Securities Law & Instruments


In the Matter of Staff’s Recommendation
to Suspend the Registrations of
Kingsmont Investment Management Inc.
and Paget Arthurlyn Warner

Opportunity to be Heard by the Director
under Section 31 of the Securities Act



Decision 

1. For the reasons outlined below, my decision is that Paget Arthurlyn Warner’s registration as an advising representative be suspended for a period of six months. 

Overview

2. By letter dated April 4, 2013, staff (Staff) of the Ontario Securities Commission (the Commission or the OSC) advised Kingsmont Investment Management Inc. (Kingsmont) and Paget Arthurlyn Warner (Warner), that Staff has recommended to the Director that Kingsmont’s registrations as a dealer in the category of exempt market dealer and as an adviser in the category of portfolio manager and the registration of Mr. Warner as dealing representative, advising representative, ultimate designated person and chief compliance officer be suspended.  

3. The basis of this recommendation is due to the number of significant deficiencies identified during the compliance review of Kingsmont, conducted under section 20 of the Securities Act (Ontario) (the Act). Staff has fundamental concerns with regards to the integrity and proficiency of Mr. Warner and the integrity and proficiency of Kingsmont. 

4. By letter dated April 18, 2013, Mr. Warner proposed an alternate recommendation to Staff that, in his opinion, would address the significant deficiencies and the fundamental concern with regards to the integrity and proficiency of both Kingsmont and Mr. Warner. Through discussion with Staff, Kingsmont and Mr. Warner were able to agree on an alternative remedy to address certain of Staff’s concerns. The terms of the alternative remedy are provided in the Stipulated Statement of Facts section below.  

5. However, the alternative remedy proposed by Mr. Warner did not address all concerns of Staff. There remained six concerns labeled “Integrity Deficiencies” that relate to Kingsmont and Mr. Warner, specifically in the capacity of chief compliance officer and ultimate designated person.  

6. By letter dated April 25, 2013, Staff outlined the six alleged Integrity Deficiencies and provided Mr. Warner with the option to provide a written response to the concerns. The issues are summarized as follows: 

Issue 1 – Alleged alteration of know your client (KYC) information forms.
Issue 2 – Improper delegation of Chief Compliance Officer (CCO) oversight.
Issue 3 – Failure to disclose complaint during compliance review.
Issue 4 – Inadequate information regarding accredited investor (AI) status to properly substantiate reliance on the AI exemption.
Issue 5 – Inappropriate disclaimer of liability in a risk document signed by clients.
Issue 6 – Failure to approve transaction until after the transaction was processed by Issuer.

Process for requesting Opportunity to be Heard

7. The responses received from Kingsmont and Mr. Warner by letter dated April 29, 2013, in Staff’s opinion, did not adequately address the alleged Integrity Deficiencies. Therefore an in-person opportunity to be heard (OTBH) pursuant to section 31 of the Act was scheduled. The in-person OTBH occurred on July 15, 2013 and July 31, 2013. 

8. Since the alternative remedy addressed the proficiency and integrity issues of Kingsmont and the proficiency issues of Mr. Warner, the scope of the OTBH was narrowed to the determination of whether Mr. Warner had the requisite integrity to act as an advising representative without any period of suspension or prohibition on seeking reinstatement. 

Stipulated Statement of Facts  

9. The Stipulated Statement of Facts that are relevant to my decision are provided below.  

Registration History 

10. Mr. Warner became registered with Kingsmont on April 3, 2008 as the sole owner of the firm. Initially, Mr. Warner was registered as a trading officer and director and designated compliance officer in the category of limited market dealer, and as an advising officer and director, chief compliance officer and ultimate responsible person in the category of ICPM. On September 28, 2009, Mr. Warner’s categories of registration transitioned to ultimate designated person (UDP) and chief compliance officer (CCO) in the categories of exempt market dealer (EMD) and portfolio manager (PM), as well as a dealing representative in the category of EMD and an advising representative in the category of PM. 

11. Mr. Warner and Kingsmont are also registered in the categories of PM and EMD in British Columbia, and in the category of EMD only in Alberta, Manitoba and Nova Scotia. 

Compliance Field Review and Proposed Restructuring of Kingsmont

12. Staff conducted a compliance field review of Kingsmont pursuant to section 20 of the Act for the period October 1, 2011 to September 30, 2012 (the Review Period). Staff issued a report summarizing its findings (the Compliance Review Report) on March 27, 2013.

13. The Compliance Review Report sets out what were, in Staff’s view, a number of compliance deficiencies at Kingsmont. Some of these alleged deficiencies, which Staff has labeled Integrity Deficiencies, are denied by Mr. Warner. Staff also listed certain other alleged deficiencies, which for purposes of this Stipulated Statement of Facts, Staff and Mr. Warner agree are properly labeled as Oversight Deficiencies.

14. Staff identified the following Oversight Deficiencies as “significant” in the Compliance Review Report:

  1. Lack of compliance system and the CCO and UDP inadequately performing responsibilities.
  2. Reliance on another party to collect and document KYC information and to discharge suitability obligation.
  3. Insufficient collection and documentation of KYC information.
  4. Unsuitable investments.
  5. Inadequate oversight of dealing representative.
  6. Insufficient product due diligence (know your product).
  7. Carrying on registerable activities without appropriate registration.
  8. Inadequate review of marketing materials.
  9. Inaccurate and misleading information provided in respect of a dealing representative on the National Registration Database.
  10. Books and records not maintained.
  11. No referral agreement in place (in respect of the activities of a dealing representative).
  12. Incomplete written policies and procedures manual.
  13. Failure to comply with firm’s policies and procedures.

15. Without admitting or denying specific Oversight Deficiencies, Mr. Warner acknowledges that it would be best that he no longer serve as Kingsmont’s UDP and CCO. 

16. Mr. Warner proposes to restructure Kingsmont by surrendering his own UDP and CCO registration. 

17. Mr. Warner proposes to sell a majority share in Kingsmont to Ms. H who proposes to serve as Kingsmont’s new UDP and CCO in the category of PM.

18. On this basis, Staff has agreed that the scope of this OTBH be limited to the six alleged Integrity Deficiencies, each of which is contested by Mr. Warner.

Submissions

19. Issue 1 - Alleged alteration of know your client (KYC) information forms. Mr. Warner provided staff with two different versions of a KYC form for the same client.

20. Issue 2 - Improper delegation of Chief Compliance Officer (CCO) oversight. A person other than Mr. Warner signed a number of Kingsmont’s New Client Application Forms as Kingsmont’s CCO. One form was never signed by Mr. Warner in his capacity as CCO and it appears that on the others his signature was added at different times.

21. Issue 3 - Failure to disclose complaint during compliance review. Staff submits that Mr. Warner failed to disclose a complaint during the compliance review. By failing to disclose, Staff contends that Mr. Warner misled or made an incomplete disclosure to Staff.

22. Issue 4 – Inadequate information regarding accredited investor (AI) status to properly substantiate reliance on the AI exemption. Staff submits that Kingsmont’s KYC collection process was flawed in that Mr. Warner did not possess adequate information to properly conclude that certain clients qualified as accredited investors when Mr. Warner made an affirmative statement to Staff that all Kingsmont’s clients are accredited investors.

23. Issue 5 – Inappropriate disclaimer of liability in a risk document signed by clients. Clients investing in a particular product were required to sign a Risk Disclosure form that contains the following statement: “As such, I hereby release Kingsmont Investment Management Inc., its officers, directors and employees and my investment advisor for any and all losses that I may incur relating to this investment.”

24. Staff submits that the inclusion of this risk disclaimer was to relieve Kingsmont and Mr. Warner from their suitability obligation in subsection 13.3(1) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registration Obligations (NI 31-103) and a breach of the obligation to deal fairly, honestly and in good faith as required in subsection 2.1(1) of OSC Rule 31-505 Conditions of Registration (OSC Rule 31-505).

25. Issue 6 – Failure to approve transaction until after the transaction was processed by Issuer. Staff submits that in certain instances the determination of whether a client met the qualifications of an AI occurred after a signed subscription agreement and payments, including bank drafts or wire payments, were sent to an issuer. Alleging that acts in furtherance of a trade occurred before a suitability and AI determination was completed for certain clients.

Decision

26. My decision is based on the submissions of Michael Denyszyn (Senior Legal Counsel, Compliance and Registrant Regulation Branch); Affidavit, Supplemental Affidavit and testimony by Dena Di Bacco (Accountant, Compliance and Registrant Regulation Branch); submissions of David Hausman (Partner of Fasken Martineau DuMoulin LLP and counsel for Kingsmont and Mr. Warner), and Affidavit, Supplemental Affidavit and testimony of Mr. Warner. 

27. The issue before me was narrowed to the question of whether Mr. Warner has the requisite integrity to act as an advising representative without any period of suspension or prohibition on seeking reinstatement.  

28. Section 28 of the Act provides that the registration of a person or company may be suspended if it is determined that the person or company is not suitable for registration, or has failed to comply with Ontario securities law or that their registration is otherwise objectionable.  

29. The meaning of integrity was debated in this OTBH and in Re Sawh (2012), 35 OSCB 7431 [Sawh], a recent decision at the Commission level which was later upheld by the Divisional Court in Sawh v. Ontario Securities Commission, 2013 ONSC 4018. At paragraph 264 of Sawh the Commission wrote:  

In determining the integrity of the Applicants, however we are guided by the principle that the Commission shall consider in pursuing the purposes of the Act which, as set out in [Re Istanbul (2008), 31 OSCB 3799] at para. 68 and subparagraph 2(iii) of section 2.1 of the Act, excerpted at paragraph [152] above, is “the maintenance of high standards of fitness and business conduct to ensure honest and responsible conduct by market participants.” [Emphasis in the original]  

Based upon this principle reiterated in Sawh, integrity encompasses more than dishonesty; it includes honest and responsible conduct.  

30. The alleged Integrity Deficiencies detailed in Issues 1, 2, 4 and 6 relate, in my opinion, to a total lack of proficiency regarding the regulatory responsibilities of a UDP and CCO. The responsibilities of a UDP and CCO, as provided in sections 5.1 and 5.2 of NI 31-103, carry great importance and must be fully appreciated and fulfilled by persons registered in those capacities. However, the issue of proficiency is outside the scope of this OTBH. Mr. Warner is surrendering his UDP, CCO and dealing representative registrations and based upon his testimony at the OTBH, I expect that Mr. Warner will not seek registration as a UDP or CCO at any time in the future.  

Issue 3

31. Staff submits that Mr. Warner failed to disclose a complaint during the compliance review in an attempt to mislead or provide incomplete disclosure to Staff.  

32. As evidenced by an email chain, Mr. Warner was aware of the complaint involving one of Kingsmont’s dealing representatives at the time of the compliance review and failed to disclose it to Staff.  

33. Additionally, at the OTBH, Mr. Warner stated that during the compliance review he told Staff that he was impressed with the dealing representative that was the subject of the complaint and that it “eventually …came back to bite me really hard because here I am talking about a guy in glowing terms not realizing that they already know he’s a crook” (Re Kingsmont Investment Management Inc. (15 July 2013), Toronto (OSC) (Transcript at 187)). 

34. During the OTBH, I found that Mr. Warner failed to provide straight answers to direct questions posed to him. He obfuscated his responses by making contradictory statements and speculative statements. He provided possible scenarios to explain what might have happened as opposed to explaining what did happen.  

35. Based upon this evidence, I have concluded that Mr. Warner’s statements were intentionally misleading and incomplete. The purpose for making these statements was to make his business appear compliant. Given the fact that Mr. Warner has extensive industry experience including, approximately 15 years as a registered advising representative at various firms including large financial institutions, Mr. Warner knew or should have known that making misleading and incomplete statements to Staff was not honest and responsible conduct of a market participant. Therefore, Mr. Warner’s conduct has impugned his integrity. 

Issue 5  

36. Staff submits that the inclusion of the risk disclaimer was to relieve Kingsmont and Mr. Warner from their suitability obligation in subsection 13.3(1) of NI 31-103 and was a breach of the obligation to deal fairly, honestly and in good faith as required in subsection 2.1(1) of OSC Rule 31-505.  

37. I agree with Staff’s position that including the risk disclaimer language in the risk disclosure document is a breach of subsection 2.1(1) of OSC Rule 31-505. Mr. Warner stated at the OTBH that he included the language as a warning to investors that the investment was risky, but the language is clear on its face and I believe its purpose was to protect Kingsmont and Mr. Warner from total liability associated with the investment. 

38. Therefore, Mr. Warner did not deal fairly, honestly and in good faith with his clients; thereby, breaching Ontario securities law.  

39. As provided in Sawh the Commission stated at paragraph 157 that  

(…) in determining whether the Applicants are suitable for registration, we must assess their suitability on the basis of their integrity and proficiency. As referenced in paragraph [153] above their past conduct is relevant to this assessment because it assists in determining whether the Applicants are likely to meet the standards of suitability imposed by Ontario Securities Law now and in the future ([Re Mithras Management Ltd. (1990), 13 OSCB 1600] at pp.1610-1611).  

40. Based on this principle, Mr. Warner’s past conduct is relevant to determining if he possesses the requisite integrity to act as an advising representative without any period of suspension or prohibition on seeking reinstatement. 

41. Section 28 of the Act permits me, as Director, to suspend the registration of Mr. Warner as an advising representative on the basis that he is not suitable for registration (as he lacks the requisite integrity of a registrant) and that he has failed to comply with Ontario securities law. Therefore, I conclude that Mr. Warner’s advising representative registration is suspended for a period of six months.  

42. The suspension period is shorter than the period recommended by Staff. The reasons for the shorter period are that the majority of the alleged Integrity Deficiencies raised by Staff, in my opinion, related to proficiency requirements of a CCO or UDP which is outside the scope of this OTBH. Also, the alleged alteration of the document was not proven to be forgery. There is also no evidence of any other disciplinary matter against Mr. Warner and credit is provided to Mr. Warner for recognizing that he lacked the proficiency to remain as UDP and CCO of Kingsmont. Finally, the fact that he proactively worked with Staff to reach a settlement that addressed the Operational Deficiencies has factored favorably in my decision.  

43. In the end, I believe that Mr. Warner found himself in a situation where he failed to understand his regulatory responsibilities, lacked an appreciation for the importance of the compliance review process and failed to interact with Staff in an appropriate manner.  

44. Prior to applying to re-instate his registration as an advising representative, Mr. Warner must pass the Conduct and Practices Handbook Course currently administered by CSI Global Education Inc.




“Debra Foubert”, J.D.
Director, Compliance and Registrant Regulation Branch
Ontario Securities Commission

Dated: September 24, 2013