Stephen Zeff Freedman and Sloane Capital Corp.
IN THE MATTER OF THE SECURITIES ACT, R.S.O. 1990, c. S.5, AS AMENDED AND IN THE MATTER OF AN OPPORTUNITY TO BE HEARD REQUESTED BY STEPHEN ZEFF FREEDMAN AND SLOANE CAPITAL CORP.
DECISION OF THE DIRECTOR
Having reviewed and considered the settlement agreement between staff of the Ontario Securities Commission ("Staff"), Stephen Zeff Freedman ("Freedman"), and Sloane Capital Corp. ("Sloane") dated June 26, 2015, a copy of which is attached as Appendix "A" to this Decision (the "Settlement Agreement");
And having reviewed and considered the joint recommendation and submissions by Staff and counsel to Freedman and Sloane, Janice Wright;
And on the basis of the agreed statement of facts, the admissions, and the representations contained in the Settlement Agreement, and the joint submissions by Staff and counsel for Freedman and Sloane, Janice Wright;
I, Marrianne Bridge, in my capacity as Director under the Securities Act (Ontario) (the "Act"), accept the joint recommendation of the parties, and make the following decision:
1. Freedman's registration as an ultimate designated person ("UDP") and chief compliance officer ("CCO") shall be suspended pursuant to section 28 of the Act effective immediately, and he may not apply for a reactivation of registration as a UDP or CCO for a period of five years from the date of this decision, provided that at the time he applies for reactivation of registration all amounts he owes to the Canada Revenue Agency as of the date of this decision, and any penalties or interest which may accrue in relation to such amounts (collectively, the "Repayment Amounts") have been paid in full, and he has no other liabilities related to the Repayment Amounts.
2. Freedman's registration as a dealing representative shall be suspended pursuant to section 28 of the Act effective immediately, and he may not apply for a reactivation of registration as a dealing representative for a period of ten months from the date of this decision.
3. Freedman shall successfully complete the Conduct and Practices Handbook Course before applying for registration in any capacity.
4. In the event Freedman's registration as a dealing representative is reactivated, it shall be subject to terms and conditions requiring strict supervision of him by his sponsor firm for a period of one year, or until the Repayment Amounts are satisfied in full (and provided he has no other liabilities related to the Repayment Amounts), whichever comes later.
5. The notice dated February 20, 2015 that the Director objects to the acquisition by Acquire Co. of the exempt market dealer assets of Sloane is hereby withdrawn, and I hereby give notice that I do not object to the acquisition by Acquire Co. of the exempt market dealer assets of Sloane as described in the notice delivered by Acquire Co. dated January 23, 2015, and further correspondence from Acquire Co., Sloane, and Freedman dated March 21, 2015, April 6, 2015, April 28, 2015, May 4, 2015, May 6, 2015, June 2, 2015, June 5, 2015, June 8, 2015, and July 8, 2015 (collectively, the "Notice"), pursuant to section 11.9 of National Instrument 31-103 Registration Requirements, Exemptions, and Ongoing Registrant Obligations. If there is a material change to the acquisition or if it is completed in a manner that is materially inconsistent with the description in the Notice, Acquire Co. shall provide Staff with prompt written notice of the change or inconsistency.
6. Effective immediately, the registration of Sloane is subject to the following terms and conditions pursuant to section 28 of the Act:
(a) Sloane shall not open any new client accounts or accept any assets from clients.
(b) Sloane shall not trade in securities.
7. The registration of Sloane shall be suspended pursuant to section 28 of the Act, effective the 30th day following the date of this decision. The purpose of this interim 30-day period is to facilitate an orderly transition of Sloane's exempt market dealer assets to Acquire Co.
8. Effective immediately, Freedman will not be a permitted individual of any registered firm except Sloane (and in the case of Sloane, only for the interim 30 day period provided for by paragraph 7 above), for a period of three years from the date of this decision, provided that at the time he seeks to be a permitted individual again the Repayment Amounts have been paid in full (and provided he has no other liabilities related to the Repayment Amounts).
9. At the time the suspension of the registration of Sloane becomes effective, Freedman shall resign all positions as a permitted individual with Sloane.
July 13, 2015
Appendix "A"
IN THE MATTER OF THE SECURITIES ACT, R.S.O. 1990, c. S.5, AS AMENDED AND IN THE MATTER OF AN OPPORTUNITY TO BE HEARD REQUESTED BY STEPHEN ZEFF FREEDMAN AND SLOANE CAPITAL CORP.
SETTLEMENT AGREEMENT
SETTLEMENT AGREEMENT
I. INTRODUCTION
1. This settlement agreement (the "Settlement Agreement") relates to the registration status under the Securities Act (Ontario) (the "Act") of Stephen Zeff Freedman ("Freedman") and Sloane Capital Corp. ("Sloane") (collectively, the "Registrants").
2. On September 24, 2014, staff of the Ontario Securities Commission ("Staff") notified the Registrants that it had recommended to the Director that their registration be suspended pursuant to section 28 of the Act.
3. On September 28, 2014, and pursuant to section 31 of the Act, the Registrants notified Staff of their request for an opportunity to be heard in relation to Staff's recommendation that their registration be suspended (the "OTBH").
4. The Registrants and Staff have agreed to settle the OTBH on the terms provided for in this Settlement Agreement.
II. AGREED STATEMENT OF FACTS
5. The Registrants agree with the facts set out in Part II of this Settlement Agreement. To the extent the Registrants do not have direct knowledge of certain facts as described below, the Registrants believe the facts to be true and accurate.
A. Sloane
6. Sloane is registered under the Act as an exempt market dealer (an "EMD").
7. Sloane's head office is located in the City of Toronto.
8. In addition to its registration under the Act, Sloane is registered pursuant to the securities laws of Alberta, Manitoba, British Columbia, Newfoundland, Nova Scotia, Quebec, and Saskatchewan.
9. Sloane offers for sale securities of third-party issuers pursuant to exemptions from the prospectus requirement. As of the date of this Settlement Agreement, Sloane offered for sale the securities of 13 different issuers.
10. As of the date of this Settlement Agreement, Sloane employed 34 registered dealing representatives across the various jurisdictions in which the firm is registered.
B. Freedman
11. Since 1975, Freedman has been registered under the Act with numerous different companies.
12. Freedman is the president and chief executive officer of Sloane.
13. Freedman, through a wholly-owned holding company, owns all of the issued and outstanding shares of Sloane.
14. Freedman is registered with Sloane as its ultimate designated person ("UDP") and chief compliance officer ("CCO"), and as one of its dealing representatives.
C. First Compliance Review
15. In May 2012, Freedman engaged a compliance consultant to work with Sloane to establish the firm's policies and procedures manual, and to assist Sloane with other compliance-related issues.
16. On December 28, 2012, Staff provided Freedman with the report of a compliance review (the "First Compliance Review") undertaken pursuant to section 20 of the Act, which examined Sloane's compliance with Ontario securities law for the period May 1, 2011 to April 30, 2012 (the "First Compliance Report").
17. The First Compliance Report identified 25 deficiencies in Sloane's compliance with Ontario securities law, 20 of which were identified as being significant. Some of the deficiencies in the First Compliance Report related to the following areas (without limitation): Sloane's overall compliance system, know-your-client ("KYC"), know-your-product ("KYP"), and investment suitability.
18. As of the date of the First Compliance Report, Staff considered that Sloane did not have a compliance system that adequately satisfied the requirements of section 11.1 of National Instrument 31-103 Registration Requirements, Exemptions, and Ongoing Registrant Obligations ("NI 31-103").
D. Second Compliance Review
19. Following the issuance of the First Compliance Report, Staff and Freedman were in communication regarding how Sloane would rectify the various deficiencies identified in the First Compliance Report. During this period of time, Sloane's business grew significantly. In particular, the number of issuers whose securities Sloane offered for sale increased from seven (at the time of the First Compliance Review) to approximately 25 issuers (in the eleven months following the period covered by the First Compliance Review).
20. Sloane represents that during the First Compliance Review and after receiving the First Compliance Report, Sloane examined all of its policies and procedures, and worked towards addressing the issues raised by Staff. For example, during this period of time Sloane instituted an online back-office system that was intended to assist Sloane in meeting its KYC obligations. However, the deficiencies identified in the First Compliance Report were not resolved to the satisfaction of Staff.
21. In September 2013, in light of the expansion of Sloane's business, Staff commenced a further compliance review pursuant to section 20 of the Act, which examined Sloane's compliance with Ontario securities law for the period September 1, 2012 to August 31, 2013 (the "Second Compliance Review"). At the time the Second Compliance Review was commenced, Sloane was in the process of responding to the issues raised in the First Compliance Report. However, Staff determined that the Second Compliance Review was necessary in light of the significant expansion of the firm's business by that point in time.
22. In November 2013, the Registrants entered into discussions with another EMD ("Acquire Co.") in relation to a potential merger and/or acquisition. These discussions culminated in an agreement pursuant to which Acquire Co. proposed to acquire all of the assets of Sloane, as more particularly described below.
23. On June 5, 2014 Staff provided Freedman with a report of the Second Compliance Review (the "Second Compliance Report"). Some of the deficiencies in the Second Compliance Report related to the following areas (without limitation): KYC, KYP, and investment suitability. Ten of the significant deficiencies identified in the Second Compliance Report had previously been identified as significant deficiencies in the First Compliance Report, although Sloane represents that some of these repeat deficiencies were issues that it was attempting to address at the time the Second Compliance Review began. While the periods covered by the First Compliance Review and the Second Compliance Review did not overlap, it is the Registrants' position that the fact that they received the First Compliance Report four months into the period of time covered by the Second Compliance Review partially contributed to the existence of some of the repeat deficiencies.
24. On June 17, 2014, Freedman attended an interview with Staff where he was provided with an opportunity to respond to the Second Compliance Report (the "Interview"). Following the Interview, Freedman provided Staff with further information in response to requests from Staff (the "Response Information"). Some of the Response Information addressed some aspects of the deficiencies that had been identified in the Second Compliance Report.
25. In general however, the Response Information did not adequately address all of the deficiencies identified in the Second Compliance Report, including in the areas of KYC, KYP, and investment suitability. Of particular concern to Staff were the following compliance deficiencies:
(a) Failure to discharge know-your-client ("KYC") obligation -- In several cases reviewed by Staff, Staff found that Sloane had sold securities to clients without having a registered representative of Sloane meet with the client prior to the trade being made, or at all, in order to obtain the client's KYC information as required by section 13.2 of NI 31-103. Freedman believes that a Sloane representative met with these clients prior to the trade being made, but acknowledges that Sloane does not have proper records to substantiate that claim.
(b) Failure to discharge know-your-product ("KYP") obligation -- For some of the issuers marketed by Sloane, Sloane had insufficient information upon which a reasonable due diligence assessment of the issuer could have been made. In the case of one issuer marketed by Sloane, the firm distributed securities of the issuer before it completed its due diligence assessment of the issuer. In the case of some other issuers marketed by Sloane, Freedman was not sufficiently familiar with, and did not take appropriate steps to fully understand, the financial statements contained in the issuer's offering documents. Finally, in the case of one issuer, Freedman was unaware of significant detrimental information regarding the issuer's mind and management, although this information was a matter of public record and was accessible using the internet.
(c) Failure to discharge suitability obligation -- The Second Compliance Report identified 19 trades made by Sloane, including some by Freedman himself, where the client's investment did not appear to be suitable for them. On July 14, 2014, Freedman provided a response to these 19 trades. Freedman's response was concerning to Staff because it sought to explain the suitability of some trades on the basis that they were made to individuals who had been referred to Sloane and not solicited by Sloane itself, and that at the time Sloane received the referral, Freedman understood that the client was an accredited investor. In Staff's view these responses demonstrated that Freedman did not understand the suitability obligation contained in section 13.3(1) of NI 31-103, and did not conduct an appropriate suitability assessment in some cases.
26. In Staff's view the deficiencies identified in the Second Compliance Report, the information provided by Freedman during the Interview, and the Response Information all indicated that Sloane still did not have a compliance system that adequately complied with section 11.1 of NI 31-103 and that Freedman had not adequately performed his obligations as a UDP, CCO, or dealing representative under Ontario securities law.
E. Notice of Proposed Suspension of Registration
27. On September 2, 2014 Acquire Co. gave notice pursuant to subsection 11.9(1) of NI 31-103 that it proposed to acquire all or substantially all of the assets of Sloane (the "Proposed Acquisition"). Pursuant to the terms of the Proposed Acquisition, Sloane would acquire approximately 40% of the voting shares of Acquire Co., Freedman would become the President and UDP of Acquire Co., and Sloane anticipated that it would surrender its registration following the completion of the Proposed Acquisition.
28. On September 24, 2014, Staff informed the Registrants that it had recommended to the Director that their registration be suspended, and that certain terms and conditions be imposed. Staff's recommendation was based on the First Compliance Report, the Second Compliance Report, the Interview, and the Response Information.
29. Also on September 24, 2014, the Director notified Acquire Co. in writing that the Director objected to the Proposed Acquisition because it did not satisfy all of the criteria in subsection 11.9(2) of NI 31-103. The Director informed Acquire Co. that the Proposed Acquisition would be inconsistent with the regulatory action that had been proposed in respect of the Registrants.
30. On September 28, 2014, the Registrants requested an OTBH in relation to Staff's recommendation of September 24, 2014.
31. On January 23, 2015, pursuant to discussions between Staff and Freedman regarding a resolution of the OTBH, Acquire Co. delivered a new notice (the "Notice") of its intent to acquire all or substantially all of the assets of Sloane on terms different from those of the Proposed Acquisition (the "Amended Proposed Acquisition"). Pursuant to the terms of the Amended Proposed Acquisition, Acquire Co. would acquire the assets of Sloane and Freedman would not receive, directly or indirectly, control over more than 10% of the voting shares of Acquire Co.
F. Admissions by Registrants
32. The Registrants admit that they did not adequately comply with the following requirements of Ontario securities law:
(a) Section 32 of the Act (duty to comply with Ontario securities law);
(b) Sections 5.1 (responsibilities of the ultimate designated person), 5.2 (responsibilities of the chief compliance officer), 11.1 (compliance system), 13.2 (know your client), 13.3 (suitability), 13.4 (identifying and responding to conflicts of interest), 13.8 (permitted referral arrangements), 14.12 (relationship disclosure information), and 14.14 (account statements) of NI 31-103;
(c) Section 5.1 (sponsoring firm obligations) of National Instrument 33-109 Registration Information; and
(d) OSC Rule 31-505 Conditions of Registration.
G. Agreed Terms and Joint Recommendation to Director
33. In order to resolve this matter without further recourse to the OTBH process, and on the basis of the agreed statement of facts set out in this Settlement Agreement, Staff and the Registrants have agreed to the following terms, and make the following joint recommendation to the Director:
(a) Freedman's registration as a UDP and CCO shall be suspended pursuant to section 28 of the Act effective immediately, and he may not apply for a reactivation of registration as a UDP or CCO for a period of five years from the date the Director's decision to suspend his registration becomes effective, provided that at the time he applies for reactivation of registration all amounts he owes to the Canada Revenue Agency as of the date of this Settlement Agreement, and any penalties or interest which may accrue in relation to such amounts (collectively, the "Repayment Amounts") have been paid in full, and he has no other liabilities related to the Repayment Amounts, after which period of time Staff shall not recommend to the Director that an application by Freedman for reactivation of registration as a UDP or CCO be refused, unless Staff becomes aware after the date of this Settlement Agreement of conduct impugning his suitability for registration, and provided he meets all other applicable criteria for registration at the time he applies for a reactivation of registration;
(b) Freedman's registration as a dealing representative shall be suspended pursuant to section 28 of the Act effective immediately, and he may not apply for a reactivation of registration as a dealing representative for a period of ten months from the date of the Director's decision to suspend his registration, after which period of time Staff shall not recommend to the Director that an application by Freedman for reactivation of registration as a dealing representative be refused, unless Staff becomes aware after the date of this Settlement Agreement of conduct impugning his suitability for registration, and provided he meets all other applicable criteria for registration at the time he applies for a reactivation of registration;
(c) Freedman shall successfully complete the Conduct and Practices Handbook Course before applying for registration in any capacity;
(d) In the event Freedman's registration as a dealing representative is reactivated, it shall be subject to terms and conditions requiring strict supervision of him by his sponsor firm for a period of one year, or until the Repayment Amounts are satisfied in full (and provided he has no other liabilities related to the Repayment Amounts), whichever comes later;
(e) Staff has reviewed the Amended Proposed Acquisition as described in the Notice, has determined that it satisfies all of the criteria in subsection 11.9(2) of NI 31-103, and has recommended to the Director that they do not object to the Amended Proposed Acquisition as described in the Notice;
(f) In the event the Director does not object to the Amended Proposed Acquisition, Acquire Co. shall carry out the Amended Proposed Acquisition, and shall do so in accordance with the Notice and not otherwise;
(g) The terms and conditions contained in Schedule "A" to this Settlement Agreement shall be imposed on the registration of Sloane pursuant to section 28 of the Act effectively immediately;
(h) The registration of Sloane shall be suspended pursuant to section 28 of the Act, effective the 30th day following the date of the Director's decision to suspend its registration in order to facilitate an orderly transition of Sloane's assets to Acquire Co.;
(i) Effective immediately, Freedman will not be a permitted individual of any registered firm, except Sloane (and in the case of Sloane, only for the interim 30 day period provided for by paragraph (h) above), for a period of three years from the date of the Director's decision to suspend his registration, provided that at the time he seeks to be a permitted individual again the Repayment Amounts have been paid in full (and provided he has no other liabilities related to the Repayment Amounts); and
(j) At the time the suspension of the registration of Sloane becomes effective, Freedman shall resign all positions as a permitted individual with Sloane.
34. Staff and the Registrants submit that their joint recommendation is reasonable, having regard to the following factors:
(a) The Registrants have admitted to their non-compliance with Ontario securities law.
(b) Previous decisions of the Commission and the Director.
(c) Staff and the Registrants anticipate that the Proposed Acquisition, which is intended to proceed in conjunction with the suspension of Sloane's registration, will reduce any inconvenience to clients that may otherwise be brought about by the suspension of Sloane's registration.
(d) Freedman acquired Sloane on April 26, 2011, which was five days prior to May 1, 2011, the first day of the period covered by the First Compliance Review.
(e) By agreeing to this Settlement Agreement, the Registrants have saved Staff and the Director the time and resources that would have been required for an OTBH.
35. Staff and the Registrants acknowledge that if the Director objects to the Amended Proposed Acquisition or does not accept this joint recommendation:
(a) This joint recommendation and all discussions and negotiations between Staff and the Registrants in relation to this matter shall be without prejudice to the parties; and
(b) The Registrants will be entitled to an OTBH in accordance with section 31 of the Act.
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"Elizabeth King"
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"Janice Wright"
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Elizabeth King
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Janice Wright
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Deputy Director Compliance and Registrant Regulation Branch
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Counsel to Stephen Zeff Freedman and Sloane Capital Corp.
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June 26, 2015
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June 26, 2015
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Date
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Schedule "A"
Terms and Conditions on the Registration of Sloane Capital Corp.
Pursuant to section 28 of the Securities Act (Ontario) the registration of Sloane Capital Corp. is subject to the following terms and conditions:
1. Sloane Capital Corp. shall not open any new client accounts or accept any assets from clients.
2. Sloane Capital Corp. shall not trade in securities.