The Duty to Act Fairly, Honestly, and in Good Faith Towards Vulnerable Clients at the Ontario Securities Commission: A Case Review Of Re (M), 2022 ONCMT 13
In Re (M), 2022 ONCMT 13, https://canlii.ca/t/jptp1, a panel of the Capital Markets Tribunal held that a mutual fund registrant who was named the sole beneficiary of a client’s estate, who accepted an appointment as the client’s power of attorney for property (POAP), and who failed to renounce an appointment as the client’s alternate executor, had:
(a) failed to comply with Mutual Fund Dealers Association of Canada (MFDA) Rules and a Member firm’s policies and procedures; and
(b) breached their obligation under subsection 2.1(2) of OSC Rule 31-505 to deal with clients fairly, honestly and in good faith.[1]
The duty of a registrant to act fairly, honestly, and in good faith to their client is (1) a fundamental obligation under Ontario securities law and (2) a cornerstone of the registrant-client relationship.[2] This duty is engaged when an actual or a potential conflict of interest is present and is of even greater importance when a client is vulnerable.[3]
In this matter, the respondent M was a mutual fund registrant and responsible for the accounts of client MU at an MFDA member firm.[4] MU was “an elderly widow, inexperienced and unsophisticated financially, and she was dying of pancreatic cancer”.[5]
The respondent M was named as the sole beneficiary of MU’s estate 10 days before MU passed away.[6] The respondent also accepted appointments as MU’s powers of attorney for personal care and property. The will and powers of attorney were executed at MU’s bedside in a palliative care unit.[7] MU’s estate was valued at more than $2 million, including approximately $1.7 million in investments that were managed by the respondent.[8]
The panel noted that while they would not be deciding the issue of MU’s capacity to make a will, evidence relating to the making of the will and the powers of attorney may be relevant in the determination of MU’s vulnerability as a client.[9]
Issue #1 – Compliance with MFDA Rules
The respondent was an “Approved Person” as defined in MFDA By-law No. 1 and was required to comply with the MFDA Rules.[10] Approved Persons may only engage in transactions on behalf of clients based on express instructions for each transaction and are similarly prohibited from having any control or authority over a client’s account, even with the client’s consent.[11] This prohibition specifically includes powers of attorney for property and executorships.[12] The panel noted that the MFDA Rules do not have restrictions around Approved Persons acting as a power of attorney for personal care for clients.[13]
Rule 2.3.1(a) – Control or Authority
MFDA Rule 2.3.1(a) states:
No Member or Approved Person shall have full or partial control or authority over the financial affairs of a client, including:
- accepting or acting upon a power of attorney from a client;
- accepting an appointment to act as a trustee or executor of a client; or
- acting as a trustee or executor in respect of the estate of a client.[14]
The panel held that the respondent breached MFDA Rule 2.3.1 (a) by accepting a power of attorney for property from his client MU and by failing to renounce an appointment to act as alternate executor in the will.[15]
Rule 2.3.1(a)(i) and powers of attorney for property
The prohibition in MFDA Rule 2.3.1(a)(i) on POAPs is unambiguous and absolute, subject to a limited exception for family members.[16] It bars any Approved Person from accepting or acting on any POAP that would give them full or partial control or authority over the financial affairs of a client.[17] The panel held that not actually exercising the POAP to conduct trades on the client’s behalf was not relevant.[18] The prohibition applied to the acceptance of the power of attorney from a client.[19]
The panel further held that the respondent’s submissions that the conduct amounted to a technical non-compliance with MFDA Rules for a period of ten days (between the execution of the power of attorney and MU’s death) and did not cause any harm was not relevant.[20] Those submissions were held to be more properly reserved for a sanctions and costs hearing panel.[21]
By knowing about and accepting the POAP from a client, the respondent breached MFDA Rule 2.3.1(a)(i).[22]
Rule 2.3.1(a)(ii) and (iii) – trustees or executors
MFDA Rule 2.3.1(a)(ii) prohibits an Approved Person from accepting an appointment to act as a trustee or executor of a client.[23] Similarly, this prohibition is on the acceptance of the position, regardless of whether it was acted upon.[24] MFDA Rule 2.3.1(a)(iii) also prohibits an Approved Person from acting as executor or trustee for a client’s estate.[25] The panel noted that the prohibition includes acceptance of “backup” or “alternate” executorships.[26] The panel rejected the respondent’s submission that they never had the opportunity to act as an alternate executor because the primary executor took up the role.[27] The panel held that the respondent took no steps to report or to renounce the appointment.[28]
Rule 2.1.4 and Conflicts of Interest
MFDA Rule 2.1.4 deals with conflicts of interest and sets out a tripartite test that requires a registrant to engage as soon as they know or reasonably ought to know that there is an actual or potential conflict of interest.[29] The panel noted that the steps required by this Rule are clear:
- Disclose the conflict or potential conflict to the Member firm when the Approved Person becomes aware of it;
- Work with their Member firm to ensure the conflict is addressed in the best interest of the client; and
- Disclose the conflict or potential conflict to the client. [30]
The panel held that the respondent breached MFDA Rule 2.1.4 by failing to report three sources of actual or potential conflicts of interest relating to MU’s estate, namely: (i) the respondent’s acceptance of a POAP for MU; (ii) the respondent’s awareness and acceptance of the role of alternate executor for MU’s estate; and (iii) the respondent’s awareness and acceptance of being named sole beneficiary under MU’s will.[31]
The panel held that the acceptance of a POAP for a client that authorizes an Approved Person to conduct trades in the client’s account on the client’s behalf is an actual or potential conflict of interest.[32] The conflict arises when the POAP is accepted and remains for as long as it is held, regardless of whether it was acted upon.[33] The fact that the respondent did not act on the POAP was not a defence to the breach.[34] The panel noted that the role of executor for a client raises similar conflicts of interest.[35]
The panel further held that an Approved Person who is named as a beneficiary of a client’s estate or on a client’s account is in an actual or potential conflict of interest, particularly when the beneficial entitlement includes investments managed by the Approved Person.[36] On this issue, reference was made to the MFA Member Regulation Notice issued on October 3, 2005 which states, among other things:
All monetary and non-monetary benefits provided directly or indirectly to or from clients must flow through the Member. The Member must be notified of any such arrangements, so that the Member is in a position to determine the significance of the benefit and to monitor the activity.[37]
The panel rejected the respondent’s submission that being a beneficiary was not a breach because they had not yet received any monetary benefit from MU’s estate, and held that becoming aware of the testamentary gift and failing to report it to the Member firm was a breach of MFDA Rule 2.1.4.[38]
Issue #2 – OSC Rule 31-505 and the duty to act fairly, honestly, and in good faith
Section 2.1 of OSC Rule 31-505 provides that every registered dealer or adviser, or a representative of such, has a statutory obligation to deal fairly, honestly, and in good faith with clients.[39]
As an MFDA registrant, the panel held that the respondent was at all material times bound by the statutory obligation under OSC Rule 31-505 to deal fairly, honestly and in good faith with clients.[40] Breaches of the MFDA Rules alone were also not sufficient to amount to a breach of OSC Rule 31-505, and the circumstances of any particular non-compliance must be considered.[41]
The panel held that the OSC applies the following lay meanings of “fairly”, “honestly”, and “good faith” when determining whether conduct amounts to a breach:
- Fairly: in a just and equitable manner.
- Honest: never deceiving, stealing or taking advantage of the trust of others; sincere, truthful; and
- Good Faith: a state of mind consisting in (1) honesty in belief or purpose; (2) faithfulness to one’s duty or obligation, (3) observance of reasonable commercial standards of fair dealing in a given trade or business, or (4) absence of intent to defraud or to seek unconscionable advantage.
In considering the vulnerability of MU, the materiality of the amounts at stake, the respondent’s failure to place the client’s interests above their own, and the seriousness of the breaches of the MFDA Rules and Member firm policies and procedures, the panel found that the respondent had failed to act fairly, honestly, and in good faith in their actions towards MU.[42]
In assessing MU’s vulnerability, the panel considered the evidence of: MU’s terminal cancer, MU’s inconsistent memory, MU’s inability to identity or quantify investments, MU’s reliance on their late spouse to mange their financial affairs, MU’s reliance on the respondent to assist with finances and other tasks (booking travel and driving to the airport), MU’s age (70s), MU’s lack of formal education, the fact that an involved lawyer wanted a capacity assessment (never obtained), and that the conduct at issue occurred during the last few weeks of MU’s life when MU was bedridden and in palliative care.[43]
The panel held that the respondent acted unfairly, dishonestly and in bad faith towards a vulnerable client by failing to follow the required procedures for dealing with conflicts of interest, which was a significant breach of the MFDA Rules and the Member firm’s policies and procedures, and this constituted a breach of OSC Rule 31-505.[44]
The panel ordered the parties to arrange an attendance for a hearing regarding sanctions and costs.[45]
—
[1] Re (M) 2022 ONCMT 13 at para 8.
[2] Re (M) 2022 ONCMT 13 at para 1.
[3] Re (M) 2022 ONCMT 13 at para 1.
[4] Re (M) 2022 ONCMT 13 at para 9.
[5] Re (M) 2022 ONCMT 13 at para 4.
[6] Re (M) 2022 ONCMT 13 at para 5.
[7] Re (M) 2022 ONCMT 13 at para 5.
[8] Re (M) 2022 ONCMT 13 at para 6.
[9] Re (M) 2022 ONCMT 13 at para 21.
[10] Re (M) 2022 ONCMT 13 at para 119.
[11] Re (M) 2022 ONCMT 13 at para 120.
[12] Re (M) 2022 ONCMT 13 at para 120.
[13] Re (M) 2022 ONCMT 13 at para 120.
[14] Re (M) 2022 ONCMT 13 at para 77.
[15] Re (M) 2022 ONCMT 13 at para 78.
[16] Re (M) 2022 ONCMT 13 at para 121.
[17] Re (M) 2022 ONCMT 13 at para 121.
[18] Re (M) 2022 ONCMT 13 at para 124.
[19] Re (M) 2022 ONCMT 13 at para 124.
[20] Re (M) 2022 ONCMT 13 at para 129.
[21] Re (M) 2022 ONCMT 13 at para 129.
[22] Re (M) 2022 ONCMT 13 at para 130.
[23] Re (M) 2022 ONCMT 13 at para 131.
[24] Re (M) 2022 ONCMT 13 at para 131.
[25] Re (M) 2022 ONCMT 13 at para 131.
[26] Re (M) 2022 ONCMT 13 at para 132.
[27] Re (M) 2022 ONCMT 13 at para 136.
[28] Re (M) 2022 ONCMT 13 at para 136.
[29] Re (M) 2022 ONCMT 13 at para 2.
[30] Re (M) 2022 ONCMT 13 at paras 139 – 140.
[31] Re (M) 2022 ONCMT 13 at paras 143-144.
[32] Re (M) 2022 ONCMT 13 at para 145.
[33] Re (M) 2022 ONCMT 13 at para 147.
[34] Re (M) 2022 ONCMT 13 at para 149.
[35] Re (M) 2022 ONCMT 13 at para 150.
[36] Re (M) 2022 ONCMT 13 at para 153.
[37] Re (M) 2022 ONCMT 13 at para 153.
[38] Re (M) 2022 ONCMT 13 at para 159.
[39] Re (M) 2022 ONCMT 13 at para 180.
[40] Re (M) 2022 ONCMT 13 at para 169.
[41] Re (M) 2022 ONCMT 13 at para 170.
[42] Re (M) 2022 ONCMT 13 at para 171.
[43] Re (M) 2022 ONCMT 13 at paras 173-175.
[44] Re (M) 2022 ONCMT 13 at para 195.
[45] Re (M) 2022 ONCMT 13 at para 199.
Written by: Nima Hojjati
Posted on: July 26, 2022
Categories: Commentary, WEL Newsletter
The Duty to Act Fairly, Honestly, and in Good Faith Towards Vulnerable Clients at the Ontario Securities Commission: A Case Review Of Re (M), 2022 ONCMT 13
In Re (M), 2022 ONCMT 13, https://canlii.ca/t/jptp1, a panel of the Capital Markets Tribunal held that a mutual fund registrant who was named the sole beneficiary of a client’s estate, who accepted an appointment as the client’s power of attorney for property (POAP), and who failed to renounce an appointment as the client’s alternate executor, had:
(a) failed to comply with Mutual Fund Dealers Association of Canada (MFDA) Rules and a Member firm’s policies and procedures; and
(b) breached their obligation under subsection 2.1(2) of OSC Rule 31-505 to deal with clients fairly, honestly and in good faith.[1]
The duty of a registrant to act fairly, honestly, and in good faith to their client is (1) a fundamental obligation under Ontario securities law and (2) a cornerstone of the registrant-client relationship.[2] This duty is engaged when an actual or a potential conflict of interest is present and is of even greater importance when a client is vulnerable.[3]
In this matter, the respondent M was a mutual fund registrant and responsible for the accounts of client MU at an MFDA member firm.[4] MU was “an elderly widow, inexperienced and unsophisticated financially, and she was dying of pancreatic cancer”.[5]
The respondent M was named as the sole beneficiary of MU’s estate 10 days before MU passed away.[6] The respondent also accepted appointments as MU’s powers of attorney for personal care and property. The will and powers of attorney were executed at MU’s bedside in a palliative care unit.[7] MU’s estate was valued at more than $2 million, including approximately $1.7 million in investments that were managed by the respondent.[8]
The panel noted that while they would not be deciding the issue of MU’s capacity to make a will, evidence relating to the making of the will and the powers of attorney may be relevant in the determination of MU’s vulnerability as a client.[9]
Issue #1 – Compliance with MFDA Rules
The respondent was an “Approved Person” as defined in MFDA By-law No. 1 and was required to comply with the MFDA Rules.[10] Approved Persons may only engage in transactions on behalf of clients based on express instructions for each transaction and are similarly prohibited from having any control or authority over a client’s account, even with the client’s consent.[11] This prohibition specifically includes powers of attorney for property and executorships.[12] The panel noted that the MFDA Rules do not have restrictions around Approved Persons acting as a power of attorney for personal care for clients.[13]
Rule 2.3.1(a) – Control or Authority
MFDA Rule 2.3.1(a) states:
No Member or Approved Person shall have full or partial control or authority over the financial affairs of a client, including:
The panel held that the respondent breached MFDA Rule 2.3.1 (a) by accepting a power of attorney for property from his client MU and by failing to renounce an appointment to act as alternate executor in the will.[15]
Rule 2.3.1(a)(i) and powers of attorney for property
The prohibition in MFDA Rule 2.3.1(a)(i) on POAPs is unambiguous and absolute, subject to a limited exception for family members.[16] It bars any Approved Person from accepting or acting on any POAP that would give them full or partial control or authority over the financial affairs of a client.[17] The panel held that not actually exercising the POAP to conduct trades on the client’s behalf was not relevant.[18] The prohibition applied to the acceptance of the power of attorney from a client.[19]
The panel further held that the respondent’s submissions that the conduct amounted to a technical non-compliance with MFDA Rules for a period of ten days (between the execution of the power of attorney and MU’s death) and did not cause any harm was not relevant.[20] Those submissions were held to be more properly reserved for a sanctions and costs hearing panel.[21]
By knowing about and accepting the POAP from a client, the respondent breached MFDA Rule 2.3.1(a)(i).[22]
Rule 2.3.1(a)(ii) and (iii) – trustees or executors
MFDA Rule 2.3.1(a)(ii) prohibits an Approved Person from accepting an appointment to act as a trustee or executor of a client.[23] Similarly, this prohibition is on the acceptance of the position, regardless of whether it was acted upon.[24] MFDA Rule 2.3.1(a)(iii) also prohibits an Approved Person from acting as executor or trustee for a client’s estate.[25] The panel noted that the prohibition includes acceptance of “backup” or “alternate” executorships.[26] The panel rejected the respondent’s submission that they never had the opportunity to act as an alternate executor because the primary executor took up the role.[27] The panel held that the respondent took no steps to report or to renounce the appointment.[28]
Rule 2.1.4 and Conflicts of Interest
MFDA Rule 2.1.4 deals with conflicts of interest and sets out a tripartite test that requires a registrant to engage as soon as they know or reasonably ought to know that there is an actual or potential conflict of interest.[29] The panel noted that the steps required by this Rule are clear:
The panel held that the respondent breached MFDA Rule 2.1.4 by failing to report three sources of actual or potential conflicts of interest relating to MU’s estate, namely: (i) the respondent’s acceptance of a POAP for MU; (ii) the respondent’s awareness and acceptance of the role of alternate executor for MU’s estate; and (iii) the respondent’s awareness and acceptance of being named sole beneficiary under MU’s will.[31]
The panel held that the acceptance of a POAP for a client that authorizes an Approved Person to conduct trades in the client’s account on the client’s behalf is an actual or potential conflict of interest.[32] The conflict arises when the POAP is accepted and remains for as long as it is held, regardless of whether it was acted upon.[33] The fact that the respondent did not act on the POAP was not a defence to the breach.[34] The panel noted that the role of executor for a client raises similar conflicts of interest.[35]
The panel further held that an Approved Person who is named as a beneficiary of a client’s estate or on a client’s account is in an actual or potential conflict of interest, particularly when the beneficial entitlement includes investments managed by the Approved Person.[36] On this issue, reference was made to the MFA Member Regulation Notice issued on October 3, 2005 which states, among other things:
All monetary and non-monetary benefits provided directly or indirectly to or from clients must flow through the Member. The Member must be notified of any such arrangements, so that the Member is in a position to determine the significance of the benefit and to monitor the activity.[37]
The panel rejected the respondent’s submission that being a beneficiary was not a breach because they had not yet received any monetary benefit from MU’s estate, and held that becoming aware of the testamentary gift and failing to report it to the Member firm was a breach of MFDA Rule 2.1.4.[38]
Issue #2 – OSC Rule 31-505 and the duty to act fairly, honestly, and in good faith
Section 2.1 of OSC Rule 31-505 provides that every registered dealer or adviser, or a representative of such, has a statutory obligation to deal fairly, honestly, and in good faith with clients.[39]
As an MFDA registrant, the panel held that the respondent was at all material times bound by the statutory obligation under OSC Rule 31-505 to deal fairly, honestly and in good faith with clients.[40] Breaches of the MFDA Rules alone were also not sufficient to amount to a breach of OSC Rule 31-505, and the circumstances of any particular non-compliance must be considered.[41]
The panel held that the OSC applies the following lay meanings of “fairly”, “honestly”, and “good faith” when determining whether conduct amounts to a breach:
In considering the vulnerability of MU, the materiality of the amounts at stake, the respondent’s failure to place the client’s interests above their own, and the seriousness of the breaches of the MFDA Rules and Member firm policies and procedures, the panel found that the respondent had failed to act fairly, honestly, and in good faith in their actions towards MU.[42]
In assessing MU’s vulnerability, the panel considered the evidence of: MU’s terminal cancer, MU’s inconsistent memory, MU’s inability to identity or quantify investments, MU’s reliance on their late spouse to mange their financial affairs, MU’s reliance on the respondent to assist with finances and other tasks (booking travel and driving to the airport), MU’s age (70s), MU’s lack of formal education, the fact that an involved lawyer wanted a capacity assessment (never obtained), and that the conduct at issue occurred during the last few weeks of MU’s life when MU was bedridden and in palliative care.[43]
The panel held that the respondent acted unfairly, dishonestly and in bad faith towards a vulnerable client by failing to follow the required procedures for dealing with conflicts of interest, which was a significant breach of the MFDA Rules and the Member firm’s policies and procedures, and this constituted a breach of OSC Rule 31-505.[44]
The panel ordered the parties to arrange an attendance for a hearing regarding sanctions and costs.[45]
—
[1] Re (M) 2022 ONCMT 13 at para 8.
[2] Re (M) 2022 ONCMT 13 at para 1.
[3] Re (M) 2022 ONCMT 13 at para 1.
[4] Re (M) 2022 ONCMT 13 at para 9.
[5] Re (M) 2022 ONCMT 13 at para 4.
[6] Re (M) 2022 ONCMT 13 at para 5.
[7] Re (M) 2022 ONCMT 13 at para 5.
[8] Re (M) 2022 ONCMT 13 at para 6.
[9] Re (M) 2022 ONCMT 13 at para 21.
[10] Re (M) 2022 ONCMT 13 at para 119.
[11] Re (M) 2022 ONCMT 13 at para 120.
[12] Re (M) 2022 ONCMT 13 at para 120.
[13] Re (M) 2022 ONCMT 13 at para 120.
[14] Re (M) 2022 ONCMT 13 at para 77.
[15] Re (M) 2022 ONCMT 13 at para 78.
[16] Re (M) 2022 ONCMT 13 at para 121.
[17] Re (M) 2022 ONCMT 13 at para 121.
[18] Re (M) 2022 ONCMT 13 at para 124.
[19] Re (M) 2022 ONCMT 13 at para 124.
[20] Re (M) 2022 ONCMT 13 at para 129.
[21] Re (M) 2022 ONCMT 13 at para 129.
[22] Re (M) 2022 ONCMT 13 at para 130.
[23] Re (M) 2022 ONCMT 13 at para 131.
[24] Re (M) 2022 ONCMT 13 at para 131.
[25] Re (M) 2022 ONCMT 13 at para 131.
[26] Re (M) 2022 ONCMT 13 at para 132.
[27] Re (M) 2022 ONCMT 13 at para 136.
[28] Re (M) 2022 ONCMT 13 at para 136.
[29] Re (M) 2022 ONCMT 13 at para 2.
[30] Re (M) 2022 ONCMT 13 at paras 139 – 140.
[31] Re (M) 2022 ONCMT 13 at paras 143-144.
[32] Re (M) 2022 ONCMT 13 at para 145.
[33] Re (M) 2022 ONCMT 13 at para 147.
[34] Re (M) 2022 ONCMT 13 at para 149.
[35] Re (M) 2022 ONCMT 13 at para 150.
[36] Re (M) 2022 ONCMT 13 at para 153.
[37] Re (M) 2022 ONCMT 13 at para 153.
[38] Re (M) 2022 ONCMT 13 at para 159.
[39] Re (M) 2022 ONCMT 13 at para 180.
[40] Re (M) 2022 ONCMT 13 at para 169.
[41] Re (M) 2022 ONCMT 13 at para 170.
[42] Re (M) 2022 ONCMT 13 at para 171.
[43] Re (M) 2022 ONCMT 13 at paras 173-175.
[44] Re (M) 2022 ONCMT 13 at para 195.
[45] Re (M) 2022 ONCMT 13 at para 199.
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