Overview
1. This decision relates to the application
of Mr. Ng (the Applicant) to transfer his registration
as a Mutual Fund Salesperson to Portfolio Strategies Corporation.
Staff has recommended that the Director deny this application.
Background
2. The Applicant was first granted registration
in 1992 as a Mutual Fund Salesperson with The Investment Centre.
In 1995, he transferred to the Info Financial Group and in
December 1998 he transferred to Fundex. Fundex dismissed Mr.
Ng for cause on July 31, 2002. On September 5, 2002, Portfolio
Strategies Corporation submitted Mr. Ng's application to transfer
his registration. In a letter dated January 16, 2003, Staff
advised the Applicant that they recommended the Director deny
his application based on grounds that he was not suitable
for registration as a Mutual Fund Salesperson under the Securities
Act (Ontario) (the Act).
3. After receiving the letter from Staff,
Mr. Ng requested the opportunity to be heard by the Director
pursuant to subsection 26(3) of the Act that states:
(3) Refusal -- The Director shall not refuse
to grant, renew, reinstate or amend registration or impose
terms and conditions thereon without giving the applicant
an opportunity to be heard.
4. The opportunity to be heard was done through
the written submissions. Counsel for Registration Staff of
the Ontario Securities Commission (OSC) provided reasons
for their recommendation on May 9, 2003. Counsel for the Applicant
provided his submission on June 13, 2003 and counsel for Staff
replied on June 23, 2003.
Staff Submissions
5. The Applicant was dismissed for cause and
as a result Staff investigated the circumstances of his dismal.
The reasons for Mr. Ng's termination were provided by Fundex
in the termination notice:
Mr. Ng had been on mandatory supervision
since pre-signed order entry tickets were found in his office
files in August 2001.
Subsequent to that finding, several complaints
were lodged with the Ontario Securities Commission against
Mr. Ng. Ken Booker and Laurie Toledano from the Enforcement
Division are currently investigating those files. An OSC
audit in April 2002 revealed additional regulatory concerns.
An internal audit was performed in June 2002 which again
revealed deficiencies in the way Mr. Ng operated.
6. Staff identified three major concerns with
the Applicant's activities based on the results of the investigation,
the interviews with complainants and the OSC compliance field
review:
• Unsuitable
risk level in clients' portfolios based on the risk tolerance
disclosed in their KYC forms,
• Leveraged
investments recommended for clients where such investments
were not suitable, and
• The use of
pre-signed order forms to purchase or redeem mutual funds
on his clients' behalf, often without consulting his clients
of the action he was to take.
7. Staff concluded that Mr. Ng lacked the
competence and integrity required of a securities industry
professional and was not suitable for registration and recommended
that the Director deny his application.
8. The Staff submission provided details of
the findings above, which I will not repeat here, however,
they support Staff's position that the Applicant had recommended
unsuitable investments to his clients.
9. The written submissions of Staff provided
a summary of the law in this area. Section 26 of the Act provides
that:
Granting of Registration -- Unless
it appears to the Director that the applicant is not suitable
for registration, renewal of registration or reinstatement
of registration or that proposed registration, renewal of
registration, reinstatement of registration or amendment
of registration is objectionable, the Director shall grant
registration, renewal of registration, reinstatement of
registration or amendment of registration to an applicant.
10. Clearly the onus of proof rests with Staff
to establish that the registrant is "not suitable for
registration" or that the registration is otherwise "objectionable".
11. Staff referred to a number of Commission
decisions including the Mithras and Charko decisions
that read in part as follows:
... the role of the Commission is to protect
the public interest by removing from the capital markets
-- wholly or partially, permanently or temporarily, as the
circumstances may warrant -- those whose conduct in the
past leads us to conclude that their conduct in the future
may well be detrimental to the integrity of those capital
markets. We are not here to punish past conduct; that is
the role of the courts, particularly under section 118 of
the Act. We are here to restrain, as best we can, future
conduct that is likely to be prejudicial to the public interest
in having capital markets that are both fair and efficient.
In doing so we must, of necessity, look to past conduct
as a guide to what we believe a person's future conduct
might reasonably be expected to be; we are not prescient,
after all.
Re Mithras Management Ltd., (1990)
13 OSCB 1600
... the Director must necessarily place
a strong reliance on an applicant's past behaviour.
Re Charko, (1992) 15 OSCB 3986
12. Staff also referred to various other decisions
(listed below) where registrants had demonstrated a lack of
understanding of their duties as registrants and whose reinstatement
was denied.
13. Re Vilas-Boas (200), 25 OSCB 6401
Re Ramdhani (2002) 25 OSCB 1745
Re DiCostanzo (2001) 24 OSCB 5307
Re Bushell (2001) 24 OSCB 5669
Re Thatcher (2001) 24 OSCB 631
Re Curia (2000) 23 OSCB 1745
Re Jaynes (2000) 23 OSCB 1543
Re Dornford (1998), 21 OSCB 7499
14. Staff further noted that in considering
an application for registration, it is appropriate to take
into account the principle of general deterrence. As expressed
in Re Jaynes:
In my view, to reinstate Mr. Jaynes at this
time despite his inappropriate past conduct and serious
breaches of his duties as a registrant, even with conditions
or restrictions on his registration would be to send an
unequivocal message to the marketplace that such conduct
has little consequence. Such a message would be inconsistent
with the Director's obligation to act in accordance with
the Commission's investor protection mandate. Mr. Jaynes'
conduct as a registrant had clear consequences for many
of his clients at Marchment. That such conduct should have
little or no consequences for Mr. Jaynes, or indeed others
who would follow his example and breach their obligations
in like fashion, is inconceivable and wholly inconsistent
with the important principle of general deterrence...
Re Jaynes (2000) 23 OSCB 1543
15. Staff concluded that the Applicant failed
to meet the standards set out in the Act in terms of determining
the suitability of investments for his clients (OSC rule 31-505,
s. 1.5), the heightened standards of duty for leveraged investments
(National Instrument 33-102), he had no authority to conduct
discretionary trading (Ont. Reg 1015, s. 98) and he did not
deal fairly, honestly and in good faith with his clients (OSC
rule 31-505, s. 2.1).
16. Staff submitted that Mr. Ng is not suitable
for registration as a Mutual Fund Salesperson and as a result,
his application should be rejected.
Applicant's Submissions
17. The key points made in Applicant's submissions
are:
• The burden
of proof for determining an applicant is unsuitable under
section 26 of the Act is the same as a proceeding under
section 127,
• Some of the
complaints should be discounted because they were withdrawn
or not acted upon by Fundex,
• The Applicant
had not recommended unsuitable investments rather his clients
were the victims of bad timing,
• The Applicant
met the higher standards required when recommending leveraged
investments as witnessed by disclosure forms clients signed
indicating they understood the risks of leveraged investments,
and
• There has
been no action by the Enforcement Branch of the OSC relating
to any of the activities described in Staff's submission.
18. The Applicant also noted that the Director
decisions relied on in the Staff submission are distinguishable
from the case of Mr. Ng.
19. The Applicant concluded that there were
relatively few complaints against Mr. Ng when the whole of
his business is considered and that the complaints related
to bad timing. He noted that the obligation to disclose the
risk of leveraged investments is demonstrated through the
signed forms. The Applicant also noted there is no clear evidence
that Mr. Ng engaged in discretionary trading or that he did
not deal with his clients fairly.
20. The Applicant submitted that there is
no valid reason to deny Mr. Ng's registration.
Reply of Staff
21. Staff's made a reply to the Applicant's
submissions. I was interested in the reply to the issues of
the burden of proof, and that the Applicant had not recommended
unsuitable investments rather his clients were the victims
of bad timing.
22. Staff submitted that the standard of proof
for determining suitability under section 26 is different
than that for proceedings under section 127. The difference
in the standard is consistent with difference in the scope
of the sections. I agree with Staff that the Director must
only find that the applicant appears to be unsuitable and
that is a different standard than section 127.
23. In addition to the submissions by Staff
and the Applicant, I referred to the 1991 OSC Annual Report.
Under the heading of Registration Section, it stated:
The section administers a registration system
which is intended to ensure that all registrants under the
Securities Act and the Commodity Futures Act meet appropriate
standards of integrity, competence and financial soundness,
...
Ontario Securities Commission, Annual Report
1991, Page 16
This is consistent with Staff's description
of the burden of proof under section 26.
24. In regard to the suitability of the investments
recommended by Mr. Ng, the Applicant had submitted that no
expert evidence had been provided to make this determination.
Staff replied that there was clear evidence from the charts
and documents supporting their submission and the Director
was competent to make this judgement. I agree with Staff on
this point. The four cases cited in Staff's reply (p.7, par.
29) clearly represent unsuitable investments recommended by
the Applicant.
Decision
25. I have reviewed and considered all written
submissions provided to me and based on that material, I find
the Applicant unsuitable to be granted registration as a Mutual
Fund Salesperson.
