commenced an internal investigation. The investigation revealed that the delays occurred primarily between May and July 2020, and were due to a temporary business process that the Respondent implemented in response to the onset of the COVID-19 pandemic and the switch from in-office to remote work for the department responsible for mailing cheques.
59. As a temporary measure, the mailing of cheques was assigned to another operations department that continued to work onsite. This switch resulted in delays, which were not reported to the original department in a timely manner. The delivery of cheques by Canada Post during this period may have also contributed to the delay in clients receiving cheques.
60. Upon identification of the issue in July 2020, the Respondent immediately reverted to its original processes and restored responsibility for mailing cheques to clients to the department that had been responsible for that function prior to the pandemic. The Respondent was thereby able to correct the delays in mailing out cheques quickly.

Client Remediation

61. The Respondent conducted an analysis to determine how many cheques may have been impacted by delays causing a client loss.
62. The Respondent determined that approximately 1,331 cheques were not cashed within 30 calendar days of issuance and therefore may have caused the client who received the cheque to incur a loss (i.e., if the client invested the funds into another investment product late and the market had appreciated during the period of the delay). The Respondent determined that it would compensate all clients who cashed their cheques more than 30 calendar days following issuance, with an amount representing the potential loss of opportunity for those clients.  In doing so, the Respondent did not determine whether or not the cheques cashed more than 30 calendar days following issuance were a result of delays in the Respondent’s internal process, Canada Post, or by the client but rather assumed that in the absence of evidence of the cause of the delay that the client should be remediated for any losses suffered.
63. As a result of this review, 827 accounts have received remediation totaling $740,145.[5]

Control Remediation

64. In August 2021, the Respondent launched an external electronic payment clearing service to enable the electronic processing of transfers out to participating financial institutions, rather than relying on physical cheque issuance, which eliminates the need for the vast majority of physical cheques that the Respondent issues to other financial institutions.
65. In November 2021, the Respondent implemented additional procedures for cheques processed outside of the above referenced system to ensure that the cheques were being transferred in a timely manner.

Contravention #5 – Purchases of Funds in Non-Registered Accounts

Background

66. At all material times, the Respondent offered the Scotia NASDAQ Index Fund, Scotia CanAM Index Fund and Scotia International Equity Index Fund (the “Funds”) for sale to its clients.
67. At all material times, the Funds’ simplified prospectuses and fund facts documents stated that the Funds were not suitable to be purchased in non-registered accounts because their distributions were considered income, which is taxed at a higher rate than capital gains when received outside of a registered account.
68. On April 13, 2021, as a result of client complaints, it came to the Respondent’s attention that some of the Respondent’s clients had purchased units of the Funds in their non-registered accounts.
69. The Respondent then commenced an internal investigation to determine the extent of the issue.

The Respondent’s Investigation

70. The Respondent’s internal investigation revealed that:
    1. between January 1, 2015 and March 31, 2021, 2,943 clients of the Respondent purchased units of the Funds in their non-registered accounts; and
    2. the Respondent’s system did not have a sufficient monitoring system in place in order to identify that the purchases of the Funds in non-registered accounts were unsuitable according to the Funds’ simplified prospectuses and fund facts documents.
71. Based on the findings that were made at the conclusion of its investigation as described above, the Respondent admits that it failed to put in place adequate controls to ensure that the Funds were not purchased in non-registered accounts, in accordance with the Funds’ simplified prospectuses and fund facts documents.

Client Remediation

72. By virtue of the Funds’ distributions being treated as income as opposed to capital gains for Funds held in non-registered accounts, the Respondent will pay compensation to all clients who purchased these affected Funds in their non-registered accounts between January 1, 2015 to December 31, 2021 and received a distribution as income. Specifically, the Respondent will pay compensation to each client to compensate them based upon an assumed tax rate for taxes that would not otherwise have been payable had the returns been treated as capital gains. Clients will be informed that they are eligible to submit complaints to the Respondent if they believe that the compensation is insufficient to account for their loss.
73. The Respondent will pay a total of at least $6 million in compensation to clients.

Control Remediation

74. The Funds have now been restructured, on notice to holders of the Funds, such that one of the Funds was merged into a different Fund, and the investment objectives of the other two Funds were amended. As a result of the restructuring, there is no longer a restriction in the Funds’ simplified prospectuses and fund facts documents that they cannot be purchased in non-registered accounts.

Contravention #6 – Failure to Process Fax Transfer Requests in a Timely Manner

75. The Respondent utilizes computer fax servers to process certain transfer requests received from clients by fax.
76. On November 24, 2021, the Respondent had a third party vendor make a software update to some of its fax servers. Unbeknownst to the Respondent at the time, the third party vendor failed to make the software update to one of the fax servers (the “Fax Server”).
77. As a result, between November 24, 2021 and February 9, 2022, the Respondent failed to process approximately 2,077 non-ATON (manual) transfer requests that were sent to the Fax Server in respect of 1,744 clients.
78. On February 9, 2022, the Respondent discovered that the third party had failed to make the software update to the Fax Server as described above, and the Respondent arranged for the software update to be immediately made to the Fax Server.
79. The Respondent then immediately took steps to process the transfer requests that had been sent to the Fax Server between November 24, 2021 and February 9, 2022.
80. The Respondent was able to retrieve and process the transfer requests that had been sent to the Fax Server between December 2, 2021 and February 9, 2022.
81. The Respondent was not able to retrieve the transfer requests that had been sent to the Fax Server between November 24, 2021 and December 1, 2021. However, the Respondent contacted several financial institutions that had sent a large number of transfer requests to the Fax Server, and the Respondent concluded that almost all of the transfer requests had been processed (i.e. by virtue of being sent to another fax server or being re-sent to the Fax Server after December 1, 2021).

Client Remediation

82. The Respondent conducted a review to identify all clients who were affected by the delay in processing transfer requests to the Fax Server. As a result of this review, approximately 1,702 clients will receive remediation totaling at least $350,000. Clients will be informed that they are eligible to submit complaints to the Respondent if they believe that the compensation is insufficient to account for their loss.

Additional Factors

Proactive and Exceptional Cooperation

83. The Respondent conducted an extensive review of the contraventions described above and provided the MFDA with regular progress updates. Voluntarily and at its own initiative, the Respondent developed the Control and Client Remediation in respect of all of the foregoing contraventions. The Respondent conducted investigations of all Approved Persons who were identified during its internal investigations and reported the results of those investigations to Staff.
84. The Respondent engaged legal counsel and Deloitte to ensure that its investigation was thorough and all appropriate client remediation was considered and effected. The Respondent promptly shared the detailed findings of the review with Staff and otherwise fully cooperated with Staff’s regulatory investigation.
85. Staff has considered this proactive and exceptional cooperation as a factor in agreeing to the sanction set out above.
86. By entering into this Settlement Agreement and conducting its own investigation, including a fulsome remediation plan, the Respondent has saved the MFDA the time, resources, and expenses associated with conducting a contested hearing on the allegations.

Governance Remediation

87. In 2021, the Respondent expanded the composition of its internal governance committee by adding additional leadership from key stakeholder groups supporting the Respondent to strengthen the coordination and oversight processes.
88. The Respondent completed a review of the governance over trade processing, including a review of the organizational structure, roles and responsibilities, issues management and reporting, and has submitted a report to its internal governance committee that has identified any additional risks and opportunities for control enhancements. This report has also been submitted to the Respondent’s board. The Respondent will continue to monitor these issues and provide regular status updates to the Respondent’s internal governance committee.

Donation to the Canadian Foundation for Economic Education

89. As referenced above, the Respondent will be making a charitable donation to the Canadian Foundation for Economic Education, a not-for-profit institution, in respect of client remediation amounts that are less than $25.

V. ADDITIONAL TERMS OF SETTLEMENT

90. 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.
91. 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.
92. 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.
93. 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.
94. 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.
95. 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.
96. 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.
97. 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.