IN THE MATTER OF THE BYLAWS
OF THE INVESTMENT DEALERS ASSOCIATION OF CANADA
- andUNION SECURITIES LTD.
(RESPONDENT)
Hearing Panel
Stephen D. Gill, Chair
Don Teatro, Member
James Harkness, Member
Appearing for the IDA
Paul Smith
Lorne Herlin
Heard: July 19 and 22, 2005 at Vancouver, BC
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INTRODUCTION
1.
The Investment Dealers Association of Canada (the “Association”) applies,
pursuant to Rule 16 and 17 of the Rules of Practice and Procedure of the
Association, and Bylaws 20.41, 20.42, 20.45 and 20.46 of the Association, for
an Order, upon terms, for the imposition of a Monitor for a Member, Union
Securities Ltd. (“Union”).
The panel was advised by counsel for the
Association that these were Expedited Proceedings, and that Rule 16.5(5)
provides “The Notice of Application is not required to be served on the
Respondent.”, and that the Association did not intend to serve Union with the
Application.
2.
The Notice of Application (Exhibit 1) set out fully the terms and conditions of
the Order being sought. In support, counsel for the Association tendered the
Affidavit of Guenther Kleberg sworn July 15, 2005 (Exhibit 2); the Affidavit
of Natalija Popovic sworn July 18, 2005 (Exhibit 3); the Affidavit of Stuart J.
Bartley #1 sworn July 15, 2005 (Exhibit 4); the Affidavit of Stuart J. Bartley
#2 sworn July 18, 2005 (Exhibit 5); the Affidavit of Warren Funt #1 sworn
July 18, 2005 in two volumes (Exhibit 6A and 6B); the Affidavit of Stewart J.
Bartley #3 sworn July 21, 2005 (Exhibit 7).
3.
At the conclusion of the Hearing, having considered all of the evidence, the
Panel was satisfied that the Association had made out a strong case for the
appointment of a Monitor, and on July 25, 2005 granted the Order which has
been published. Reasons were to follow and these are those reasons.
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FACTS AND ANALYSIS
4.
By-law 20.41 provides for expedited hearings:
“(1) Expedited hearings are held upon application by Association
Staff and without notice to the Respondent in the circumstances
prescribed in By-law 20.42 and By-law 20.43.”
5.
By-law 20.42, dealing with Members, provides:
“(1) A Hearing Panel may impose any of the penalties prescribed
by By-law 20.45 upon a Member in any of the following
circumstances:...”
6.
Counsel for the Association made their Application pursuant to By-law 20.42
(1)(d) which provides:
“where a Member is in such operating difficulty that the Hearing
Panel determines the Member cannot be permitted to continue to
operate without risk of imminent harm to the public, other
Members or the Association;”
7.
By-law 20.45 sets out the powers of a Hearing Panel namely:
“(1)A Hearing Panel has the power to impose any of the following
penalties upon a Respondent who is an Approved Person or
Member in the circumstances prescribed in By-law 20.42 and Bylaw 20.43: …
(h) imposition of a Monitor pursuant to By-law 20.46.”
8.
By-law 20.46 describes the powers of Hearing Panel to impose a Monitor as
follows:
“(1) A Hearing Panel may order the imposition of a Monitor, on
such terms and conditions as it deems just and appropriate, where
it is in the interest of the public, and the Hearing Panel determines
that: …”
-4(b) client accounts are at risk of financial loss due to a
Member’s financial condition, inadequate internal controls
or deficient operating procedures; …
(2) A Monitor appointed pursuant to subsection (1) shall monitor
the Member’s business and financial affairs in accordance with the
terms and conditions specified by the Hearing Panel.”
9.
By-law 20.46 (3) sets out the terms and conditions that the Hearing Panel may
assign to the Monitor, for such period of time as the Hearing Panel determines
is just and appropriate in the circumstances, and includes: …
“(i) any other such terms or conditions that the Hearing Panel
determines is just and appropriate to assign to the Monitor.”
10.
The Association, in its Notice of Application, set out the terms and conditions
for the Monitor that they were requesting in paragraphs 1 to 7 of the Notice of
Application.
11.
The Notice of Application set out the grounds for the Application as follows:
“(1) Union is in such operating difficulty that continuing to operate
without the appointment of a Monitor would risk imminent harm
to the public, other Members of the Association, and/or the
Association for the following reasons:
(a) the latest Sales Compliance Review (SCR)
conducted by the Association identified a pervasive
failure of Union’s compliance systems;
(b) Union, its employees, and its clients have been
the subjects of a number of enforcement
proceedings and warnings;
(d) Union’s Board of Directors and management
have not demonstrated a willingness and/or ability
to effectively address problems in Union’s
compliance systems;
-5(e) Union has failed to fulfill undertakings given to
correct deficiencies in its compliance systems
following previous SCRs;
(f) swift, corrective action to Union’s compliance
systems is in the public interest because, among
other things, client accounts are at risk of financial
loss due Union’s inadequate internal controls and/or
deficient operating procedures;”
12.
The Affidavit of Warren Funt #1 sworn July 18, 2005, was tendered in support
of the Application; as well Mr. Funt testified before the Panel. Mr. Funt is the
Vice-President, Western Canada, Member Regulation, of the Association. He
is responsible for all of the member regulation activities, registration, sales
compliance,
financial
compliance
and
enforcement,
west
of
the
Ontario/Manitoba border. Mr. Funt has been a regulator in different roles in
Vancouver for 15 years, and in the securities industry for 28 years. For the past
4 years, in his current role, he reviews all of the Sales Compliance Reviews
(“SCRs”), and financial reviews, for the approximately 40 western based
members firms, including Union.
13.
Mr. Funt states that from time to time Association staff review the sales
compliance procedures, policies and practices of member firms. These reviews
are conducted by sales compliance officers employed by the Association (sales
compliance staff). The purpose of the SCRs is to identify, for the Member, any
problems or concerns related to the Member’s sales compliance systems or the
implementation or operation of those systems.
14.
After the SCR has been planned, and the documents to review have been
identified, sales compliance officers attend at the Member’s business premises
to conduct the review. Field work for the review can take anywhere from a few
days to a few weeks to complete. In the course of the review, the sales
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compliance officers will review the documents requested, and interview key
compliance personnel such as the Ultimate Designated Person and the Chief
Compliance Officer. If, after the review, problems or concerns are identified,
sales compliance staff will set up requirements to effect changes necessary for
the Member to become compliant with the Association By-laws, Regulations or
Policies or the requirements of any Federal or Provincial law or regulation.
Sales compliance staff will also make recommendations for improvements that
are not mandatory. Those requirements or recommendations are contained in a
Sales Compliance Review report (SCR report) that is provided to the Member,
first in draft form, and later in the final form approved by Mr. Funt.
15.
According to Mr. Funt, sales compliance staff often has an ongoing dialogue
with Member firms to resolve the issues and concerns identified by the SCRs.
In most cases, any issues or concerns raised by the sales compliance staff in a
review are remedied by the time that any subsequent sales compliance review
takes place. If they are not, the issue of concern is identified as a repeat item in
the subsequent SCR report.
16.
Union Securities Ltd. has been a Member of the Association since 1997. Its
head office is in Vancouver, BC and it has branches throughout Canada.
According to Mr. Funt, traditionally Union’s business has been relatively highrisk. The firm’s original roots were trading and financing Vancouver Stock
Exchange (“VSE”) and Alberta Stock Exchange (“ASE”) companies. They
then followed some of that business to the U.S. OTCBB. According to Mr.
Funt, Union has now diversified geographically, and by business lines, but is
still involved in high-risk business be it TSX Venture, OTCBB, Futures, short
selling, and has a disproportionate number of non-Canadian accounts.
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17.
According to Mr. Funt, in 1998 the VSE required Union to undertake an
independent review of its internal controls as part of its settlement for failing to
diligently supervise the client accounts of 3 registered representatives. Mr.
Funt was also directly involved in the B.C. Security Commission’s plan to
place terms and conditions on Union’s registration in 2002.
18.
Union came under the audit jurisdiction of the Association after Member
regulation was transferred from CDNX in 2000.
Association staff have
conducted 4 head office SCR’s of Union namely in 2000, 2001, 2003 and 2005.
Mr. Funt states in his Affidavit:
“17. Based on its background, my experience in the industry and
the results of the four SCRs, it appears to me that Union has deep
rooted, historical and persistent compliance failures that don’t
seem to be remedied by our conventional methods.” (Exhibit 6A,
p. 3)
19.
Sales compliance officers of the Association carried out Union’s 2005 SCR in
February 2005. The SCRs conducted at Union are described in the Affidavit
of Stuart J. Bartley #1 (Exhibit 4). Mr. Bartley was responsible for assigning,
instructing and overseeing the sales compliance staff who conducted the 2001,
2003 and 2005 SCRs of the Vancouver head office of Union. He also oversaw
and participated in the drafting of those 3 SCRs. The 2000, 2001 and 2003
SCR reports, along with Union’s replies thereto, are attached to Mr. Bartley’s
Affidavit #1.
20.
In preparation for the 2005 sales compliance review, the Association’s sales
compliance staff conducted a risk assessment of Union’s operation.
As
explained in Mr. Bartley’s Affidavit #1, the risk assessment is part of the
normal process followed by Association sales compliance staff and is intended
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to help identify special areas of risk that they should be aware of when they
conduct a review of a Member’s sales compliance systems and practices.
21.
At paragraph 14 of his Affidavit #1, Mr. Bartley indicated the information that
was reviewed as part of the risk assessment process, and in paragraph 15
indicated the Association also made inquiries. Based upon their inquiries, they
assigned a risk rating to Union of 3.3 on a scale where “1” indicates very little
risk and “5” indicates a very high risk. Mr. Bartley states that if a Member firm
is assigned a risk rating of 3 or more, then Association sales compliance staff
conducts a full sales compliance review of that Member. This was done for
Union in 2005.
Mr. Funt states that higher-risk business requires strong
compliance systems.
22.
Further, Mr. Bartley states (Affidavit #1), that based on staff’s findings from
the 2005 SCR of Union, the Association assessed the risk at 4.2.
23.
The review of Union’s sales compliance systems and practices commenced on
February 7, 2005 and ended on April 28, 2005. Documents were requested
from and provided by Union both prior to and during the SCR. In addition to
reviewing documentation, Association sales compliance staff also spoke to a
number of Union personnel, including the Chief Executive Officer and
Ultimate Designated Person; the senior Vice-President of Compliance; the
senior Vice-President of Credit and Chief Administrative Officer; the VicePresident of Finance; the Vice-President of Corporate Finance; Senior VicePresident of Futures Compliance; etc. (Bartley Affidavit #1, para. 24). On
April 4, 2005 Martin Lang became the Chief Compliance Officer, and the
Alternate Designated Person of Union.
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24.
The Union pre-exit meeting was held on April 28, 2005.
Two of the
Association’s senior sales compliance officers met with Martin Lang, and
Kevin Dire (Designated Registered Futures Options Principal) to discuss some
of the findings from the 2005 Sales Compliance Review. On June 22, 2005,
the Association sent Union the draft 2005 SCR report.
The Association
requested that Union provide the Association with a list of any concerns that
they had regarding the draft Review by June 29, 2005. Union made 2 requests
for an extension for Union’s reply, firstly to July 8, 2005 and secondly to July
15, 2005.
25.
The 2005 SCR is Exhibit 18 to the Bartley Affidavit #1. In the Executive
Summary of the SCR, staff noted significant items which the Member must
address and resolve, and 9 repeat deficiencies or repeat of significant items; the
Executive Summary is attached hereto as Appendix A.
The Executive
Summary states:
“We are alarmed by the number of findings, the severity of the
findings, and the number of repeat findings. Parts or all of the
Review will be forwarded to Enforcement for further investigation
and we will consider placing terms and conditions on the firm’s
registration. We expect the Member to take strong steps
immediately to improve the Member’s compliance systems.”
26.
At the Hearing, counsel for the Association spent considerable time taking the
Panel through various documents, attached to the various Affidavits, which
demonstrated that Union had, in the past, made commitments to the
Association to remedy and correct deficiencies or significant items, but had
failed to carry out those assurances. The Panel requested Association counsel
provide specific references to a number of the findings in the 2005 SCR for
which Union had previously acknowledged compliance deficiencies and had
made a commitment to improve, which had not been carried out. Association
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counsel provided the requested references, and a copy is attached hereto as
Appendix “B”.
27.
A review of the 2005 SCR demonstrates that Union had many repeat
deficiencies and repeat significant items. Further, they appear to cover a whole
range of items, and are not simply a breakdown in one area. Mr. Funt, with his
28 years experience in the securities industry, and in a regulator’s role for 15
years, states that in June 2005 he received a draft of the 2005 SCR report. He
states:
“21. From reading the 2005 Draft SCR Report, and given the
context in which the 2005 SCR was carried out, I have come to the
conclusion that there has been such a pervasive failure of its
operating procedures and sales compliance systems that Union
cannot continue to operate in the same manner without risk of
imminent harm to the public, other Members, or the
Association.
22. The problems identified in the 2005 Draft SCR Report and
described in this Affidavit are indicative of the extent and scope of
this failure.
23. There are 36 findings in total of which there are 14 findings
repeated from the previous review, and 9 of the 14 were repeated
and significant. There were 2 new significant findings. The
absolute number of findings is a concern, but of greater concern is
the number of repeat findings. It is expected that when a firm is
told to address a problem, and they accept our position, that they
will do so.” (Funt Affidavit #1) (emph. added)
28.
Mr. Funt, in his Affidavit #1, gives a great deal of detail as to Union’s
deficiencies and repeat deficiencies. He states there is no effective supervision
of client account activity: see paragraphs 24 – 47 of Funt Affidavit #1.
29.
For example, Mr. Funt noted that the SCR reported that Union’s branch dailies
were not timely, and apparently they were altered and back-dated. Some
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reports were not faxed from head office for as many as 60 days after the report
was produced. In some cases, the dates initialled by the reviewer were prior to
the date that reports were received in the branch. In other cases the review
dates appeared to be altered to indicate the reviews were completed by the next
business day. Mr. Funt states:
“This appears to create a false audit trail by the supervisory
personnel who are entrusted to ensure the integrity of the firm.”
(Funt Affidavit #1, paras. 30 – 32)
30.
Mr. Funt further testified that a number of these supervision issues were found
in the previous SCRs, and Union represented to the Association that they had
taken action to improve their compliance. Notwithstanding assurances that
Union would respond, Mr. Funt states that it is clear that the efforts by Union
were not effective, and that Union’s self-directed efforts to deal with their poor
compliance record on supervision issues has failed.
31.
Mr. Funt states:
“47. Many of the problems identified above are potentially very
serious and would have been caught by a functional and effective
account supervision system. Given the number and type of
problems that were detected from the very limited sample of
accounts reviewed by the Sales Compliance Officers, I believe that
many other Union client accounts may be in jeopardy and the
markets may be at risk given Union’s lack of supervision over
client trading.” (Funt Affidavit #1)
32.
Mr. Funt states that the 2005 SCR demonstrates that there are insufficient or
ineffective functioning internal controls at Union to prevent regulatory
violation. He states,
“The report sites examples of both registrants and accounts that
were restricted from trading but still traded. This is of particular
concern because it demonstrates an inability for compliance staff
- 12 to control sales, even when they decide to act. The ability of any
Member to prevent a restricted registrant or account from trading
is a very basic type of control. The fact that even such a basic
control is ineffective at Union is another indication of the
pervasive nature of the failure in Union’s compliance controls.”
33.
Mr. Funt details the lack of internal controls in paras. 48 to 60 of his Affidavit
#1.
34.
Mr. Funt also demonstrates that Union has significant documentary
deficiencies. See paragraphs 61 to 70 of Mr. Funt’s Affidavit #1.
35.
Mr. Funt also sets forth that Union has been attracting undesirable U.S.
business, and not complying with the required procedures. See paras. 71 to 77
of his Affidavit #1.
36.
Mr. Funt further states that it appears Union has no effective compliance
system to deter money laundering and terrorist financing. Thirty-three of the
ninety accounts reviewed for identity verification procedures for anti-money
laundering purposes were deficient.
There was no improvement in the
deficiency rate from the 2003 SCR notwithstanding Union’s commitment that
it was rigorously enforcing the revised ID verification policy developed in
2003. Eleven of the deficient accounts originate from off-shore jurisdictions:
see Funt Affidavit #1, paras. 78 – 84.
37.
Mr. Funt went on to describe how Union was on notice of the potential pitfalls
of non-compliance regarding U.S. business and anti-money laundering
standards: see paras. 85 – 88 of Mr. Funt’s Affidavit #1.
38.
Mr. Funt went on to describe that Union is on notice of the potential pitfalls of
non-compliance regarding U.S. business and anti-money laundering standards
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in that Union, and its registrants, have been subject to regulatory and criminal
investigations and prosecutions in the United States, and that accounts at Union
have been used to conduct manipulative trading, money laundering, and serious
frauds against securities markets. Mr. Funt describes a number of instances in
which Union, its employees and/or its clients have been subject to regulatory
and/or court proceedings due to misconduct. Mr. Funt details stock exchange
disciplinary proceedings from May 1994 to January 2001 (paras. 90 – 94 of
Funt Affidavit #1) and U.S. criminal proceedings (paras. 95 – 102 of Funt
Affidavit #1) and proceedings initiated by the U.S. Securities Commission
(paras. 103 – 112 of Funt Affidavit #1). Further, Mr. Funt describes various
B.C. Securities Commission actions (paras. 113 – 116 of Funt Affidavit #1)
and enforcement proceedings by the Association including the fact that there
are currently 7 active enforcement matters which name either Union or one of
its RR’s as the subject of the investigation (paras. 117 – 121 of Funt Affidavit
#1).
39.
Mr. Funt states that in his opinion, supervisory personnel at Union should be
aware of the foregoing proceedings, as well as the ongoing inquiries from
authorities in the United States. It is his belief that these proceedings and
ongoing inquiries would have encouraged Union to adopt more rigorous
compliance standards. However, he states: “The 2005 SCR confirmed to me
that they have not
and I have concluded that Union will not adopt new
standards of compliance without decisive action on the part of the
Association.”
40.
Mr. Funt went on to state:
“125. It is clear that Union has failed to take appropriate remedial
steps to address problems that had been identified in previous
- 14 SCRs and has failed to fulfill certain undertakings to the
Association to correct those problems.
126. The fact that these issues are not resolved leads me to
conclude that I cannot rely on Union’s continued assurances that
their compliance regime will improve.
127. I saw Union’s response to the 2005 Draft Report for the first
time in the evening on Sunday, July 17, 2005. There are some
factual changes that we may incorporate into the final review, as is
the normal audit process. I do not see anything in Union’s
response which changes any of the conclusions made by me
throughout this Affidavit.” (emph. added)
41.
Mr. Funt states that normally the Sales Compliance Review process results in
the Member addressing the concerns and issues that have been raised, and
correcting the deficiencies. He considered permitting the remedial process to
go forward, but “…rejected this approach because I believe the immediate risk
is too great. Also, Union has had many chances to improve and has chosen not
to.” (Funt Affidavit #1, para. 129)
42.
Mr. Funt states that in his opinion, employing the usual remedial processes of
the SCR will not effectively or quickly achieve the goal of making Union
compliant with the applicable requirements, because Union requires an indepth review and overhaul of its existing sales compliance systems. In his
opinion, the SCR remedial process is not capable of dealing with a systemic
breakdown of a Member’s sales compliance system, which is the case with
Union. He states:
“As a result of having dysfunctional sales compliance systems,
there is a significant risk of imminent harm to the public,
Union’s clients and to Union itself. In the circumstances, swift
corrective action is necessary.” (Funt Affidavit #1, para. 132)
(emph. added)
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43.
In Mr.Funt’s opinion, given the extent of the breakdown in Union’s sales
compliance systems, it is necessary to evaluate those systems, at an in-depth
level, to determine why they are not working properly.
It will then be
necessary to determine how they can be corrected, or, if they cannot be
corrected, what should replace them. It will also be necessary to consider
issues such as whether or not Union has enough resources dedicated to
compliance, whether or not those conducting the supervisory reviews have
appropriate training and skills, and whether or not sales staff is being
responsive to inquiries made by compliance staff.
44.
Mr. Funt states that he has no confidence that Union’s Board of Directors or
Management is either willing or able to conduct a compliance review by itself,
and make the necessary changes in a timely manner. He points out that Union
has given undertakings in the past, to correct matters, but they have failed to
fulfill those undertakings. Union’s Board of Directors and Management have
allowed Union’s sales compliance systems to slide into an unacceptable and
non-compliant state.
45.
Mr. Funt states in paragraph 143 of his Affidavit #1:
“…if Union continues to conduct business under its current culture
of non-compliance, there is a risk of imminent harm to both
investors and the capital markets. To be more specific, if a
Monitor is not put in place, there will likely be at some point,
perhaps not tomorrow, but eventually, a matter such as a market
manipulation involving Union RRs. It is equally likely that an
individual Union RR will harm clients through inappropriate
trading without the matter being detected in any reasonable time
by Union compliance staff. The Association has made every effort
to effect necessary change at Union through co-operative means.
All have failed. It is now imperative that these measures be taken
to protect investors and the capital market.” (Funt Affidavit #1,
para. 143)
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46.
Mr. Funt states that an independent Monitor is the most effective way of
ensuring that Union will quickly implement appropriate sales compliance
systems.
47.
In support of the Application the Association submitted the Affidavit of
Guenther Kleberg sworn July 15, 2005 (Exhibit 2). Mr. Kleberg was employed
in the Canadian Securities industry from 1967 to 2003. In 1982 he became a
fellow of the Canadian Securities Institute. From 1956 to 1964 he worked in
the banking industry, predominantly in securities related areas, in Germany,
Switzerland and France. His experience in the Canadian securities industry
includes acting in the capacity of V.P. & Head Of Compliance of CIBC Wealth
Management (1998 – 2003); acting as Chief Compliance Officer, (CCO),
Designate Registered Options Principal (DROP); Designated Registered
Futures Principal (DFRP), at CIBC World Markets Inc. (1990 – 1998); acting
as CCO at CIBC Securites Inc. (1998 – 2003); and acting as Manager of
Compliance, DROP, and DRFP at Merrill Lynch Canada Inc. (1978 – 1990).
Currently, Mr. Kleberg provides consulting services in respect of Canadian
Securities regulatory matters.
48.
Mr. Kleberg has also been a member of one or more industry hearing
committees since 1982. In addition to his work experience as aforesaid, he has
been a member of the Joint Industry Compliance Group and currently is a
member of the hearing committees of RS Inc. (formerly the TSX), the IDA and
MFDA. (Kleberg Affidavit, paras. 1 – 4)
49.
Mr. Kleberg states that he is familiar with the Sales Compliance Review
process of the Association, and that the SCR process is critical to assessment
of, and assistance with, ensuring the underlying health of a firm’s compliance
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program. He notes the Association has conducted 4 SCRs of Union for the
years 2000, 2001, 2003 and 2005, and that he has reviewed these SCRs,
together with Union’s responses thereto. He comments on Union’s response to
the 2005 SCR in his letter of July 18, 2005; their response did not change his
opinion. (See the Affidavit of Popovic, Exhibit 3)
50.
Mr. Kleberg states his conclusions with respect to Union, and their compliance
system, as follows:
“8. From reviewing the SCRs I have come to the conclusion that
there is a pattern of willful or negligent non-compliance with
Association rules and regulations on the part of Union. The
problems described below, which are identified in the SCRs, are
indicative of an alarming trend of repeated compliance deficiencies
over successive years. Without corrective action there is, in my
view, imminent financial risk to Union and Union’s clients and
future clients, as well as reputational risk to the entire
industry.
9. In my view the management at Union is merely paying lip
service to the compliance issues raised by the Association. I have
come to the conclusion that there is no evidence of proper internal
controls or systems indicating a commitment, on the part of Union,
to fostering a culture of compliance with Association rules and
regulations.” (Kleberg Affidavit, paras. 8 and 9) (emph. added)
51.
Mr. Kleberg, gives general and specific comments with respect to his review of
the 4 SCRs conducted of Union. He prepared a spreadsheet, which is attached
to his Affidavit, which shows the issues highlighted by the Association. He
notes there was a steady increase of repeat findings and of significant priority
items. He concludes that Union does not follow through on the requirement to
effect the addressed issues highlighted in the SCRs.
52.
Mr. Kleberg also comments upon the compliance infrastructure at Union; the
lack of effective supervision of client account activity; and the lack of
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employee supervision (Kleberg Affidavit, paras. 15 – 21).
Mr. Kleberg
concludes that there has been an increase in deficiencies reported by the
Association since the 2000 SCR, and that the inordinate high rates of
deficiency at Union are reflective of a breakdown of compliance at Union.
Without a correction of the deficiencies, Union could be financially exposed to
client claims, regulatory fines and/or suspensions and restrictions. He states:
“23. In my view, Union’s client accounts are at risk of financial
loss due to Union’s inadequate controls and deficient operating
procedures. Remedial action must be taken to bring Union in line
with Association’s rules and regulations and industry standards. If
such action is not taken I believe there is a risk of imminent
harm to Union’s clients, the public and other Members.”
(Kleberg Affidavit, para. 23) (emph. added)
53.
Like Mr. Funt, Mr. Kleberg states that in his opinion it is most appropriate that
an independent compliance Monitor be appointed for Union. In his view, an
independent compliance Monitor would be able to advise Union’s
Board of Directors what needs to be done, and how it should be done. The
compliance Monitor, being independent from the Board of Directors, could
make recommendations and advise on implementing changes free of internal
conflict with Union staff. Mr. Kleberg also has a number of other comments
and suggestions as to how Union can make the changes or implement changes
to become compliant.
54.
Union, in its July 15, 2005 response to the 2005 SCR, states it has appointed a
new Chief Compliance Officer, Mr. Martin Lang. They state that Mr. Lang is a
CA, and a former examiner of the VSC, and is the kind of detail oriented,
knowledgeable and reliable person that the CCO must be. (Exhibit 1 of Bartley
Affidavit #2)
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CONCLUSIONS AND ORDER
55.
At the outset of the Hearing, this panel was not comfortable that the
Application should proceed without notice to Union. However, having heard
submissions, and carefully considered all the evidence submitted by the
Association, we accept that it was appropriate to proceed without notice.
56.
Further, we are satisfied on all of the evidence, that the Association has made
out a strong case for the appointment of a Monitor with respect to the
compliance systems at Union, and has met the appropriate tests set out in the
Rules and By-laws. Accordingly, the Order is granted in the terms approved
by the Panel.
57.
We anticipate that the new CCO, Mr. Lang, and the compliance Monitor will
work together closely to accomplish compliance by Union. To that end, the
panel has carefully reviewed the proposed terms and conditions of the Monitor,
and has stipulated the terms and conditions. For example, the compliance
Monitor is directed that within 30 days of the Order, he is to provide a report of
his findings, observations and recommendations to Union’s Board of Directors
and to Association staff, the said report to specifically address whether
business conducted following the issuance of the Order has complied with all
Association By-laws, Regulations, Rulings and Policies.
Based upon the
evidence, Union’s compliance systems have to improve significantly, and have
to do so very quickly. In our view, there is no reason why new business cannot
comply with the Association Rules and Regulations. We trust that the terms of
the Order will convey the sense of urgency the Panel has about this matter, and
the need to address all the deficiencies.
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58.
Similarly, in our view, if the compliance Monitor receives the full co-operation
of Union, it is possible that he will be able to complete his task in 90 days.
This may be somewhat optimistic, but again, in our view, there is a great deal
of urgency here and drastic action is called for. However, if necessary, the
Association can apply to extend the term of the compliance Monitor.
59.
During this application, we noted that Rule 17.4(1)(b) and (c) refer to a roster
of eligible Monitors, and a fee schedule. We were advised by counsel that
there is no roster of eligible Members, (Schedule B), and no fee schedule
(Tariff A). We trust the Association will address those matters forthwith, but
as none are in existence at the time of this Application, we have added terms
and conditions to the Order to address what in our view may be some concerns
by Union. We did have the benefit of testimony from Mr. Funt with respect to
the Monitor, and we are confident that the Monitor we have appointed will be
able to carry out the appointed tasks, if he receives full and complete cooperation from Union, and particularly its senior management.
60.
However, this is, to our knowledge, the first time a Monitor has been appointed
pursuant to an Application by the Association, in these circumstances. We
have, therefore, included as a term of the Order, leave to Association staff or
Union to apply to the Hearing Panel for directions regarding any terms and
conditions of the Order.
61.
These reasons may be signed in counterparts.
DATED this 29th, day of July, 2005
___________________
___________________
_____________________
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Stephen D. Gill, Chair
Don Teatro, Member
James Harkness, Member
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APPENDIX A
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APPENDIX B
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Lib2:60553.1