Securities Law & Instruments

IN THE MATTER OF AN APPLICATION

FOR REGISTRATION OF RHONDA ASBREUK

 

OPPORTUNITY TO BE HEARD BY THE DIRECTOR

SECTION 26(3) OF THE SECURITIES ACT

Date:
January 28, 2008
 
Director:
David M. Gilkes
Manager, Registrant Regulation
 
Appearances:
Charles Piroli
For Ontario Securities Commission staff
 
Rhonda Asbreuk
In person

Overview

1. This decision relates to the application of Ms. Asbreuk (also referred to as the Applicant) for transfer of registration as a salesperson in the category of mutual fund dealer and limited market dealer sponsored by Family Investment Planning Inc. (FIP). Ontario Securities Commission (OSC) staff has recommended that the Director refuse to grant registration. OSC staff made the recommendation based on information that revealed the applicant lacks the competency and integrity required of a professional in the securities industry.

Background

2.Ms. Asbreuk was registered as a mutual fund dealer salesperson under the Securities Act (the Act) sponsored by Optifund Investments Inc. (Optifund) from August 23, 2005 untilMay 4, 2006. Ms. Asbreuk also holds a level 1 insurance licence which was granted inMay 2005. Optifund terminated Ms. Asbreuk’s employment on May 4, 2006 for what it described as inappropriate sales practices.

3. On May 29, 2006 an application for the transfer of the registration of Ms. Asbreuk was received. OSC staff investigated the details relating to her termination and onDecember 29, 2006 advised Ms. Asbreuk that staff had recommended the Director refuse her application for registration.

4. Over this same time period the Mutual Fund Dealers Association of Canada (MFDA) had commenced an investigation into the sales practices of Ms. Asbreuk while she was sponsored by Optifund. On February 2, 2007, Ms. Asbreuk advised the OSC that rather than request an opportunity to be heard she was withdrawing her transfer application until such time as the MFDA investigation was completed.

5. The MFDA completed its investigation on September 7, 2007 and issued a warning letter to Ms. Asbreuk.

6. On October 3, 2007, Ms. Asbreuk applied to have her registration reinstated as a salesperson in the categories of mutual fund dealer and limited market dealer sponsored by FIP.

7. On November 15, 2007, OSC staff notified Ms. Asbreuk that it had recommended the Director refuse her application for registration. Ms. Asbreuk exercised 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.

8.The OTBH was conducted in person on November 30, 2007.

Staff Submissions

9. OSC staff recommended that the Director refuse to grant registration to Ms. Asbreuk in December 2006 and October 2007. In both cases OSC staff expressed concerns with the sales practices of Ms. Asbreuk. Specifically, OSC staff raised concerns that the Applicant had recommended unsuitable leveraging, recorded inconsistent information on loan applications, did not maintain necessary documentation in client files, over-concentrated clients' portfolios in labour sponsored mutual funds ( LSFs ) , appeared to be fronting for an unregistered individual, and appeared involved in a strategy to double charge commissions. The Applicant’s sales practices have also been the subject of an investigation by the MFDA and an internal compliance review by Optifund.

MFDA Investigation

10. The MFDA conducted an investigation into Ms. Asbreuk’s activities at Optifund. The investigation looked into whether Ms. Asbreuk had violated MFDA rules relating to the distribution of sales materials that had not been approved by Optifund, and whether she had failed to maintain adequate meeting notes regarding discussions with clients relating to the Return on Innovation LSF.

11. The MFDA concluded its investigation in September 2007 and issued a warning letter.

Fronting for Chad Martin

12.Optifund began its compliance review into the Applicant’s activities after it received two telephone calls from clients. The first person was a mutual fund client of Ms. Asbreuk who claimed his representative was Mr. Martin. Optifund learned that the client’s portfolio consisted solely of LSFs. Optifund received a second phone call from another client of Ms. Asbreuk. This client revealed that Mr. Martin made the sales presentation regarding LSFs and Ms. Asbreuk merely completed the paperwork. This client was also heavily concentrated in LSFs.

13. As a result, on March 24, 2006 Optifund placed Ms. Asbreuk under strict supervision and began a compliance review of her sales practices.

14. Chad Martin is Ms. Asbreuk’s common law spouse and is not currently registered under the Act to sell mutual funds or any other securities. While at Optifund, Ms. Asbreuk andMr. Martin worked together with a number of clients where Mr. Martin was supposed to be responsible for insurance products and Ms. Asbreuk for mutual funds. Currently,Ms. Asbreuk and Mr. Martin both work for FIP out of the same office and work together with some clients.

15. Mr. Martin had been registered as a mutual fund salesperson. On March 21, 2002, Mr. Martin was granted registration as a salesperson in the category of mutual fund dealer, sponsored by Quadrus Investment Services Ltd. At the time of his application for registration, Mr. Martin already held a Level 2 insurance licence. On June 27, 2002, while under contract with London Life Insurance Company, Mr. Martin was subject of an internal investigation where it was determined that he had forged a client's signature on certain documentation. As a result, he was terminated for cause. OSC staff at the time determined that issues regarding Mr. Martin's suitability for registration would be addressed when an application for transfer or reactivation of his registration was submitted.

16. An application was filed by Mr. Martin to be registered as a mutual fund dealer with Optifund on August 10, 2005. At the time of this transfer application, OSC staff learned that Mr. Martin had been convicted in July 2000 for practising as an insurance agent without a licence. In addition, he was under investigation by the Financial Services Commission of Ontario for alleged mortgage fraud perpetrated in Kingston, Ontario. On March 26, 2006, he was charged with four counts of making false statements to obtain credit and one count of fraud over $5,000. He was granted an absolute discharge on one charge and the four other charges were dismissed. It should be noted that being granted an “absolute discharge” means there was a finding of guilt but no conviction is registered.

17. The application for registration was withdrawn by Optifund on August 29, 2005 due to the fact that Mr. Martin's investment funds course had expired and he was unwilling or unable to rewrite it. Mr. Martin continued to work at Optifund as a salesperson on the insurance side of Optifund's business.

Double Commissions

18. Optifund found a pattern of an investment strategy whereby clients took out RSP loans to buy segregated funds with Mr. Martin. Shortly after the purchase, part of these funds, sometimes as much as half, were redeemed and invested in LSFs sold by Ms. Asbreuk. Optifund discovered 22 cases of this investment strategy.

19. This investment strategy led to excessive commissions. A commission was paid toMr. Martin on the sale of the segregated funds that were purchased with the borrowed money. Another commission was paid to Ms. Asbreuk on the sale of the LSFs that were bought with the money from the redemption of the segregated funds.

20. In many cases, the redemption of the segregated funds led to the client paying a deferred sales charge. This led to excessive charges to the client resulting in less borrowed money being invested.

Loan Applications

21.There was only one case out of 27 RSP loan applications reviewed where the financial data disclosed in the loan application was consistent with the client's financial needs data analysis documentation. This information was apparently misstated in the 26 other applications to ensure the loans were approved.

22. In the 26 other cases, the information on the loan application was not consistent with that in the financial needs analysis documentation. Optifund found the following issues relating to the RSP loans arranged by the Applicant for clients:

  • in at least one case, the money borrowed for the purpose of buying segregated funds within the RSP was found to have been used for another purpose, to pay down debt,
  • there were 12 instances where the leverage disclosure documentation could not be located in any of Ms. Asbreuk's files, Mr. Martin's files, or Optifund's files, and
  • none of the client files contained detailed written recommendations for leveraging.

Concentration in LSFs

23. Optifund investigated the concentration in LSFs held by Ms. Asbreuk’s clients. In addition to a concentration in LSFs, it was also discovered, that the Applicant only sold a single type of mutual funds to her clients, the Return on Innovation Labour Sponsored Fund.

24. This pattern raises a concern relating to the suitability of these investments. Due to the generally higher risk and lower returns, it is commonly known that LSFs are not appropriate for every client, even when the taxation advantage is taken into account. However, salespersons usually receive a higher commission from the sale of LSFs than from other mutual funds.

Applicant Submissions

25. The Applicant contested the claim that she had been terminated, saying she resigned from Optifund on May 3, 2006. She did not have any documents to prove this point. However,Ms. Asbreuk did send a letter to the MFDA to advise of her change of employment status; it was received by the MFDA on May 17, 2006. Optifund submitted a notice of termination to the OSC indicating it had terminated Ms. Asbreuk for cause on May 4, 2006 based on the results of an internal compliance review.

26. Ms. Asbreuk felt a lot of the problems identified by staff were the result of poor training provided by Optifund and she admitted that she is not “a super-knowledgeable mutual fund representative”. She noted that she was on probation at Optifund and worked with the branch manager. All her trades were approved before they were made and there were no concerns raised about her trades.

27. Ms. Asbreuk believed that Optifund failed in its duties as a member of the MFDA. According to Ms. Asbreuk, product orientation consisted of being provided a book, and she was asked to write the ninety-day training examination after being on the job for seven and a half months without any instruction during that time. She felt that if Optifund was dissatisfied with anything she was doing, they had a responsibility to identify the issues and teach her the proper way of doing things.

28. The Applicant also felt it was unfair that she was being judged on Mr. Martin’s past and not on her own merits.

MFDA Investigation

29. In relation to the findings from the MFDA Investigation, Ms. Asbreuk noted that she had not submitted sales disclosure materials for approval. However, the disclosure materials had come from the manager of the London branch of Optifund. Since it had come from the London office, Ms. Asbreuk believed it to be an approved form.

30. In regard to note taking, the Applicant said she did not know how many notes were enough notes. It was not until her last week at Optifund that the branch manager showed her how to prepare an ideal client file. If Optifund was dissatisfied with her note taking, it was not brought to her attention.

Fronting for Chad Martin

31. The Applicant explained that she had handled mutual funds with clients where Mr. Martin was the insurance representative. However, because of a longer term relationship and larger sums of money invested with Mr. Martin, many clients would say that he was their advisor. Ms. Asbreuk did not think the clients were confused and knew Ms. Asbreuk was their advisor in relation to mutual funds.

Double Commissions

32. Ms. Asbreuk noted that there were loans made to her clients under Mr. Martin’s name. These loans were later moved under her name. This was apparently due to a mistake where the mutual fund company loaning the money only had a segregated fund code for Ms. Asbreuk and did not have a mutual fund code. As a workaround, she used Mr. Martin’s code to get the loans for her clients. She said this only happened for about one week until she got her own code and created the loans for clients. The workaround was approved by the London office of Optifund.

33. Ms. Asbreuk said that she moved clients out of segregated funds and into LSFs because it was never intended for the clients to be in segregated funds but they could only get the loan under the segregated fund code. She said that for other clients, only deferred sales charge (DSC) free or the 10 per cent free from DSC, were moved to LSFs. As a result, clients did not pay any extra fees.

Loan Applications

34. In relation to the loan applications, Ms. Asbreuk explained that any discrepancies with financial needs analysis data was due to timing. Other insurance advisors who did not sell mutual funds worked with the Applicant when their clients needed mutual funds. These advisors had prepared the original financial needs analysis and this was in the client files. This analysis may have been out of date by one or two years. Ms. Asbreuk updated the information for the new loan and it did not match the financial needs analysis.

35. The Applicant apparently did not know an updated financial needs analysis needed to be done. However, she used the most updated information on the loan application and this was inconsistent with the financial needs analysis.

Concentration in LSFs

36. Ms. Asbreuk made a number of comments relating to insufficient or a lack training undertaken by Optifund. She said that the company had held more training seminars on the Return on Innovation funds than for any other company. Ms. Asbreuk concluded that Optifund was pushing those funds and because she had been to a number of seminars, she knew this fund better than others. As a result, this was the only fund that she sold out of the thousands of mutual funds available.

37. The Applicant sold more segregated funds than LSFs, but all the mutual funds she sold were one type of LSF.

38. Ms. Asbreuk said that at Optifund, clients with tolerance for medium risk or high risk were considered suitable for LSFs. She said that her know-your-client (KYC) forms were always checked medium risk or high risk and approved by the branch manager.

Suitability for Registration

39.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.

40. 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

41. 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

42. 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.

43. In this matter the question of the Applicant’s suitability for registration surrounds the criteria of competence and integrity. There is no issue relating to the Applicant’s financial solvency.

44. The Applicant admits that she is not a highly knowledgeable mutual fund salesperson. The Applicant’s lack of competence is highlighted in the following:

  • she only sold LSFs and from only one company,
  • her clients were highly concentrated in LSFs,
  • she only sold one segregated fund,
  • she failed to have sales disclosure approved,
  • she did not maintain adequate records of meetings with clients,
  • she arranged loans for clients that were inconsistent with their financial needs analysis,
  • she did not provide leverage disclosure to clients borrowing money to invest,
  • she arranged loans for clients under the wrong fund code, and
  • she arranged loans for clients under the code of another representative.

45. Optifund bears some of the responsibility as it has an obligation to ensure that its salespersons are trained and understand the products they are selling. Optifund’s supervision should have found these shortfalls and corrected them. It was only as the result of a telephone inquiry from a client that the Applicant’s sales practices came to light.

46. Ms. Asbreuk’s dealings with clients together with Mr. Martin raise concerns of integrity. Her explanation of why some clients believed Mr. Martin was their advisor was possible. However, given her lack of experience, and that at least in one instance the client saidMr. Martin was involved in selling mutual funds, it is likely Mr. Martin was involved in the sales of mutual funds.

47. There were 26 cases where the financial needs analysis documentation was inconsistent with the loan application, there was only one case where it was consistent. OSC staff submits that this was done to ensure the loan was approved. This is supported by Mr. Martin’s past behaviour. The mortgage fraud charges against Mr. Martin alleged that he falsified financial documents to ensure that mortgages were approved.

48. The Applicant claimed that the inconsistent loan records were due to timing. If that was the case it is not clear how she determined the amount of the loan. Was the amount of the loan based on an old financial needs analysis or on undocumented discussion with the client.

49. There were 12 instances where leverage disclosure information was not found in any file relating to the client. Borrowing money for investing can increase the risks for an investor as the money borrowed must be repaid. This risk is exacerbated when the money is borrowed for a high risk investment such as a LSF. This is a situation where a clear conflict of interest can be found. This lack of disclosure was not in the best interest of her clients.

50. Ms. Asbreuk said the alleged double commissions resulted from loans arranged for the purchase of segregated funds but intended to buy mutual funds. As soon as the loan code error was fixed she put the money where it was intended. It is not clear, why the loans were made out under Mr. Martin’s name and code. Ms. Asbreuk said she had a code to make the loans under her own name for segregated funds. Mr. Martin could not arrange loans for mutual funds.

51. Ms. Asbreuk said the loan workaround was only in place for a short period of time, perhaps one week. This does not appear to explain the 22 cases where Optifund found that a client bought segregated funds with borrowed money from Mr. Martin, and then bought LSFs from Ms. Asbreuk with money from redeeming the same segregated funds purchased fromMr. Martin. Again this practice was not in the best interest of her clients.

Decision and Reasons

52. The Director has the discretion to grant registration, refuse registration or impose terms and conditions on the registration. Terms and conditions are most useful in cases where remediation is possible but not where there is a question of integrity. This point was discussed in the Jaynes decision that reads in part:

While terms and conditions restricting registration may be appropriate in a wide variety of circumstances, they should not be used to “shore up” a fundamentally objectionable registration. To do so would be to create the very real risk that a client’s interests cannot be effectively served due to the severity and extent of the restrictions imposed. Re Jaynes (2000), 23 O.S.C.B. 1543

53.The submissions made by OSC staff clearly demonstrate that the Applicant lacks the competence required of a mutual fund salesperson. The Applicant admitted as much in her submission.

54.Registrants have a duty to deal fairly, honestly and in good faith with their clients. This is a cornerstone of the regulatory regime. The Applicant, particularly in situations where she was meeting clients with Mr. Martin, appeared to be involved in self-dealing to the detriment of her clients. In my view, the Applicant has demonstrated a lack of integrity.

55.The Applicant has not demonstrated the high standard of competency and integrity required of a professional in the securities industry and I find that this would not be an appropriate situation to impose terms and conditions. Therefore, I refuse to grant the registration of Rhonda Asbreuk.

January 28, 2008

“David M. Gilkes”