An application for a hearing and review of this decision was made to the Commission pursuant to section 8 of the Securities Act (Ontario), and all notices, orders, and decisions relating to that application can be found in ‘OSC Proceedings’: The Commission’s final decision dismissing the application can be accessed by clicking here.
An appeal of the Commission’s decision dismissing the application for a hearing and review was brought to the Ontario Superior court of Justice (Divisional Court). The Court’s decision dismissing the appeal can be accessed by clicking here.
In the Matter of Staff’s Recommendations
for the Non-Reinstatement of Registration
of Sanjiv Sawh and Vlad Trkulja
Opportunities to be Heard by the Director
under section 31 of the Securities Act (Act)
1. For the reasons outlined below, my decision is to deny the reinstatement of registration of each of Sanjiv Sawh and Vlad Trkulja (collectively, the Applicants).
2. On September 20, 2010, Staff recommended that the registration of:
- Sanjiv Sawh as a dealing representative of a mutual fund dealer (MFD) and an exempt market dealer (EMD) be refused,
- Vlad Trkulja as a dealing representative of a MFD and an EMD be refused.
MGI Financial Inc. (MGI) sponsored Sawh’s and Trkulja’s registrations.
3. Pursuant to section 31 of the Act, the Applicants are each entitled to an opportunity to be heard (OTBH) before a decision is made by the Director. On consent of the parties, a joint OTBH was held on November 2, 2010. Written closing submissions of Staff (Michael Denyszyn and Mark Skuce, Legal Counsel, Compliance and Registrant Regulation Branch, Ontario Securities Commission (OSC)) and Applicants’ counsel (Ari Kulidjian, Kulidjian & Associates) were filed subsequently.
4. At the OTBH, both Applicants clarified that their intent was that their applications for reinstatement of registration as dealing representatives with MGI be in the category of MFD only, not EMD. This is despite the fact that MGI is registered as both a MFD and an EMD. The Applicants take this position because their understanding is that MGI doesn’t sell exempt products and therefore MGI is not using its EMD licence.
5. My decision is based on my reading of the documentary evidence provided to me, the verbal submissions of both Staff and the Applicants’ counsel, the testimony of Trkulja and Sawh, and the written closing submissions.
6. The purposes of the Act (as set out in section 1.1) 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.
7. Subsection 25(1) of the Act generally requires that any person or company that engages in the business of trading in securities to be registered in the relevant category. 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, as noted in numerous prior decisions, registration is a privilege, not a right.
8. Subsection 27(1) of the Act states that, on application by a person, the Director shall reinstate the registration of the person unless it appears to the Director that the person is not suitable for registration or that the proposed registration is otherwise objectionable. The question for me to determine as Director is whether each of Trkulja and Sawh is suitable for registration and whether each of their registrations is otherwise objectionable.
9. Subsection 27(2) of the Act provides that in determining whether a person is suitable for registration, the Director shall consider whether the person has satisfied the requirements prescribed in the regulations relating to proficiency, solvency and integrity, and such other factors as the Director considers relevant. The meanings of “suitable” and “objectionable” are not prescribed in Ontario securities law. However, the Commission has, over time, articulated the 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
The criteria at issue here are integrity and proficiency.
10. Prior Commission decisions have held that registration is “otherwise objectionable” if it is determined, with reference to the purposes of the Act, that it is not in the public interest for the person or company to be registered. See Re Mithras Management Ltd., (1990) 13 OSCB 1600.
Arguments relating to the non-reinstatement of the Applicants’ registration
11. Staff submits that each of the Applicants’ registrations should not be reinstated on the grounds that each of them is unsuitable for registration and that each of their continued registrations would be objectionable.
12. Staff based its recommendations on two primary bases – (1) a settlement agreement dated April 8, 2010 among The Investment House of Canada Inc. (IHOC) and the Applicants (collectively, the Respondents) and the Mutual Fund Dealers Association (MFDA) (Settlement Agreement), and (2) the affidavits of several clients of the Applicants. The MFDA also issued reasons for their decision on June 29, 2010.
Settlement Agreement with the MFDA
13. IHOC became a member of the MFDA in 2003. IHOC was registered with the OSC as a MFD and limited market dealer (now EMD). Prior to IHOC’s suspension in May 2010, Sawh was at various times an officer, director, salesperson, dealing representative, chief compliance officer (CCO), Executive Vice President, and Managing Director of IHOC. Trkulja was at various times an officer, director, President, Chief Executive Officer, salesperson, and dealing representative. Sawh and Trkulja owned IHOC.
14. Golden Gate Funds Limited Partnership (Golden Gate) and Alterra Preferred Equity Real Estate Limited Partnership (Alterra Fund) were two of the products distributed by IHOC on an exempt basis to “accredited investors”. Golden Gate’s described business was to invest in premium quality residential and commercial mortgages with the intention of providing unitholders with steady interest income and preservation of capital. Alterra Fund’s described business was to invest in a related limited partnership which had real estate development projects in the United States. IHOC sold approximately $3 million of units in Golden Gate and $1.6 million of units in Alterra Fund to its clients.
15. As an aside, Staff also referred to the November 2009 settlement agreement between Golden Gate and Ernest Anderson, as respondents, and Staff of the OSC. In that settlement agreement, Anderson and Golden Gate were found to have breached securities laws by participating in an illegal distribution of securities. The Commission ordered that trading in securities of Golden Gate cease immediately and removed securities law exemptions from Anderson and Golden Gate permanently. Anderson and Golden Gate were also ordered to pay administrative penalties and costs of the investigation and to jointly disgorge funds in the approximate amount of $4.6 million made under the illegal distribution. The vast majority of the units of Golden Gate sold by registrants were sold by IHOC and its representatives.
16. The MFDA performed three compliance reviews of IHOC – the second in 2006 and the third in 2009. During the 2006 review, MFDA staff advised IHOC that it considered exempt products (such as Golden Gate and the Alterra Fund) to be high risk investments. Following the 2006 review, IHOC changed its risk ranking of these exempt products to high risk from medium risk. Despite IHOC changing the risk ranking of these exempt products to “high”, the Applicants continued to sell these products to clients “without ensuring the [products] were suitable for clients and in keeping with their investment objectives; and… without ensuring that the clients qualified as accredited investors in accordance with National Policy 45-106” Distribution Requirements.
17. The Settlement Agreement states that the 2009 review identified that deficiencies identified in the 2006 review had not yet been addressed. These deficiencies included inadequate head office supervision, not ensuring that trades in some client accounts in mutual funds and other securities were suitable for clients and consistent with the clients’ documented investment objectives and know your client (KYC) information, failure to maintain complete KYC and new account application form (NAAF) information, etc. [emphasis added]
18. The 2009 review also identified client files in which there was incomplete or missing NAAFs or KYC information and IHOC had permitted numerous trades in these accounts. As well, for approximately 10% of the client accounts sampled during the 2009 review, the NAAF was completed after the initial trade in the account had occurred.
19. Briefly, the Settlement Agreement sets out the following selected contraventions by the Respondents:
- Sawh and Trkulja sold exempt products to some clients without ensuring that the products were suitable for clients and in keeping with their investment objectives,
- Sawh and Trkulja sold exempt products to some clients without ensuring that the clients qualified as accredited investors,
- IHOC approved the sale of exempt products to some clients without conducting reasonable due diligence,
- The Respondents did not ensure that actual or potential conflicts between their interests and those of IHOC’s clients were addressed by the exercise of responsible business judgment influenced only by the best interests of the clients,
- IHOC did not ensure that trades in some client accounts in mutual funds and other securities were suitable for clients and consistent with the clients’ documented investment objectives and KYC information, and
- IHOC did not collect complete NAAF and KYC information for some clients and permitted trading in such accounts.
20. The Respondents agreed to the following selected terms of settlement:
- IHOC was suspended from membership in the MFDA,
- Sawh and Trkulja each paid fines of $10,000, and
- Sawh and Trkulja were each prohibited from acting as a branch manager, compliance officer or ultimate designated person for three years.
21. OSC Staff submits the terms of the Settlement Agreement in and of themselves are sufficient for me, as Director, to refuse the reinstatement of registration of the Applicants. I agree for the reasons set out below.
22. Applicants’ counsel argued that I should consider various changes in the Settlement Agreement between the original draft agreement and the final agreement. With respect, I disagree. Settlement agreements are, by their nature, negotiated agreements between the parties. In my view, the only relevant “draft” of the agreement that I need to consider in making my decision is the (final) Settlement Agreement agreed to by the Applicants and the MFDA.
23. Applicants’ counsel also argued that staff was effectively penalizing the Applicants twice for the same misconduct, effectively engaging in double jeopardy. However, staff is correct in its argument that it is the OSC, and not the MFDA, that has jurisdiction over the registration of individuals and firms. As such, it is the OSC that does the analysis of whether an applicant is suitable for reinstatement of registration or whether the applicant’s registration would be objectionable. Thus, it is my view that the double jeopardy argument is not applicable in these circumstances.
Clients’ affidavits set out a similar fact pattern to the MFDA Settlement Agreement
24. Several clients’ affidavits were filed as exhibits to the joint OTBH. The clients’ affidavits set out fact patterns substantially similar to the fact patterns agreed to by the Respondents as part of the Settlement Agreement. As a result, this decision provides a brief summary of two client affidavits only.
25. Client A is a 66 year old retired married woman. She pre-signed a NAAF without all the necessary information completed (including her investment risk tolerance). The “completed” NAAF shows as a risk tolerance of 33% low risk, 33% medium risk, and 33% high risk. She describes herself and her husband as being “risk-averse investors, and a correct description of our risk tolerance would be 90% low risk and 10% medium risk”. Her affidavit also states that “I specifically advised Trkulja that the profits from the Oakville home were my retirement savings, and that… our objective was to invest in something that would provide us with reliable monthly payments as part of our retirement income, while protecting the investment principal at the same time”. Despite the risk tolerance set out in her NAAF (which was much higher than her declared risk tolerance), “[b]ased on the assurances we received from Trkulja, I decided to invest in Golden Gate”.
26. Client B is a 44 year old married man. For the past eight years, he has worked as a part-time teacher’s assistant with an annual income of approximately $30,000. His wife’s salary is approximately the same and he and his wife have a combined net worth of approximately $300,000. Client B states that “Trkulja filled out the [NAAF] after asking me a few personal questions, and then I signed it. [The NAAF] indicated that my risk tolerance was 90% low risk and 10% medium risk… I met with Trkulja… and told him that I was interested in investing in the Alterra Fund because I liked the fourteen percent return advertised in the newspaper… Trkulja told me that I was a potential accredited investor… Trkulja completed a second [NAAF]… and I signed it.. This form indicates that I have a 100% high risk tolerance and liquid assets of over one million dollars. This information is not correct.” Client B invested US$10,000 in the Alterra Fund.
Does it matter that the Applicants no longer plan to sell exempt products?
27. Applicants’ counsel argued that since many of the matters in the Settlement Agreement relate to the sale by the Applicants of exempt products to accredited investors, less weight should be placed on the terms of the Settlement Agreement by me since the Applicants now only propose to be MFD dealing representatives. I disagree. Although the Settlement Agreement primarily relates to the Applicants’ misconduct with respect to the sale of exempt products, the Settlement Agreement also clearly states that the Applicants did not ensure that trades on some client accounts in mutual funds were suitable for clients. As well, I do not believe that the Applicants can lack integrity in the sale of exempt products (which in my view is what the Settlement Agreement clearly sets out) and have integrity in the sale of mutual funds. The Applicants either have the requisite integrity of securities professionals or they do not. In my opinion, they do not.
Does it matter that the Applicants will not be in a managerial position with MGI?
28. Applicants’ counsel argued that it was relevant to my decision that the Applicants would not be in a managerial position with MGI, as they were with IHOC. I do not agree. The Applicants are applying for reinstatement as dealing representatives of a MFD. It does not matter for the purposes of that determination whether they also intend to be in management positions with MGI.
29. My decision is to deny the reinstatement of registration of both Applicants. In my view, the past conduct of both Applicants (based on the test set out in Re Mithras) leads me to conclude that their conduct in the future may well be detrimental to the integrity of the capital markets. As well, in my view, neither Applicant has demonstrated the required integrity or proficiency of securities professionals. I also find that the reinstatement of registration of each Applicant would be objectionable.
30. Applicants’ counsel argued that the Applicants should be able to rely on Trafalgar, Re (2010), 33 O.S.C.B. 1197 which they submit stands for the proposition that the facts contained in a settlement agreement negotiated with a regulator cannot alone establish a history of wrong doing sufficient to deny reinstatement of registration. The settlement agreement in Re Trafalgar was entered into seven years before the Director’s decision was issued and thus in the Re Trafalgar matter I, as Director, did not agree with staff’s conclusion that the Re Mithras test applied in assessing Trafalgar’s current fitness for registration. However, in this case, the MFDA Settlement Agreement was very recent and evidenced serious misconduct. As a result, I decided that the Re Mithras test did apply in this case and that the facts set out in the Settlement Agreement were, in and of themselves, sufficient to refuse the reinstatement of registration of the Applicants.
31. The facts set out in the Settlement Agreement were not “comparably benign violations of the MFDA regulations” as set out by Applicants’ counsel. The Settlement Agreement references serious misconduct by the Applicants and resulted in the MFDA taking the very serious and unusual step of suspending the registration of IHOC, a firm owned and operated by the Applicants. “This may be the first time in Canadian securities history that a going concern is wound down as a result of breaches in securities legislation… [t]he suspension of [IHOC] as an MFDA member is the most severe penalty [the MFDA] can impose. [IHOC] will not harm the public anymore… [W]e believe that the Settlement Agreement and the penalties imposed on the Respondents are reasonable and proportionate and will communicate to others that this kind of conduct will not be tolerated and will bring severe sanctions against those who might engage in such activity.” (Reasons for Decision of the MFDA dated June 29, 2010)
32. I also had the affidavits of several clients of IHOC, which described conduct similar to the conduct described in the agreed facts in the Settlement Agreement. Although the Applicants both provided testimony refuting some of the statements made in the various affidavits, I did not find their evidence to be credible as it related to some of the statements made in the clients’ affidavits and, as a result, I relied on the statements made in the affidavits provided to me in making my decision.
33. For example, I was troubled by the testimony of Trkulja with respect to Client B. I did not find Trkulja’s testimony credible with respect to the completion of the second NAAF for Client B (approximately a year after the completion of the first NAAF). The second NAAF for Client B was only completed after he expressed an interest in buying an exempt product that clearly didn’t match his risk profile and in circumstances where Trkulja knew or should have known that Client B was likely not an accredited investor. At the very least, Trkulja should have asked enough questions to satisfy himself that Client B was an accredited investor despite strong apparent evidence to the contrary. This was not an “unsolicited trade” as it was compared to by Trkulja. The Applicants were actively distributing securities of both Golden Gate and the Alterra Fund. Trkulja should not have completed the second NAAF for Client B, nor should he have completed the trade of securities of Alterra Fund to Client B in these circumstances.
34. I was also troubled by the testimony of Sawh relating to the proposed purchases of IHOC by entities affiliated with both Golden Gate and the Alterra Fund. Both proposed purchases were ongoing and notice had been provided to either the OSC or to the MFDA at the same time as some of the clients that completed affidavits were being solicited by the Applicants to purchase securities of Golden Gate or the Alterra Fund. No disclosure was made to any of IHOC’s clients about these conflicts of interest. While I acknowledge that the proposed purchase transactions may have been confidential, I do not believe that the Applicants or IHOC should have continued to actively distribute these products while in negotiations to sell their firm to entities related to the product issuers unless they were prepared to provide appropriate conflict of interest disclosure to the applicable clients.
35. 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”. Although I was not asked to consider terms and conditions, in my view, the use of terms and conditions in this case would be shoring up fundamentally objectionable registrations.
“Marrianne Bridge, FCA”
Deputy Director, Compliance
Ontario Securities Commission
January 25, 2011