Securities Law & Instruments

August 29, 2005

IN THE MATTER OF AN APPLICATION

FOR REGISTRATION OF SARWAT ROOHI KHAN

 

OPPORTUNITY TO BE HEARD BY THE DIRECTOR

UNDER SUBSECTION 26(3) OF THE SECURITIES ACT

Date:
August 29, 2005
 
Director:
David M. Gilkes
Manager, Registrant Regulation
Capital Markets Branch
 
Submissions:
Les Daiter
For Ontario Securities Commission staff
 
Sarwat Khan
For herself

Overview

 

1. This decision relates to the application of Ms. Khan (also referred to as the Applicant) for registration as a Scholarship Plan Dealer Salesperson for Children's Education Funds Inc. (CEF). Ontario Securities Commission (OSC) staff has recommended that the Director refuse to grant registration.

Background

 

2. Ms. Khan was registered as a Scholarship Plan Dealer Salesperson under the Securities Act (the Act) sponsored by USC Education Savings Plans Inc. (USC) from February 24, 1999 until her termination effective May 10, 2005.

3. Ms. Khan was terminated for cause by USC. On May 16, 2005 OSC staff received a transfer request for Ms. Khan's registration from USC to CEF via the National Registration Database (NRD).

4. On June 20, 2005 OSC staff sent Ms. Khan a letter by way of registered mail, notifying her of Staff's recommendation that the request for the transfer of her registration to CEF be refused.

5. On June 29, 2005 staff received a letter from Ms. Khan indicating that she wished to exercise her right for an Opportunity to be Heard (OTBH) by the Director. Subsection 26(3) of the Act 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.

6. The OTBH was conducted through written submissions made by OSC staff and Ms. Khan.

Submissions

 

7. OSC staff noted five incidents that led to the recommendation to refuse to grant registration to Ms. Khan. The reasons were:

 

i. A client complaint from a husband and wife by the names of Nair Mahmood and Irfana Nasir was received by USC on April 19, 2005. Mr. Mahmood and Ms. Nasir complained that Ms. Khan had forged their signatures and submitted a scholarship plan enrolment form without their knowledge or consent. Substantial evidence has been collected to substantiate this complaint;

ii. In 2002 an unusual amount of returned mail from enrolment applicants serviced by Ms. Khan prompted an investigation by USC. USC uncovered that Ms. Khan was altering or not fully completing mailing addresses on enrolment applications. This resulted in delays to the subscribers receiving the terms and conditions of their agreement. As a result of this activity, Ms. Khan was placed under close supervision by USC;

iii. In 2004 Ms. Khan launched a website at www.sarwatkhan.com/aboutus.html, prior to receiving USC's approval. During the investigation that followed, USC discovered that Ms. Khan had not disclosed that she held a level 1 insurance license since November 2001. On January 28, 2004, Staff received a completed form 33-109F5 -- Change of Registration Information, disclosing Ms. Khan's insurance license; and

iv. Throughout 2004 and the early part of 2005 Ms. Khan paid for and had several television advertisements aired without USC's approval. During the ensuing investigation, Ms. Khan stated that the commercials had not aired since the fall of 2004. However, according to USC, the commercials were seen on air as recently as March and April of 2005.

8. The first reason contains a serious allegation relating to Ms. Khan's sales practices. OSC staff investigated this allegation and found that Mr. Mahmood's recollection of the events leading to opening of a scholarship plan for his son is very different to Ms. Khan's submission.

9. Ms. Khan submitted that Ms. Nasir asked Ms. Khan to open a plan for their son, Yasir. In his complaint to USC, Mr. Mahmood stated that they did not want to start another plan (they had two plans for their other children) but Ms. Khan called them repeatedly for over a year. Eventually, Ms. Khan sent an enrolment form to Ms. Nasir at home. After discussing the matter with Mr. Mahmood, they did not sign the form or return it to Ms. Khan.

10. Mr. Mahmood first learned of the scholarship plan for Yasir when he saw the money withdrawn from his account on his bank statement. At this time he contacted USC and made a complaint. USC sent him a copy of the enrolment form submitted by Ms. Khan and he noted that the serial number on that form was different than the one that had been sent to their home. USC asked Mr. Mahmood to file a written complaint.

11. Ms. Khan admitted to completing the enrolment form for Yasir based on information including signatures from an enrolment form previously completed by Mr. Mahmood and Ms. Nasir. She submitted the form with the knowledge that Mr. Mahmood and Ms. Nasir had not signed the document.

12. The other four reasons cited by OSC staff reveal that Ms. Khan did not appear to understand the internal procedures and policies at USC. Her submissions in regard to these issues highlight this weakness. This lack of understanding also raises questions about USC's training practices.

Suitability for Registration

 

13. A registrant is in a position to perform valuable services to the public, both in the form of direct services to individual investors and as part of the larger system that provides the public benefits of fair and efficient capital markets. A registrant also has a corresponding capacity to do material harm to individual investors and the public at large.

14. Determining whether an applicant should be registered is an important component of the work undertaken by OSC staff to protect investors and foster confidence in the capital markets. This point was made in the Mithras decision that reads in part:

 

... 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

15. The standard for suitability is based on three well established criteria that have been identified by the OSC:

 

The [Registrant Regulation] section administers a registration system which is intended to ensure that all Applicants 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

16. The meanings of the criteria for the purposes of determining suitability for registration are not defined in Ontario securities legislation but OSC staff consider:

      integrity includes honesty and good faith, particularly in dealings with clients, and compliance with Ontario securities law;

      competence includes prescribed proficiency and knowledge of the requirements of Ontario securities law; and

      financial soundness is an indicator of a firm's capacity to fulfill its obligations and can be an indicator of the risk that an individual will engage in self-interested activities at the expense of clients.

    Decision and Reasons

     

    17. There are significant differences between the descriptions of events surrounding the enrolment of Yasir Mahmood in a scholarship plan. However, there is agreement that Ms. Khan submitted a scholarship plan enrolment form with false signatures on it. This clearly demonstrates a lack of integrity by the Applicant.

    18. The other four issues raised by OSC staff all relate to the competency of Ms. Khan. Not collecting the appropriate information and completing the forms correctly for clients, not informing USC and the OSC that she had received an insurance licence and not complying with USC policies and procedures relating to promotional materials.

    19. Her lack of competency led her to feel that she was "being victimized by staff at Compliance Department at USCI." The submissions indicate that Ms. Khan did not understand certain requirements and responsibilities that accompany the position she held.

    20. Having reviewed all the information provided to me, I find that the Applicant has not demonstrated the high standards of competency and of integrity required of a professional in the securities industry. Therefore, I refuse to grant the Applicant registration as a Scholarship Plan Dealer Salesperson.

    "David M. Gilkes"