R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
DINO P. DELELLIS,WILLIAM R. KENNEDY
THE HEIGHT OF EXCELLENCEFINANCIAL PLANNING GROUP INC.
WITH THE HEIGHT OF EXCELLENCEFINANCIAL PLANNING GROUP INC.
1. By Notice of Hearing dated April 9, 1997, the Ontario Securities Commission (the "Commission") announced that it proposed to hold a hearing to consider,inter alia;
(a) whether it is in the public interest to order, pursuant to clause 1 of subsection 127(1) of the Act, that the registration granted to The Height of ExcellenceFinancial Planning Group Inc. ("FPG") be suspended or restricted for such period as is specified in the order or that terms and conditions be imposed on theregistration;
(b) whether it is in the public interest to order, pursuant to clause 4 of subsection 127(1) of the Act, that FPG submit to a review of its practices and proceduresand institute such changes as may be ordered by the Commission; and
(c) whether it is in the public interest to order, pursuant to clause 6 of subsection 127(1) of the Act, that FPG be reprimanded.
II JOINT SETTLEMENT RECOMMENDATION
2. The staff of the Enforcement Branch of the Commission ("Staff") agrees to recommend the settlement of the proceedings against FPG commenced by Noticeof Hearing dated April 9, 1997 in accordance with the terms and conditions set out hereinafter. FPG agrees to the settlement on the basis of the facts hereinafterset out.
3. Staff and FPG agree that only if, as and when the settlement is approved by the Commission, may this settlement agreement and Appendix "A" and Appendix"B" attached hereto (the "Settlement Agreement") be released to the public.
III STATEMENT OF FACTS
4. FPG agrees with the facts set out in this section of the Settlement Agreement.
5. Staff acknowledges that the facts contained in this section of the Settlement Agreement are consistent with its investigation.
6. DeLellis is registered with the Commission, to sell mutual funds and limited market products. DeLellis worked out of the FPG branch office in London,Ontario.
7. FPG is registered with the Commission as a mutual fund dealer and limited market dealer. FPG was DeLellis' employer and sponsor from February 29, 1996 toApril 8, 1997. FPG's head office is in North York, Ontario.
8. DPM Securities Inc. ("DPM") is registered with the Commission as a securities dealer. DPM is associated with FPG. DPM's head office is in Pointe Claire,Quebec.
(iii) DeLellis' Registration on Terms and Conditions
9. February 29, 1996, DeLellis' registration as a salesperson was transferred to FPG subject to the condition that FPG's Branch Manager and FPG's ComplianceOfficer ensure that prior to the sale of any limited market product, all investors acknowledged in writing that: (a) they have been advised to seek legal,accounting or other professional investment advice; (b) they have received a copy of the offering memorandum; and (c) they have signed a disclosure documentdescribing the risks associated with leveraging an account. DeLellis was to be supervised by Lou Calderisi, the President of FPG, who filed quarterly supervisionreports with the Commission.
(iv) Staff's Attendances at FPG's Offices
10. From February 17 to 19, 1997 inclusive, Staff conducted a review of DeLellis' client files at FPG's branch office in London, Ontario.
11. On February 17, 1997, Staff attended at FPG's head office in North York, Ontario and was informed that FPG's books and records were kept at DPM's headoffice in Pointe Claire, Quebec.
12. On February 24, 1997, Staff attended DPM's head office in Pointe Claire, Quebec to assess Lou Calderisi's supervision of DeLellis by reviewing transactionrecords for Mr. DeLellis' clients and commission statements for Mr. DeLellis and by conducting interviews.
(v) Results of Staff's Review
13. Staff's reviews indicated (i) no supervision of DeLellis at the branch level; (ii) inadequate supervision of DeLellis by head office; and (iii) that FPG wasresponsible for certain practices in the London Office of FPG which were not in compliance with Ontario securities laws. This resulted in the problems identifiedin paragraphs 14 to 23 of the Settlement Agreement.
14. FPG encouraged DeLellis to refer clients to fully registered representatives at DPM for the purpose of purchasing securities which were sold pursuant to aprospectus and which DeLellis was not registered to sell in exchange for which DeLellis received part of the commission paid on the sale. FPG also encouragedDeLellis to enter into similar commission sharing arrangements with fully registered representatives at DPM with respect to open market trading by DeLellis'clients in securities in which DeLellis was not licensed to trade. Prior to March, 1997, FPG mistakenly believed that these split commission arrangements werepermitted in Ontario. DeLellis willingly participated in these arrangements. As a result of these arrangements, between March, 1996 and March, 1997, DeLellisreceived part of the commission for the sale of units of Enervest Resource Fund 1996, Tiffin Financial Limited Partnership and O'Donnell 1996 LimitedPartnership, all of which are securities sold pursuant to a prospectus, and received part of the commission on open market trades in Trimark common stock,MacKenzie common stock and AGF common stock, which trades DeLellis was not licensed to transact.
15. Staff's review identified several instances where DeLellis' clients did not sign purchase forms yet the transactions were processed by FPG.
16 .Staff's review of DeLellis' client files revealed the existence of some pre-signed blank purchase/redemption forms.
17. Staff's review identified DeLellis' client files which did not have completed know-your-client forms necessary to assess clients' risk tolerance or investmentknowledge.
18. DeLellis advised and sold securities in a Labour-Sponsored Investment Fund Corporation which he was not registered to sell. This practice was terminatedby FPG on May 21, 1996.
19. One of DeLellis' assistants, who had passed the Canadian Investment Funds Course but was not registered with the Commission, signed purchase/redemptionforms as a registered representative. FPG failed to advise the assistant or DeLellis that she could not sign purchase/redemption forms.
20. The assistant referred to in paragraph 19 gave instructions regarding the purchase and sale of securities which neither DeLellis nor the assistant wasregistered to sell.
21. DeLellis recommended limited partnership tax shelters to certain clients for whom such investments were, in the opinion of FPG, unsuitable.
22. DeLellis recommended leveraging to certain clients for whom, in the opinion of FPG, it was unsuitable. For example, in one client file, DeLellisrecommended a $40,000 loan to a client. The bank rejected the client's request for a loan citing "high debt servicing" as the reason for the refusal. In anotherclient file, DeLellis recommended a $10,000 investment loan to clients who had a negative net worth. Staff's review identified other client files where loanapplications were refused by the bank.
23. DeLellis held himself out as the co-author of a book entitled "Your Guide to Financial Independence" which was distributed to his clients. Such activity wascontrary to FPG's policy concerning the use of unauthorized advertising literature. No procedures were in place to ensure that FPG's policy was complied with.
(vi) Lack of Supervision of DeLellis by FPG
24. FPG's branch manager in London, Ontario did not supervise the activities of DeLellis and was unaware that the terms and conditions imposed on DeLellis'registration required him to supervise DeLellis. The London branch manager understood that Mr. Calderisi would supervise DeLellis directly.
25. FPG's branch manager in London also did not supervise the activities of DeLellis' two assistants.
26. The compliance officer for FPG until April 1, 1997, was aware of the supervision terms and conditions imposed on DeLellis' registration. However, the FPGcompliance officer did not comply with the supervisory terms and conditions set out in paragraph 9 of the Settlement Agreement as Lou Calderisi, President ofFPG, assumed the responsibility to supervise DeLellis.
27. Lou Calderisi was required to file quarterly supervision reports with the Commission as a term of DeLellis' registration. Quarterly supervision reports werefiled with the Commission on June 6, September 9 and December 4, 1996. The reports incorrectly stated that:
(a) all buy and sell orders and sales contracts were initialled and reviewed by the supervising officer before execution. Mr. Calderisi did not review and initial allof this documentation. Through inadvertence, not all order documentation was forwarded to Mr. Calderisi for review prior to execution of trades.
(b) all client accounts have been reviewed for: (i) suitability of trades; (ii) excess trading; and (iii) any changes to client's address or any amendments thereto.
(c) a review of trading activity on a daily basis has been conducted relative to DeLellis' client accounts. As indicated above, Mr. Calderisi believed that he wasreviewing all orders placed with DeLellis by clients.
(d) no transactions have been made in any account until the full and correct documentation was in place.
(e) there has been no handling of clients' securities and payments by DeLellis and no issuance of cheques to clients without management's approval. Staffidentified one instance in which cheques to a client were forwarded to the London branch office rather than to the client directly. Shortly after this occurred, FPGpromulgated a policy prohibiting these arrangements.
(f) spot audits have been conducted for DeLellis' client accounts during the preceding quarter to ensure compliance with the procedures and no violation of theseprocedures was discovered. Mr. Calderisi did visit the London office and met with DeLellis from time to time to discuss his sales activities and inquire about anycomplaints. However, he did not review branch files during these visits.
(vii) Mitigating Factors
28. FPG has co-operated fully with Staff during this investigation.
29. Prior to March, 1997, FPG mistakenly believed that split commissions as identified in paragraph 14 were permitted in Ontario.
30. In March, 1997, FPG implemented new procedures designed to remedy certain of the deficiencies identified by Staff, including termination of the practice ofpaying split commissions.
31. On March 26, 1997, FPG retained Arthur Andersen & Co. ("Arthur Andersen") of its own volition to review FPG's compliance procedures and makerecommendations concerning these procedures. FPG has provided to Staff the results of Arthur Andersen's review to date and agreed to implement therecommendations of Arthur Andersen and Staff. These recommendations are attached at Appendix "A" of this Settlement Agreement. FPG has undertaken toprovide a further report to Staff in six months from the date of this agreement detailing steps taken and being taken by FPG to implement the recommendations.
32. On April 1, 1997, FPG hired a new Director of Compliance for Ontario.
33. FPG received no complaints from clients about DeLellis prior to the issuance of the Notice of Hearing. On April 3, 1997, Staff provided FPG with details ofcertain information which it had received from clients concerning DeLellis' activities at FPG.
34. On April 8, 1997, FPG filed a notice with Staff which provided that DeLellis was being terminated "pending OSC review".
35. On April 10, 1997, after issuance of the Notice of Hearing and receipt of Staff's Statement of Allegations, FPG filed a further termination notice with Staffwhich provided that DeLellis had been terminated for cause because it appeared that DeLellis: (a) had used unauthorized advertising material; (b) allowed anunregistered sales assistant to sign transaction records; (c) may have misled FPG about his activities at DeLellis' previous sponsor; and (d) may haverecommended an unsuitable security which he was not registered to sell while employed at FPG.
36. The assistant described in paragraphs 19 and 20 was terminated by FPG.
(viii) Conduct Contrary to the Public Interest
37. The conduct of FPG was contrary to the public interest in that FPG: (a) failed to adequately supervise DeLellis; (b) failed to ensure compliance with theterms and conditions of DeLellis' registration; and (c) failed to ensure that correct quarterly supervision reports were filed with the Commission.
IV TERMS OF SETTLEMENT
38. FPG agrees to the following terms of settlement:
(a) that an order be made pursuant to clause 4 of subsection 127(1) of the Act, that FPG implement the changes recommended by Staff and Arthur Andersen, asset out in Appendix "A" of the Settlement Agreement;
(b) FPG will provide a further report to Staff in six months from the date of this agreement detailing steps taken and being taken to implement therecommendations.
(c) that an order be made pursuant to clause 6 of subsection 127(1) of the Act, that FPG be reprimanded; and
(d) FPG pay $20,000 towards the costs of Staff's investigation.
39. FPG hereby consents to an order of the Commission incorporating the provisions of Part IV above in the form of order annexed hereto as Appendix "B".
VI STAFF COMMITMENT
40. If this Settlement Agreement is approved by the Commission, Staff will not initiate any complaint to the Commission or request the Commission to hold ahearing or issue an order in respect of any conduct or alleged conduct of FPG in relation to the facts set out in Part III of this Settlement Agreement in respect ofwhich the Notice of Hearing was issued on April 9, 1997 against the Respondents.
VII PROCEDURE FOR APPROVAL OF SETTLEMENT
41. The approval of the Settlement Agreement shall be sought at a public hearing of the Commission scheduled for August 15, 1997.
42. Staff and FPG agree that if the Settlement Agreement is approved by the Commission, it will constitute the entirety of the evidence to be submittedrespecting FPG in this matter and FPG agrees to waive its rights to a full hearing and appeal of this matter under the Act.
43. Staff and FPG agree that if the Settlement Agreement is approved by the Commission, FPG will not make further statements which are inconsistent with theSettlement Agreement.
44. If, for any reason whatsoever, the Settlement Agreement is not approved by the Commission or the order set forth in Appendix "B" is not made by theCommission:
(a) Staff and FPG will each be entitled to proceed with a hearing of the allegations in the Notice of Hearing, unaffected by the Settlement Agreement or thesettlement negotiations;
(b) the terms of the Settlement Agreement will not be raised in any other proceeding or disclosed to any person except with the written consent of FPG and Staffor as may be otherwise be required by law; and
(c) FPG further agrees that it will not raise in any proceeding the Settlement Agreement or the negotiation or the process of approval thereof as the basis for anyattack on the Commission's jurisdiction, alleged bias, alleged unfairness or any other challenge that may otherwise be available.
45. If, prior to the approval of this settlement by the Commission, there are new facts or issues of substantial concern to Staff regarding the facts set out in PartIII of the Settlement Agreement, Staff will be at liberty to withdraw from the Settlement Agreement. Notice of such intention will be provided to FPG in writing.In the event of such notice being given, the provision of paragraph 44 of this part will apply as if the Settlement Agreement had not been approved in accordancewith the procedures set out herein.
VIII DISCLOSURE OF SETTLEMENT AGREEMENT
46. The terms of the Settlement Agreement will be treated as confidential by both parties hereto until approved by the Commission, and forever if, for any reasonwhatsoever, the Settlement Agreement is not approved by the Commission.
47. Any obligation as to confidentiality shall terminate upon the approval of this Settlement Agreement by the Commission.
IX EXECUTION OF SETTLEMENT AGREEMENT
48. The Settlement Agreement may be signed in one or more counterparts which shall constitute a binding agreement and a facsimile copy of any signature shallbe as effective as an original signature.
August 14th, 1997
SIGNED IN THE PRESENCE OF:
THE HEIGHT OF EXCELLENCE
FINANCIAL PLANNING GROUP INC.
Per: Lou Calderisi
Executive Director on Behalf of Staff
of the Ontario Securities Commission
Recommendations To Be Implemented By FPG
A. Policies and Procedures Documentation
1. FPG will revise and update the policy and procedures manual for its branch operations and its head office operations to cover all regulatory requirementsincluding: (1) client confirmations and statements; (2) compensation practices; (3) client complaints; (4) client order processing; (5) representative registrationstatus; (6) maintenance of trust accounts; (7) marketing communications; and (8) handling of new client accounts.
2. FPG will distribute and keep at least one copy of the policy and procedures manual at each of its branches.
3. FPG will update its Compliance Officer job description to specify duties and responsibilities.
4. FPG will update its branch manager agreements to specify duties and responsibilities.
5. FPG will update its representative agreements to specify duties and responsibilities.
6 FPG will notify the OSC of any changes regarding officers, sales representatives and branches in a timely manner.
7. FPG will institute a training program for head office operations and branch personnel to educate them concerning their regulatory responsibilities.
8. FPG will develop branch manager self-assessment representation forms.
9. FPG will develop compliance department branch review inspection checklists.
10. FPG will develop compliance department inspection checklists for head office operations.
11. FPG will develop branch and head office compliance reporting monitoring processes.
12. FPG will determine annually on a branch by branch basis which of its branches should be inspected. Each branch will be inspected by knowledgeable andauthorized individuals no less than once every two to three years and more often if required. All branches will be reviewed within one year of the date of thisorder.
13. FPG will undertake annual inspections of head office operations.
14. FPG will undertake semi-annual communication of compliance/business performance results within FPG.
C. Supervisory Functions
15. FPG will require that all client transactions and new client account applications are reviewed and initialled by a branch manager for suitability.
16. FPG will require that all branch manager transactions are reviewed and initialled by a registered senior operations officer/compliance officer who has accessto "know your client" information in order to ensure trade suitability.
17. FPG will advise all representatives in writing: (1) of their employment and registration status vis-a-vis FPG and DPM Securities Inc. and; (2) not to use anMRS power of attorney.
18. FPG will institute quarterly branch manager self-assessment reports to be prepared by each branch manager.
19. FPG will not supervise representatives registered to sell securities other than mutual funds and limited market products.
D. Client Order Processing and Operations
20. FPG's head office trust account reconciliations will be performed monthly and all reconciling items will be resolved within the following month.
21. FPG will maintain signature specimen cards in every client file and will perform signature comparisons on every redemption.
22. FPG will ensure that incomplete transaction forms are not processed.
23. FPG will obtain letters of authorization for client transactions which are anticipated to occur during special circumstances (i.e. client vacation). Writtenauthorization of each transaction must be obtained before order execution. FPG will advise representatives that the practice of having clients or representativespre-signing transaction records is unacceptable.
E. Client Accounts
24. FPG will advise MRS in writing not to process switches or purchases of existing fund requests received directly from representatives.
25. FPG's head office operations shall deliver statements to clients at least once per year.
F. Marketing Communications
26. FPG will institute procedures to ensure that all newsletters, radio advertisements, and other forms of marketing communications are approved by FPG'scompliance personnel.
G. Sales Practices
27. FPG will require that written client authorizations be obtained for all transactions and require that all client signatures be dated.
28. FPG will require that representatives update their clients "know your client" information when client circumstances change and/or at least once a year.
H. Books and Records
29. FPG will ensure that all commissions and expenses of FPG and any affiliated companies are separated and recorded in the appropriate books and records.
30. FPG will make books and records relating to transactions by Ontario residents available and readily accessible electronically or in hard copy for the previoustwo years at the head office in North York, Ontario.
31. FPG will require that "know your client" information is readily accessible in all client files at each branch.
32. FPG will create a standard trade blotter template to be used by all branches.