Craig, Lawrence William - Opportunity to be Heard

[Update: The terms and conditions imposed by the Director in this decision were removed as at June 30, 2008.]

Overview

1.   This decision relates to the recommendation of Ontario Securities Commission (OSC) staff to impose terms and conditions on the registration of Mr. Craig (also referred to as the Registrant). OSC staff made the recommendation based on an investigation conducted by the Mutual Fund Dealers Association of Canada (MFDA) that called into question the Registrant’s continued suitability for registration in the securities industry.

Background

2.   Mr. Craig was registered as salesperson in the category of mutual fund dealer under the Securities Act (the Act) on June 20, 1994. Mr. Craig has been sponsored by Ten Star Financial Inc. to act on its behalf as a limited market dealer salesperson and a mutual fund dealer salesperson (Ten Star) since August 31, 2004.

3.   On December 11, 2007 the MFDA issued a warning letter to the registrant related to his conduct as a mutual fund salesperson. Based on this letter, OSC staff conducted a review of Mr. Craig’s continued suitability for registration. On February 22, 2008, OSC staff advised Mr. Craig that it had recommended the Director impose supervisory terms and conditions on his registration. Mr. Craig exercised his right for an Opportunity to be Heard (OTBH) by the Director.

4.   The OTBH was conducted through written submissions.

Staff Submissions

5.   OSC staff recommended that the Director impose terms and conditions on the registration of Mr. Craig based on the findings of an investigation by the MFDA into the activities of the registrant.

6.   During a branch compliance examination, staff of the MFDA noted that in 13 cases, different levels of investment knowledge were entered for a single client’s account opening forms. For example, a client may have investment knowledge described as “good” in an RESP account and as “experienced” in a leveraged account. In some cases the accounts were opened on the same day. In other cases, the client’s investment knowledge decreased after the client opened a leveraged account.

7.   In an interview with the MFDA, the registrant admitted to advising clients that altering the know-your-client (KYC) information in the leveraged account opening forms would help ensure the approval of the accounts by Ten Star.

8.   According to Ten Star’s guidelines, leveraging is offered for clients that have good to experienced, or sophisticated investment knowledge. Leveraging is unsuitable for clients that have none/some, average or good investment knowledge. However, the guidelines suggest that there could be situations where leveraging may be considered for clients that have good investment knowledge.

9.   The compliance examination led to an investigation. The MFDA investigation resulted in warning letters being issued to Mr. Craig and to Ten Star.

Registrant Submissions

10.  The Registrant believed that his client’s were rated correctly with respect to investment knowledge. Mr. Craig did not recommend leveraging to all his clients. He only recommended leveraging for those clients where it was appropriate.

11.  The Registrant supplied information and had discussions with clients about leveraging which raised their investment knowledge to a higher level. As a result, a client could have a different level of knowledge with respect to different programs or accounts.

12.  Mr. Craig has learned that the MFDA and the OSC do not consider this practice as correct. There should only be one investment knowledge level per client.

13.  There have never been any formal complaints lodged against Mr. Craig in his 13 year-tenure as a registrant. He has a significant client portfolio that he services.

14.  Ten Star has placed Mr. Craig under voluntary supervision.

Suitability for Registration

15.  A registrant is in a position to perform valuable services to the public, both in the form of direct services to individual investors and as part of the larger system that provides the public benefits of fair and efficient capital markets. A registrant also has a corresponding capacity to do material harm to individual investors and the public at large.

16.  Determining whether an Registrant should be registered is an important component of the work undertaken by OSC staff to protect investors and foster confidence in the capital markets. The standard for suitability is based on three well established criteria that have been identified by the OSC:

• Integrity, including honesty and good faith, particularly in dealings with clients, and compliance with Ontario securities law,
• Competency, including prescribed proficiency and knowledge of the requirements of Ontario securities law, and
• financial soundness, an indicator of a firm’s capacity to fulfill its obligations and of the risk that an individual will engage in self-interested activities at the expense of clients.

17.  In this matter the question of the Registrant’s suitability for registration surrounds the criteria of competency and to a lesser extent integrity. There is no issue relating to the Registrant’s financial solvency.

18.  The Registrant admits that he did not completely understand the application of KYC information. All registrants are expected to know how to apply KYC information. The Registrant’s lack of understanding could have resulted in unsuitable leverage being recommended to a client. There is no evidence that this happened but the risk was present.

19.  Ten Star bears some of the responsibility as it has an obligation to ensure that its salespersons are trained and understand the products and services they are selling. Ten Star’s supervision should have found these irregularities in investment knowledge and corrected them. It was only as the result of the MFDA compliance review that the Registrant’s practices came to light.

Decision and Reasons

20.  The Director has the discretion to grant registration, refuse registration or impose terms and conditions on the registration. Terms and conditions are most useful in cases where remediation is possible. This point was discussed in the Jaynes decision that reads in part:

While terms and conditions restricting registration may be appropriate in a wide variety of circumstances, they should not be used to “shore up” a fundamentally objectionable registration. To do so would be to create the very real risk that a client’s interests cannot be effectively served due to the severity and extent of the restrictions imposed.Re Jaynes (2000), 23 O.S.C.B. 1543

21.  The submissions made by OSC staff and by the Registrant demonstrated a shortcoming in relation to the competency required of a mutual fund salesperson. The Registrant, however, believed he was acting in the best interests of his client.

22.  In the situation presented, I believe the Registrant understands his past mistakes. I further believe that it is in the best interests of his clients that he remain registered. However, to ensure that there is no recurrence of past practices, close supervision will be required for a period of two years. Therefore, I impose the terms and conditions as set out in Exhibit A on the registration of Lawrence William Craig.

June 9, 2008
“David M. Gilkes”


 

Monthly Close Supervision Reports are to be completed on the registrant’s sales activities and dealings with clients. The supervision reports are to be retained with the sponsoring firm and must be made available for review upon request. These terms and conditions are to continue for a period of two years commencing June 30, 2008.


__________________________               ________________________
Approved Officer for                                        Lawrence William Craig
Ten Star Financial Inc.



____________________________               ________________________
Print Name of Approved Officer                                         Date

I hereby certify that supervision has been conducted for the month ending____________ of the trading activities of Lawrence William Craig, by the undersigned. I further certify the following:

1. All orders from the salesperson were reviewed and approved by a compliance officer or branch manager of Ten Star Financial Inc.
2. There were no client complaints received during the preceding month. If there were complaints, a description of the complaint and follow-up action initiated by the company is attached.
3. All payments for the purchase of the investments were made payable to the dealer. There were no cash payments accepted.
4. The transactions of the salesperson were reviewed during the preceding month to ensure compliance with the policies and procedures of the dealer, including the suitability of investments for clients. If there were any violations, a description of the violation and follow-up action is attached.

____________________________
Signature
Compliance Officer/Branch Manager
Ten Star Financial Inc.


____________________________               ________________________
Print Name                                                                         Date




*In the case of violations or client complaints, the regulator must be notified within five business days.