Securities Law & Instruments


[Update: Stephen Freedman was registered as the Ultimate Designated Person, Chief Compliance Officer, and Dealing Representative of Sloane Capital Corp. on September 2010.]


IN THE MATTER OF

AN APPLICATION FOR REGISTRATION OF

STEPHEN ZEFF FREEDMAN

OPPORTUNITY TO BE HEARD BY THE DIRECTOR

PURSUANT TO SUBSECTION 26(3) OF THE SECURITIES ACT

Date:
August 17, 2004
 
Director:
David M. Gilkes
Manager, Registrant Regulation
Capital Markets Branch
 
Submissions:
Leslie Daiter
For Commission Staff
Stephen Z. Freedman
For himself

Introduction

 

1. This decision relates to the application of Stephen Freedman (also referred to as the Applicant) for registration under the Securities Act (Ontario) (the Act) as Designated Compliance Officer and an Officer and Director (Trading, Resident) for mutual fund dealer Monarch Delaney Financial Inc. (MDFI). Commission Staff has recommended that the Director deny this application.

Background

 

2. The Applicant's history in the securities industry is lengthy. He was first registered as an Investment Dealer Salesperson in 1975. Most recently, he was employed as an Officer and Director and Designated Compliance Officer of Avenue Wealth Management Inc (Avenue), a mutual fund dealer. He had not acted as a compliance officer with a mutual fund dealer until he worked at Avenue. The Designated Compliance Officer is responsible for opening new accounts, supervising trades and ensuring compliance with the requirements of securities legislation.{1}

3. No termination notice was filed by Avenue for Mr. Freedman. There is some question as to Mr. Freedman's employment situation after August 31, 2003. In any event, his registration was automatically suspended when the registration of Avenue was suspended on December 31, 2003, at which time Avenue was to have ceased to conduct business.

4. On March 2, 2004 Mr. Freedman applied for registration as Designated Compliance Officer and Officer and Director (Trading, Resident) for MDFI. A series of communications between Staff and Mr. Freedman followed. This process culminated in a letter from Staff to Mr. Freedman dated June 11, 2004 advising him that Staff was recommending the Director deny his application. The letter informed Mr. Freedman that Staff's recommendation was based on a determination that he was not suitable for registration because of evidence that he lacked the integrity and competence required of a registrant. Staff's letter also informed Mr. Freedman of his right, under section 26(3) of the Act, to be heard before the Director made a decision in the matter and set out the process for exercising that right.

5. Mr. Freedman elected to exercise his right to an opportunity to be heard through written submissions. Mr. Freedman made submissions on June 24, 2004, July 9, 2004, July 16, 2004 and responded to further questions from the Director by telephone on July 27, 2004. Staff made its submission on July 13, 2004.

Submissions

 

6. Staff's concerns relate to Mr. Freedman's activities when he was the Designated Compliance Officer of Avenue. Staff is also of the opinion that there was a lack of cooperation by Mr. Freedman with respect to questions about his application.

7. Staff submitted that during the time when the Applicant was the Designated Compliance Officer at Avenue he failed in his duty to supervise the sales force and especially a particular mutual fund salesperson, Ernest Huckerby. Mr. Huckerby was denied registration by the Director on June 8, 2004{2} and his appeal before the Ontario Securities Commission (the OSC) is currently pending. Staff submitted that during the period when he was supervised by Mr. Freedman, the OSC's Contact Centre received 12 client complaints about Mr. Huckerby. Mr. Freedman responded that these complaints related to Mr. Huckerby's previous employment with another dealer, which is no longer a registrant. Staff subsequently conceded that some of the 12 client complaints did relate to his previous employment, but maintains that most related to Mr. Huckerby's time at Avenue.

8. Staff submitted that Mr. Freedman failed in his duty as Designated Compliance Officer to supervise the opening of new accounts. Staff noted that terms and conditions were placed on Avenue's registration in April 2003 in connection with the wind-up of its operations. These included a prohibition on the opening of new accounts. Staff found that Avenue nonetheless opened 24 new accounts after the terms and conditions were imposed. Mr. Freedman submitted that he was not aware of the terms and conditions as management of Avenue did not inform him of their existence.

9. Submissions from Staff and Mr. Freedman differed as to his employment situation after August 31, 2003.

10. According to Staff's submissions, Vicki Rosenthal, Chief Financial Officer of Avenue, confirmed that Mr. Freedman was terminated August 31, 2003 and was not paid after that date. She said that as Avenue was preparing to sell part of its business and wind-up the remaining operations, it did not file a termination notice for Mr. Freedman. However, Ms Rosenthal noted that Mr. Freedman continued to spend time at Avenue but she could not say how much time, as the head office of Avenue and the sales office are in different locations.

11. In his application for registration, Mr. Freedman noted December 31, 2003 as his termination date, however, in his written submission he said he was terminated by Avenue effective August 31, 2003. Staff's submission included correspondence sent from the Mutual Fund Dealers Association of Canada and from the OSC addressed to Mr. Freedman at Avenue after August 31, 2003 but there were no responses from Mr. Freedman. There was internal documentation from Avenue after this date that was copied to Mr. Freedman. There is also account opening documentation that is initialed approved by "SF". Mr. Freedman responded to this submission by saying that his practice was to sign documents, not initial them.

Suitability for Registration

 

12. Section 26(1) of the Act provides that

 

Unless it appears to the Director that the Applicant is not suitable for registration [or] renewal of registration.... or that the proposed registration, renewal of registration or amendment of registration is objectionable, the Director shall grant registration, renewal of registration..... to an applicant.

Section 26(2) provides that the Director with the discretionary power to impose restrictive terms and conditions on a registration as an alternative to refusing to grant registration altogether.

13. Determining the suitability for registration of applicants is an important function of the OSC in the discharge of its mandate to protect investors and foster confidence in the capital markets. In doing so, it is necessary to look to past conduct for guidance. This point was made by the Commission in its decision Re Mithras Management Ltd.{3} 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.

14. The standard for suitability is based on three tenets which the Commission has articulated over time and which were noted in the Staff submission:

 

The [registration] 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, ... {4}

15. As set out in Staff's submission and in other decisions, the criterion of integrity includes honesty and good faith, particularly in dealings with clients, and compliance with Ontario securities law, while competence includes prescribed proficiency and knowledge of Ontario securities law (Staff expressed no concerns with respect to the Applicant's financial solvency).

16. In addition, the Director could find that the application is objectionable. This could refer to conduct that while not directly related to the securities industry, could affect investor confidence in the capital markets and their participants or conduct that points to investor protection concerns.

Decision and Reasons

 

17. I find that Mr. Freedman's submission is more of a criticism of Staff than a rebuttal of Staff's concerns as to his suitability for registration.

18. Mr. Freedman has said he was not aware of the terms and conditions imposed on Avenue's registration and as a result, client accounts continued to be opened. Regardless of when Mr. Freedman left Avenue, his position amounts to saying that during the time when he was employed there he was not meeting with senior management of the company to keep abreast of compliance-related issues, as a competent Designated Compliance Officer would do. He is effectively saying that for a period of four to eight months he was not aware terms and conditions were placed on Avenue. He ought to have known -- it is impossible to understand how a Designated Compliance Officer could think he or she was discharging his or her duties without monitoring the firm's regulatory status. Mr. Freedman's submissions on these points are all the more questionable because he held various senior management positions during his employment with Avenue including, for a time, President.

19. In regard to the client complaints relating to Mr. Huckerby, Mr. Freedman said the complaints related to Mr. Huckerby's past employment. It is clear that the bulk of the complaints were from clients at Avenue. The Applicant said he was aware of these complaints. This being so, he should have been extremely diligent in his supervision of Mr. Huckerby. It is evident that he was not.

20. I find that Mr. Freedman was not forthright with Staff in providing complete and accurate information in connection with his application and Staff's investigation into his suitability for registration. This calls his integrity into question.

21. I find that the Applicant has demonstrated a lack of supervisory competence and in particular has failed to meet the high standards of competency required of a Compliance Officer in the securities industry. And, although there is no reason to believe that he does not have relevant and valuable industry experience, his conduct in connection with his present application has not been reflective of a high standard of personal integrity.

22. Having reviewed all the information provided to me, I find the Applicant unsuitable to be granted registration in any supervisory capacity, including compliance-related or management roles. It is therefore my decision to deny Mr. Freedman's application for registration as a Designated Compliance Officer and an Officer and Director (Trading, Resident). I would be willing to consider an application from Mr. Freedman for registration as a Salesperson.

August 17, 2004.

"David M. Gilkes"

 

{1} OSC Rule 31-505 -- Registration Requirements, 1.3 Designation of Compliance Officer

 

(1) A registered dealer or adviser shall designate a registered partner or officer as the compliance officer who is responsible for discharging the obligations of the registered dealer or adviser under Ontario securities law.

(2) The person designated under subsection (1) by a registered dealer or adviser shall also be responsible for opening each new account, supervising trades made for or with each client and supervising advice provided to each client or, if a branch manager is designated under subsection 1.4(1), for supervising the branch manager's conduct of the activities specified in subsection 1.4(2).

{2} (2004) 27 OSCB 5654

{3} (1990), OSCB 1600

{4} Ontario Securities Commission Annual Report 1991, Page 16