IN THE MATTER OF THE SECURITIES ACT
R.S.O. 1990, C.S.5, AS AMENDED
IN THE MATTER OF THE APPLICATION FOR
REINSTATEMENT OF REGISTRATION OF
LESLIE BRENT THATCHER
HEARING BEFORE THE DIRECTOR
PURSUANT TO SUBSECTION 26(3) OF THE SECURITIES ACT
Motion Heard: October 16, 2000
Director: Peggy Dowdall-Logie
Leslie Brent Thatcher: In Person
Staff of the Ontario Securities Commission: Kathryn Daniels, Counsel
DECISION AND REASONS FOR DECISION
The Decision of the Director was to refuse the request by Leslie Brent Thatcher (the applicant) for reinstatement of his registration as a salesperson. This decision was issued by the Director on January 12, 2001, with notice that reasons for the decision would follow at a later date. These are the reasons for the decision.
The applicant was previously employed at A.C. MacPherson and Company, Inc. (MacPherson) from August, 1997 to January, 2000 and was a registered salesperson of MacPherson from June 10, 1999 to January 20, 2000. MacPherson was an investment dealer whose registration was terminated on July 5, 2000 by an Order of the Ontario Securities Commission (the Commission) dated April 6, 2000, pursuant to section 127 of the Securities Act (Ontario) (the Act). The applicant's registration as a salesperson with MacPherson was suspended on January 20, 2000 when he, along with the other salespersons, were advised that there were problems with MacPherson's registration.
The applicant's registration as a salesperson continues to be suspended until two conditions set out in subsection 25(2) are met: first, notice is received from another registered dealer of employment of the salesperson; and, second reinstatement of the registration is approved by the Director.
The first of these conditions has been satisfied by the Notice of Employment dated February 8, 2000 received by the Director from Scotia Discount Brokerage Inc., an investment dealer under the Act. However, the second condition has not been satisfied, and Staff of the Registration Branch of the Commission have recommended that the Director not reinstate the applicant's registration. Staff issued a letter dated August 22, 2000 to the applicant identifying reasons for their recommendation. Staff is of the view that the applicant resold securities to his own clients at excessive mark-ups and failed to deal fairly, honestly and in good faith with his clients while employed at MacPherson. Staff submitted that the applicant was not suitable for registration. A hearing was convened before the Director on October 16, 2000 pursuant to subsection 26(3) of the Act which provides that:
(3) 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.
The other provision which is relevant to this hearing is subsection 26(1) of the Act which provides as follows:
(1)Unless it appears to the Director that the applicant is not suitable for registration, renewal of registration or reinstatement of registration or that the proposed registration, renewal of registration, reinstatement of registration or amendment to registration is objectionable, the Director shall grant registration, renewal of registration, reinstatement of registration or amendment to registration to an applicant.
At the hearing, Mr. Thatcher represented himself. Kathryn Daniels was counsel for staff of the Commission.
The only testimony presented at the hearing was that of Mr. Thatcher. He testified that he had been employed at MacPherson from August, 1997 until January, 2000. Mr. Thatcher was first employed in the telemarketing department of the firm. Upon successful completion of the Canadian Securities Course, the Conduct and Practices Handbook (CPH) course and the training required under the IDA rules, he transferred to the job of salesperson. He was registered as a salesperson at MacPherson from June 10, 1999 to January 20, 2000.
On cross-examination, Mr. Thatcher testified that as a registered salesperson, he acted as an account opener. He would call leads with the object of selling them securities of particular issuers that were part of the current sales campaign of Mac Pherson. After Mr. Thatcher sold to a client once, he would pass the client's account to a senior salesperson at MacPherson. He would then split the commissions from all sales from the accounts he opened with the senior salesperson. Unless a client happened to call him directly, he would have no further contact with the client.
Mr. Thatcher testified that his commission for principal sales made on behalf of MacPherson to his clients was between 15 and 20 percent. For agency trades, the commission would be two to three percent, of which Mr. Thatcher, as the selling representative, would receive approximately one percent. On subsequent sales made by the senior salesperson to clients whom he opened, Mr. Thatcher would typically get seven percent of those sales.
While employed as a registered salesperson, Mr. Thatcher testified that he only sold securities that MacPherson was promoting in a sales campaign and that were held in his employer's inventory. He stated that it was made clear to him that he could sell securities on an agency basis but it wasn?t recommended because he would not be entitled to the higher commission. He stated that he understood that he promoted and sold high risk, speculative securities to clients. He testified that he knew that MacPherson was a market maker for all the securities he sold but did not investigate whether MacPherson was the only market maker.
Mr. Thatcher testified that salespeople at MacPherson were told every day the acquisition and selling prices of the securities they were selling. With regard to one of the securities sold by MacPherson, Blue Gold, Mr. Thatcher agreed with the suggestion by Ms. Daniels that the acquisition price was between 35 and 45 cents, and it was sold at a starting price of 90 cents. With regard to Ontario Hose, Mr. Thatcher agreed that the acquisition cost was between 35 and 45 cents, and that Mr. Thatcher sold it at between 75 and 90 cents. With regard to IO Gold, Mr. Thatcher agreed that the acquisition cost was between 50 and 60 cents, and that it was sold at between 95 cents and $1.45. Mr. Thatcher testified that ?he sees now that it seems to be the case that MacPherson was buying securities and then doubling the price of what it paid when selling it to clients. Mr. Thatcher stated that he did not have the opportunity to observe a drop in the price of securities after the sales campaign ended. Mr. Thatcher also testified that he never called clients to suggest that they sell the securities sold to them by MacPherson, even if the securities was going down. He stated that his only role was to sell the issues that he was given to sell.
SUMMARY OF THE APPLICANT'S SUBMISSIONS
The applicant submitted that there exists no basis for denying his application for registration. He stated that, until the day of the hearing, he did not know where to find a definition of what constitutes excessive mark-ups and that he did not know that MacPherson inflated the value of securities. Mr. Thatcher stated that he trusted MacPherson to sell shares with integrity, and that because of this reliance he did not investigate security prices. He submitted that he understood the nature of his duties at MacPherson, and that he made full disclosure to clients. Finally, Mr. Thatcher stated that he is currently employed by Scotia Discount Brokerage, Inc., and that he poses no threat to the capital markets given the competency of the firm's compliance department and his proposed limited role as an order-taker.
SUMMARY OF STAFF'S SUBMISSIONS
Staff of the Commission recommended that the Director deny the application on the grounds that the applicant failed to fulfil his duty to clients. First, Staff submitted that Mr. Thatcher sold securities to his clients at excessive mark-ups. In its settlement agreement with the Commission, MacPherson admitted to selling securities of two issuers at excessive mark-ups, and Staff drew an analogy between the nature and extent of the mark-ups in those situations and the mark-ups on those securities sold by Mr. Thatcher. Staff's second submission was that Mr. Thatcher knew or ought to have known that selling securities at excessive mark-ups was not in the best interest of his clients. Staff argued that it is an ongoing finding of the Commission that selling to clients at excessive mark-ups is a failure to deal honestly, fairly and in good faith with clients. As well, Staff proposed that wilful blindness is not a valid excuse, as salespersons have a duty to ensure that they discharge their responsibilities to clients. Consequently, Staff asked the Director to find that Mr. Thatcher failed to fulfil his duty under Rule 31-505 (the Rule) to deal fairly, honestly and in good faith with clients.
Mr. Thatcher's application for reinstatement of registration is denied on the basis that I find him not suitable for registration because he did not meet the obligations of a registered salesperson while employed by MacPherson. Pursuant to the Rule, a registered salesperson has the duty to deal fairly, honestly and in good faith with his or her clients. These general obligations are further elaborated within the specific context of the Know-Your-Client and Suitability provisions of the Rule.
While Mr. Thatcher agreed with counsel for the Commission that the Suitability obligations of the Rule includes knowing and analyzing the transactions being recommended, Mr. Thatcher did not follow through with this commitment. This is illustrated by the fact that when selling securitity from MacPherson's inventory, the applicant did not take steps to inquire as to whether the price of the security was justified by market conditions. Even though he acknowledged that the price of some securities appeared to double, the applicant did not make inquiries into reasons for this movement; rather, he relied absolutely and unquestioningly on MacPherson. Apart from the direction given by the firm, the applicant did not have a basis for recommending specific securities.
A further illustration of Mr. Thatcher's failure to live up to his obligations as a registered salesperson can be seen in the fact that he testified that he did not know whether MacPherson was the market maker for the securities that he sold. In the context of a dealer promoting and selling high risk, speculative securities as principal from its own inventory, Mr. Thatcher's failure to investigate whether MacPherson was the sole market maker on the securities demonstrates a lack of due diligence on behalf of his clients.
While the applicant states that he did not act with malice, neither did he act in accordance with his responsibilities to clients under the Rule. Moreover, his testimony illustrates that he remains unaware of the substantive nature of these duties. He did not investigate the securities that he was promoting, and continues to claim that his actions were reasonable and that he was justified in relying absolutely on his employer. On the basis of his testimony before me, I am not satisfied that he understood then or that he understands now the nature of a salesperson's duties to his or her clients.
As a result of Mr. Thatcher's failure to appreciate his responsibilities as a registered salesperson, he participated in the sale of securities to his clients at what he now recognizes were excessive mark-ups. In so doing, Mr. Thatcher failed to deal fairly, honestly and in good faith with his clients, as was his duty under the Rule.
Although I have decided against allowing reinstatement of Mr. Thatcher's registration at this time, I have decided that it is appropriate in this case to offer some guidance as to what actions he might take should he decide to reapply for reinstatement at a later date. As noted in Re Jaynes (2000), 23 OSCB 1543 and Re Curia (2000) 23 OSCB 7505, this is a case, where, in my opinion, it is appropriate that the applicant have a period of reflection to be used to address some of the matters identified above which continue to be of concern. During this period, Mr. Thatcher may wish to address my finding that he does not understand the duties and obligations of a registered salesperson by enrolling in and successfully completing the CPH course in order to assist him in fully understanding the duties and obligations of a registered salesperson. Finally, Mr. Thatcher should be made aware that in relation to any future application for reinstatement that he may elect to file, the Director responsible for considering said application may decide that additional remedial terms and conditions be placed on his registration.
January 22, 2001.