In the Matter of Staff’s Recommendation
to Refuse the Reactivation of Registration
of Abdelkader Hamdan
Opportunity to be Heard by the Director
Section 31 of the Securities Act
|Date of decision:||November 25, 2010|
|Director:||Marrianne Bridge, FCA|
|Written materials submitted by:||Michael Denyszyn, Legal Counsel for the
Staff of the Ontario Securities Commission
1. Mr. Hamdan was first registered in 2001. In 2002, he joined Investors Group Financial Services Inc. (IG) as a mutual fund dealer (MFD) and limited market dealer (now exempt market dealer) salesperson (now dealing representative).
2. Effective April 14, 2009, Mr. Hamdan was terminated for cause by IG for “working as an Assistant to another advisor at another Dealer… Mr. Hamdan… submitted business to the other Dealer and completed trades under the advisor’s Dealer and representative code…”
[extracted from disclosure filed by IG]
3. By letter dated August 27, 2010, Staff advised Mr. Hamdan that it had recommended that his application for reactivation of registration as a MFD dealing representative sponsored by GP Wealth Management Corporation (GP Wealth) be refused.
Meanings of suitable and objectionable
4. The purposes of the Securities Act (Ontario) (Act) are to provide protection to investors from unfair, improper or fraudulent practices, and to foster fair and efficient capital markets and confidence in capital markets.
5. A registrant is in a position to provide valuable services to the public. A registrant also has a corresponding capacity to do material harm to investors and to the public at large. Determining whether an applicant should be registered is thus an important component of the OSC’s public interest mandate. As well, registration is a privilege, not a right.
6. Section 25 of the Act requires any person or company that trades in securities to become registered in the relevant category under the Act. Section 27(1) of the Act provides that the Director shall register the person unless it appears to the Director that the person is not suitable for registration or that the registration is otherwise objectionable.
7. The OSC has articulated three fundamental criteria for determining suitability for registration – integrity (which includes honesty and good faith, particularly in dealings with clients, and compliance with Ontario securities law), proficiency (which includes prescribed proficiency and knowledge of the requirements of Ontario securities law), and solvency. These criteria are codified in subsection 27(2) of the Act.
8. The determination of whether an applicant’s proposed registration may be otherwise objectionable goes beyond the three suitability criteria above. Prior OSC decisions have held that registration is “otherwise objectionable” if it is determined that it is not in the public interest for the person or company to be registered. See Mithras Management Ltd., Re (1990), 13 O.S.C.B. 1600.
9. Staff argued that Mr. Hamdan’s registration should be refused on the grounds that he is unsuitable for registration due to a lack of the requisite integrity and proficiency of a securities professional. Staff further argued that Mr. Hamdan’s proposed registration would be objectionable.
Chronology of eventsAgreement relating to the acquisition of Roche Financial Corporation
10. In December 2008, Mr. Hamdan entered into an agreement with Ronald Roche and Olive Roche to acquire shares in Roche Financial Corporation, the parent company of Roche Financial Group (RFG). Mr. Roche’s registration was sponsored by Hub Capital Inc., a MFD. The plan was that Mr. Hamdan was to gradually acquire RFG.
11. Mr. Roche notified Hub Capital of the agreement in early January 2009. He advised Hub Capital that Mr. Hamdan planned to move about 10% of his investment clients to Hub Capital and sell the remainder of his investment clients to other IG agents. For accounts moving to Hub Capital, Mr. Roche proposed opening new accounts under his name and dealer representative code, and setting up Mr. Hamdan to be his “assistant” to facilitate the transition of these clients. Mr. Roche stated that Mr. Hamdan would “meet with people and discuss their financial affairs and make recommendations” and that “[w]hen financial plans are completed and recommendations are prepared I am involved and the business is written under my code.”
12. Hub Capital advised Mr. Roche that until Mr. Hamdan resigned from IG, he “can not talk to any of [Mr. Roche’s] clients in regards to [mutual funds]”. Despite this, Mr. Hamdan transitioned four IG clients to Hub Capital as described above for a value of nearly $390,000. Hub Capital cancelled these transactions.
13. Mr. Hamdan represented to Staff that his manager was aware that he planned to sell his IG book of business. No evidence was provided to support these representations.“Stealth advising”
14. Hub Capital informed Mr. Roche and Mr. Hamdan that Mr. Hamdan’s activities constituted “stealth advising”, which is conduct described in Member Regulation Notice MR-0067 Stealth Advising (MR-0067) of the Mutual Fund Dealers Association (MFDA). Stealth Advising is defined as:
“… client accounts are set up at the Member with the registered Approved Person as the representative of record, and trading activity is processed using the Approved Person’s representative code. However, a non-registered individual services the account and this individual provides advice and makes recommendations to clients with respect to securities in the account, directing the registered Approved Person to place trades… Essentially, the non-registered individual maintains a book of business without registration, by executing trades through a registrant. This is done without notice to, or approval of the Member.”
15. MR-0067 sets out the MFDA concerns with respect to stealth advising including the inability of the member to properly supervise dealing activity, conflicts of interest, and that this activity “may be subject to sanctions by the provincial securities authorities.”
16. Mr. Hamdan explained that “since I was an approved person… I was… within the MFDA rules… and I believed that as long as I processed the business through Ron Roche… that I was compliant with the MFDA rules…” He also represented that he “forgot that I would not be able to service the business [and] that [Mr. Roche] should have been called in to sit in on the meeting and review the trades that the clients had accepted to ensure that Ron was willing to be responsible for the business, I did not do that…”
17. On April 9, 2009, Mr. Hamdan met with the Managing Director and the Chief Compliance Officer (CCO) of Hub Capital. Mr. Hamdan confirmed that, for four clients, he had signed new client application forms himself using Mr. Roche’s dealer representative code. Hub Capital staff notes indicated that Mr. Hamdan “did not understand why this could not continue… until he transferred his registration to Hub Capital” and “stated his frustration that Hub [Capital] would hold him to ‘the rule’.”
18. Hub Capital’s CCO was concerned that Mr. Hamdan failed to disclose (a) his conflict of interest, (b) his referral arrangement with Mr. Roche, and (c) the compensation arrangements in place between Mr. Roche, Mr. Hamdan, Hub Capital and the affected clients. Hub Capital decided to refuse Mr. Hamdan’s further business.
19. By memorandum dated April 10, 2009 from Mr. Roche to Hub Capital, Mr. Roche stated that he was “shocked… to learn that [Mr. Hamdan] had used my agent code… and signed his own name as agent”. He also expressed his belief that Mr. Hamdan’s conduct was a technical error “since [Mr. Hamdan] was duly licensed and legally discussing a portfolio with the client”.IG learns of Mr. Hamdan’s conduct
20. IG became aware of Mr. Hamdan’s conduct on behalf of Hub Capital on April 9, 2009 when the CCO of Hub Capital contacted them. Mr. Hamdan was interviewed on April 13, 2009 by his manager at IG. Mr. Hamdan provided “issues related to personal financial difficulty” as the explanation for why he acted on behalf of Hub Capital prior to applying to transfer his registration to them. IG terminated Mr. Hamdan for cause for non-disclosure of his outside business activity and violation of his consultant agreement with them.Mr. Hamdan’s conduct after termination by IG
21. After his termination by IG, Mr. Hamdan circulated disclosures for signature by his clients asking that they acknowledge that he was not appropriately registered with Hub Capital and disclosing the nature of his relationship with RFG. As well, despite the fact that Mr. Hamdan’s registration with GP Wealth was not yet approved, Mr. Hamdan advised one client that he was “delighted to inform you that the transfer of my registration to [GP Wealth] is complete”.
Arguments from StaffMr. Hamdan appears to lack the integrity and proficiency required of a securities professional
22. Staff argued that Mr. Hamdan has engaged in a course of conduct that does not reflect the requisite integrity or proficiency of a securities professional.
23. Clause 25(1)(b) of the act provides that an individual may not engage in or hold himself out as engaging in the business of trading in securities unless the person “is a representative registered in accordance with Ontario securities law as a dealing representative of a registered dealer and is acting on behalf of the registered dealer”. (emphasis added). Staff argued that this provision emphasizes the vital connection between a registered dealing representative and his sponsoring firm, and prohibits registerable activity outside of this relationship. Staff argued that Mr. Hamdan breached this requirement by trading mutual funds on behalf of RFG and its sponsoring firm, Hub Capital. Mr. Hamdan continued with this course of conduct until his sponsoring firm learned of it and fired him for cause.
24. Staff argued that Mr. Hamdan’s activity comprised not only “stealth advising”, but also a violation of section 43 of the Act which provides that:
“No registrant shall use the name of another registrant on letterheads, forms, advertisements or signs, as correspondent or otherwise, unless the registrant is a partner, officer or agent of or is authorized to do so in writing by the other registrant”.
25. Staff also argued that Mr. Hamdan failed to act fairly, honestly and in good faith with his clients as required by section 2.1 of OSC Rule 31-505 Conditions of Registration (OSC Rule 31-505). Mr. Hamdan did not initially make full, true and plain disclosure to his clients that he was not appropriately registered with Hub Capital, and failed to disclose his referral and compensation arrangements, as well as the conflict of interest arising out of his unauthorized dual occupation.
26. As a result of his course of conduct, Staff argued that Mr. Hamdan failed to demonstrate the requisite integrity of securities professionals and that this failure created significant risks for his clients both at IG and Hub Capital. As well, Staff argued that the misinformation provided to a client regarding his registration status with GP Wealth also demonstrates that he lacks the requisite integrity of securities professionals.
27. Staff also argued that Mr. Hamdan’s conduct demonstrates that he lacks the requisite proficiency of securities professionals due to his demonstrated lack of knowledge of Ontario securities law, MFDA rules and notices, and the policies and procedures of both registered firms.Registration objectionable
28. Staff argued that the proposed registration of Mr. Hamdan with GP Wealth would be objectionable on public interest grounds for the reasons outlined above.Mr. Hamdan’s registration can not be “shored up” by terms and conditions
29. The Director decision in Jaynes, Re (2000), 23 O.S.C.B. 1543 states in part that “[w]hile 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”. Staff’s argued that Mr. Hamdan’s registration would be fundamentally objectionable and that his registration can not be “shored up” by terms and conditions.No written submissions from Mr. Hamdan
30. Mr. Hamdan, despite being given multiple extensions do to so, did not file written submissions with me.Director’s Decision
31. My decision is that the application by Mr. Hamdan for reactivation of registration as a MFD dealing representative sponsored by GP Wealth be denied.
32. In my view, it was not necessary to make a determination regarding whether Mr. Hamdan’s conduct technically constituted stealth advising. In my view, Mr. Hamdan clearly breached various requirements of Ontario securities law – including clause 25(1) of the Act and section 43 of the Act. I also find that Mr. Hamdan failed to act fairly, honestly and in good faith with his clients as required by section 2.1 of OSC Rule 31-505.
33. Mr. Hamdan has not demonstrated the requisite proficiency or integrity of securities professionals as evidenced by his overall course of conduct, and by his insufficient understanding of Ontario securities law and the policies and procedures of IG and Hub Capital. I agreed with staff’s arguments that these failures created significant risks for his clients and to both registered firms.
34. I also agreed that Staff’s submissions that Mr. Hamdan’s registration is fundamentally objectionable and that it can not be shored up by terms and conditions.
“Marrianne Bridge, FCA”
Deputy Director, Compliance
Ontario Securities Commission
November 25, 2010