MFDA Case Summary. Enforcement. This case summary was prepared by Staff of the MFDA.

Transcription

1 Contact: Hugh Corbett Director of Litigation Phone: CASE SUMMARY # May 30, 2011 MFDA Case Summary Enforcement This case summary was prepared by Staff of the MFDA. Hearing Panel imposes 5 year suspension, $40,000 fine and costs of $5,000 on Michael Franco Nature of Proceeding A Hearing Panel of the Prairie Regional Council of the Mutual Fund Dealers Association of Canada ( MFDA ) has imposed disciplinary penalties on Michael Franco ( Franco ), an Approved Person of the MFDA. By-Laws, Rules, Policies Violated Following a hearing held on January 25, 2011, the Hearing Panel found that: 1. Between October 9, 2003 and December 27, 2007, Franco had and continued in another gainful occupation that was not disclosed to and approved by the Member by facilitating participation in the total amount of $428,279 by twenty-six (26) clients in four charitable donation programs, contrary to MFDA Rules 1.2.1(d) 1 and Between October 9, 2003 and December 27, 2007, Franco facilitated the participation of twenty-six (26) clients in four charitable donation programs which were not disclosed to and approved by the Member, thereby failing to comply with the Member s policies and procedures and interfering with the ability of the Member to supervise the 1 MFDA Rule 1.2.1(d) was amended on December 10, As of the date of this summary, it is now MFDA Rule 1.2.1(c).

2 Respondent and comply with its obligations under MFDA Rule , contrary to MFDA Rules and 2.5.1, and MFDA Rule Between October 9, 2003 and December 27, 2007, Franco recommended and facilitated the participation of twenty-six (26) clients in four charitable donation programs without disclosing to the clients that he would receive, in total, $80,176 in commissions for doing so, thereby giving rise to an actual or potential conflict of interest between Franco and the clients which he failed to address by the exercise of responsible business judgment, contrary to MFDA Rules and MFDA Rules 1.2.1(d) 3, 2.1.1, , 2.3.1(a) and state that: 1.2.1(d) Dual Occupations. An Approved Person may have, and continue in, another gainful occupation, provided that: (i) Permitted by legislation. The securities commission in the jurisdiction in which the Approved Person carries on or proposes to carry on business specifically permits him or her to devote less than his or her full time to the business of the Member for which he or she acts on behalf of; (ii) Not prohibited. The securities commission in the jurisdiction in which the Approved Person carries on or proposes to carry on business does not prohibit an Approved Person from engaging in such gainful occupation; (iii) Member approval. The Member for which the Approved Person carries on business either as an employee or agent is aware and approves of the Approved Person engaging in such other gainful occupation; (iv) Member procedures. Such Member establishes and maintains procedures to ensure continuous service to clients and to address potential conflicts of interest; (v) Conduct unbecoming. Any such gainful occupation of the Approved Person must not be such as to bring the Corporation, its Members or the mutual fund industry into disrepute; 2 MFDA Rule was amended on February 27, It is alleged that the Respondent s conduct contravened MFDA Rule both pre- and post-amendment. 3 See note 1 above. 4 See note 2 above. Page 2 of 5

3 (vi) Disclosure. Clear disclosure is provided to clients that any activities related to such other gainful occupation are not business of the Member and are not the responsibility of the Member; and (vii) Financial planning. Any Approved Person that engages in financial planning services otherwise than through or on behalf of a Member must: (A) Regulations - provide such services through another person that is either regulated by a governmental authority or statutory agency or subject to the rules and regulations of a widelyrecognized professional association; (B) Legislation - comply with the requirements of any applicable legislation in connection with the services; (C) Access - ensure that, subject to any applicable legislation, the Member and the Corporation have access to financial plans prepared on behalf of the clients of the Member by its Approved Persons; and (D) Proficiency - have satisfied any applicable proficiency requirements by securities regulatory authorities having jurisdiction Standard of Conduct. Each Member and each Approved Person of a Member shall: (a) deal fairly, honestly and in good faith with its clients; (b) observe high standards of ethics and conduct in the transaction of business; (c) not engage in any business conduct or practice which is unbecoming or detrimental to the public interest; and (d) be of such character and business repute and have such experience and training as is consistent with the standards described in this Rule 2.1.1, or as may be prescribed by the Corporation Conflicts of Interest (a) Each Member and Approved Person shall be aware of the possibility of conflicts of interest arising between the interests of Page 3 of 5

4 the Member or Approved Person and the interests of the client. Where an Approved Person becomes aware of any conflict or potential conflict of interest, the Approved Person shall immediately disclose such conflict or potential conflict of interest to the Member. (b) In the event that such a conflict or potential conflict of interest arises, the Member and the Approved Person shall ensure that it is addressed by the exercise of responsible business judgment influenced only by the best interests of the client and in compliance with Rules 2.1.4(c) and (d). (c) Any conflict or potential conflict of interest that arises as referred to in Rule 2.1.4(a) shall be immediately disclosed in writing to the client by the Member, or by the Approved Person as the Member directs, prior to the Member or Approved Person proceeding with the proposed transaction giving rise to the conflict or potential conflict of interest. (d) Each Member shall develop and maintain written policies and procedures to ensure compliance with Rules 2.1.4(a), (b) and (c) Member Responsibilities. Each Member is responsible for establishing, implementing and maintaining policies and procedures to ensure the handling of its business is in accordance with the By-laws, Rules and Policies and with applicable securities legislation. Penalty The Hearing Panel imposed the following penalties on Franco: 1. A 5 year suspension on Franco s authority to conduct securities related business while in the employ of or associated with any MFDA Member; 2. A fine in the amount of $40,000; and 3. Costs in the amount of $5,000. Summary of Facts The Respondent was registered in Alberta as a mutual fund salesperson with Aegon Dealer Services Canada Inc. ( Aegon ) from March 14, 2003 to June 26, 2008, when he was terminated. Between October 9, 2003 and December 27, 2007, the Respondent, through Franco Financial Inc. (a business through which he was approved by Aegon to sell life insurance and provide financial planning and tax preparation services to clients and other individuals), sold or facilitated the sale of a total of $428,279 in four (4) charitable donation programs (the Charitable Page 4 of 5

5 Donations Programs ) to twenty-six (26) clients. The Charitable Donation Programs held themselves out as tax minimization programs designed to provide participants with tax receipts from registered charities that could be used to reduce the total amount of taxes they were required to pay. For his efforts in selling the Charitable Donations Programs to clients, Franco was paid commissions or fees from the four Charitable Donation Programs totaling $80, He did not disclose to clients that he was to receive these commissions. The Charitable Donations Programs were not Approved Financial Service Products of Aegon and Franco never sought or obtained approval from Aegon to market or sell the Charitable Donations Programs. In June 2006, the Canada Revenue Agency (the CRA ) informed the clients who purchased the Charitable Donation Programs that their tax returns were subject to reassessments given that the donations they had made pursuant to the Charitable Donation Programs were disallowed by the CRA based on their interpretation of the Income Tax Act (the CRA Tax Reassessment Notices ). Therefore, all clients, as well as the Respondent, were faced with the potential for significant losses for their 2003 to 2006 tax years. Notwithstanding the CRA Tax Re-assessment Notices, the Respondent continued to facilitate client purchases of alternative Charitable Donation Programs until December For greater detail, see the Decision and Reasons and other documents in this proceeding posted on the MFDA s website in the Completed Cases section under Enforcement. DM # Page 5 of 5