The Mutual Fund Dealers Association of Canada (MFDA) is making inroads into lowering the number of altered forms cases taking place in the mutual fund industry, while the Investment Industry Regulatory Organization of Canada (IIROC) is hoping to do likewise by standing firm on its stiff sanctions aimed at deterring investment dealers from changing forms.
What appeared to be a large and growing number of pre-signed forms cases had been a thorn in the side of the MFDA for a number of years. As recently as 2019, the MFDA had opened 112 cases dealing with the category of pre-signed forms – the most frequent of all allegations investigated by the national self-regulatory organization for quite some time.
A significant decrease
But from Jan. 1, 2020 to December 30, 2020, there were only 39 cases opened that even broadly involved forms issues, a significant decrease from the previous year, said Charles Toth, vice-president, Enforcement at the MFDA.
Ellen Bessner, a securities lawyer and partner at Babin Bessner Spry LLP, said at one time MFDA advisors needed to get client sign-off on virtually every transaction – unless the advisor had limited trading authorization – and getting that sign-off “is a big job.”
Before the pandemic, said Bessner, an advisor would go to a client’s home and review a number of issues with the client but could get back to the office and suddenly realize the advisor had, for example, accidentally put down an account number that was off by one digit. Advisors then had to send any and all forms back to the client to repair any errors, said Bessner.
“At the beginning there were hundreds and hundreds and hundreds of these infractions,” she said. “Now there are far fewer but they [MFDA] seem to use perfection as a standard.”
Toth acknowledged that most cases of signature falsification have been for client or advisor convenience and few cases have been as the result of a client complaint – but noted that’s no excuse.
“Regardless of whether the conduct is for the purposes of convenience or to commit a further regulatory violation, MFDA Hearing Panels have consistently ruled that all types of signature falsification violate MFDA Rule 2.1.1 which requires members and approved persons to deal fairly, honestly and in good faith with clients and observe high standards of ethics and conduct in the transaction of business.”
Focus on deterrence
To that end, Toth said the MFDA is continuing to focus on deterrence through its enforcement process, noting that penalties have included fines of up to $40,000, suspensions of as long as three years and re-education requirements.
Nowadays, more MFDA advisors are using electronic signatures, a convenience for both advisors and clients, especially during COVID-19, and Toth foresees the number of altered forms issues continuing to drop.
On the IIROC side, advisors don’t have to have a signature for every transaction. In fact, advisors now frequently talk to their clients over the phone and clients can buy or sell an investment with the advisor making a note of it and that’s basically it, said Bessner.
“So if there is an infraction on the IIROC side, it may be a more serious infraction because it may be, for example, on a KYC form, where they may be changing the risk profile. That’s more serious than correcting one digit that was wrong on a trade form without obtaining a client signature.”
Contraventions carry strict penalties
Charles Corlett, acting vice-president of Enforcement at IIROC, said cases of pre-signed forms are not commonplace at IIROC but contraventions carry strict penalties. Even though advisors may cite client convenience as a reason for altering forms in some cases “the practice is strongly condemned and usually carries a period of suspension.”
Corlett said altering IIROC forms can be anything from a blank form signed by a client to more complex changes, any of which can be discovered by another employee, a firm’s compliance department, internal audit, during the course of an IIROC investigation or client complaint.
One of the greatest deterrents is the sanctions themselves, he said.
IIROC has suspended advisors in the past over altered forms. One notable dealt with Jeffrey Edward Gebert, a former advisor with BMO Nesbitt Burns Inc. and Manulife Securities Inc. who was found liable of entering into personal financial dealings with a client, obtaining and submitting blank and/or pre-signed investment related forms for clients, and failing to co-operate with an IIROC investigation.
Permanently banned
In December 2016 an IIROC panel permanently banned Gebert from the investment industry, fined him $275,000 and ordered him to pay $20,000 in costs.
One name still making the news is Douglas John Eley. In 2014, Eley, then working in the Burlington, Ontario office of Macquarie Private Wealth Inc., was suspended for six months, subject to a further 12 months of close supervision upon re-registering and ordered to pay a fine of $50,000. The penalties followed a decision by an IIROC panel that Eley inflated certain clients’ net worth and falsely endorsed the signatures of several clients on certain client account documentation and other forms.
Then in early 2020 an IIROC hearing panel ruled that Eley, then working for Echelon Wealth Partners Inc., was to be suspended for a year and fined $50,000 after it ruled he inappropriately altered previously signed client documents. He was subject to another 18 months of close supervision. Eley has appealed the IIROC decision to the Ontario Securities Commission and is awaiting a decision.
Corlett said the strict adherence on the altered forms issue falls in line with IIROC’s stated priority to strengthen its ability to ensure that Canadian investors have a consistent level of investor protection.
