Doe, John - Opportunity to be Heard

Overview

[1] This was a hearing, pursuant to section 31 of the Securities Act, R.S.O. 1990, c. S.5, as amended (the Act), to consider whether John Doe (the Applicant) should be denied registration by reason of his failure to accurately and completely provide the required criminal disclosure in his application for registration as a dealing representative of a mutual fund dealer.

[2] I have made a decision, pursuant to subsection 10(a) of the Procedures for Opportunities to be Heard before Director’s Decisions on Registration Matters and subsection 9(1) of the Statutory Powers Procedure Act, R.S.O. 1990, c. S.22, as amended, that the transcript of the hearing and any exhibits introduced at the hearing be sealed and not disclosed to or made available to the public, as the desirability of avoiding the disclosure of the intimate personal matters discussed in these documents would outweigh the public benefit of openness in Commission proceedings. Accordingly, these reasons have been published with the name of the applicant replaced with “John Doe”.

Background

[3] The Applicant applied for registration as a dealing representative of a mutual fund dealer on July 31, 2009 by filing a Form 33-109F4 Registration Information for an Individual (Form F4). The Applicant had never been registered under the Act and had been working in the financial services industry in a non-registered capacity for a number of years.

[4] Item 14 of Form F4 deals with criminal disclosure. Specifically, it asks the following question:

Criminal, provincial and territorial offences

With respect to questions (b) … below, if you or your firm have pleaded guilty or been found guilty of an offence, that offence must be reported even if an absolute or conditional discharge has been granted with respect to the offence. You are not required to disclose any offence for which a pardon has been granted under the Criminal Records Act (Canada) unless the pardon has been revoked. You are not required to disclose speeding or parking violations.

…

(b) Have you, since attaining the age of 18, ever been convicted of, pleaded guilty to or no contest to an offence that was committed in any province, territory, state, or country?

If “Yes”, complete Schedule “K”, section (b).

The Applicant answered “No” to Item 14(b).

[5] Upon receipt of the Applicant’s Form F4, OSC staff conducted the standard criminal and intelligence checks on the Applicant. The Canadian Police Information Centre (CPIC) check on the Applicant revealed the following “disciplinary or conviction history”:

Off: Indecent ActX2 – SD: 2009-06-24
- Conditional Discharge

These two convictions resulted from a guilty plea by the Applicant. The Applicant was ultimately granted a conditional discharge, the condition being that he complete two years of probation.

[6] On August 18, 2009, OSC staff wrote to the Applicant indicating that there appeared to be outstanding warrants or criminal charges against him. The letter requested the Applicant obtain a Certificate of Police Clearance or reconsider his response to Item 14. Additionally, the letter warned that failure to provide details of all convictions upon filing of initial submissions of registration is an offence under section 122 of the Act.

[7] Section b of Schedule K to Form F4 requests additional information where an individual has responded “yes” to Item 14(b). Specifically, it asks the following question:

For each conviction, indicate below (1) the offence, (2) the date of the conviction, and (3) the disposition (state any penalty or fine and the date any fine was paid).

[8] On September 18, 2009, the Applicant’s response to Item 14(b) of Form F4 was updated from “no” to “yes” and the following details were added in section b of Schedule K to Form F4:

1) Criminal Harassment
2) July 2, 2008
3) Discharged on June 24, 2009 – no criminal record (Discharge Document is to follow)

[9] OSC staff compared the September 18, 2009 update with the results of the CPIC check and concluded that the September 18, 2009 update was inaccurate. Accordingly, OSC staff returned the submission. On September 22, 2009, the Applicant’s response at section b of Schedule K to Form F4 was updated for a second time as follows:

1) Indecent Act
2) July 2, 2008
3) Discharged on June 24, 2009 – no criminal record (Discharge Document is to follow)

[10] On September 24, 2009, the Applicant updated his September 22, 2009 response for a third time to add the following details:

On June 25, 2008, my female neighbour … alleged that I exposed myself in an indecent act in the underground parking. My version of the events stated that my training pants dropped to my knees by accident since I had placed too many items in my pockets. I did not think that the incident was significant since it was not done intentionally. On July 1, 2008, I approached the same neighbour to greet her in the underground parking lot wearing my bath robe since I was going to my car. Again the same neighbour alleged that I exposed myself. On July 2, 2008[,] I was charged by the police with two acts of incident [sic] exposure. I was given bail but ordered to not live at … and reside with a relative elsewhere. On June 24, 2009, the trial concluded that I was given a conditional discharge which ordered that I stay away from the neighbour and serve probation for a period of 24 months. If I comply with the requirements of the conditional order then the criminal charge will be removed from my record.

[11] On November 12, 2009, OSC staff was advised by the Joint Securities and Intelligence Unit (JSIU) that information to which it had access showed that the information on the Applicant’s Form F4 was inaccurate and incomplete. Specifically, JSIU staff advised that there were, in fact, two victims referenced in the terms of the Applicant’s probation.

[12] On November 19, 2009, OSC staff wrote to inform the Applicant that OSC staff has recommended to the Director that the Applicant’s application for registration be refused. OSC staff noted to the Applicant that there was information that indicated his explanation was not a “true and complete account” of the events underlying his convictions. Specifically, the letter provided that:

With respect to the Application, staff is of the view that your failure to provide all required information in Item 14(b), even after being provided further opportunities to update or modify your application, shows that you lack the integrity required of a securities professional, and are therefore unsuitable for registration. Staff is therefore recommending to the Director that your application be refused.

[13] The Applicant exercised his right to an opportunity to be heard by the Director, pursuant to section 31 of the Act.

[14] In connection with preparing for the opportunity to be heard hearing, OSC staff requested the Applicant provide the police report relating to the events in question. The Applicant provided a copy of the police report along with a copy of a related psychiatric assessment prepared by staff at the Centre for Addition and Mental Health.

[15] The opportunity to be heard hearing was conducted in person on December 18, 2009.

[16] Subsequent to the opportunity to be heard hearing, the Applicant provided to OSC staff a letter from his probation officer confirming that the Applicant pleaded guilty to two counts of Indecent Acts, received a conditional discharge and was sentenced to two years of probation. The Applicant also provided additional documentation to OSC staff, including honours he has received at work and teaching evaluations from courses he has taught.

Submissions

Summary of OSC staff’s submissions

[17] OSC staff argued that the Applicant failed to meet the requisite integrity for registration. OSC staff’s view was that the Applicant is not suitable for registration and that his proposed registration would be objectionable on public interest grounds.

[18] On the issue of whether the convictions themselves indicate a lack of the integrity requisite of a securities professional, OSC staff cited Re Boisvert (2005), 28 OSCB 2181, for the proposition that it is not the role of the Commission to ensure the physical safety of investors in the context of an applicant who had previously been convicted of family disturbance and sexual interference. However, OSC staff argued that there was an important distinction between Re Boisvert and the present case: the applicant in Re Boisvert was forthcoming about his convictions.

[19] OSC staff submitted that the Applicant had not been similarly forthcoming about his criminal history. Specifically, OSC staff noted the following:

1. The Applicant initially indicated in Item 14(b) of his Form F4 that he had not been convicted of or pleaded guilty to an offence when in fact he had.
2. The Applicant’s subsequent disclosure in his Form F4 omitted certain incidents to which he had admitted to doing intentionally and for which he pleaded guilty.
3. The Applicant’s subsequent disclosure in his Form F4 omitted the fact that there was a separate incident involving a second victim.

[20] OSC staff submitted that throughout the application process, the Applicant’s disclosures with respect to item 14 of Form F4 had been inaccurate and inadequate. OSC staff acknowledged that although it would have been understandably stressful and inconvenient for any applicant to divulge even sparse details about convictions such as the Applicant’s on one’s Form F4, securities professionals routinely face stressful or inconvenient situations and are relied upon to nevertheless be forthright in their dealings and to conduct themselves at all times with integrity.

Summary of the Applicant’s submissions

[21] The Applicant blamed his failure to provide accurate information on misunderstanding and miscommunication. He stated that he failed to understand what he had to disclose and, in this regard, he suggested he was a bit ignorant.

[22] In particular, the Applicant submitted that he understood a conditional discharge as meaning that there would not be any criminal record and that it was the issue of his criminal record which he focussed upon in completing his Form F4. In particular, the Applicant noted that in filling out his Form F4, he focussed on the part of Item 14(b) which provides that: “You are not required to disclose any offence for which a pardon has been granted under the Criminal Records Act (Canada) unless the pardon has been revoked”. He noted that he initially thought that when the judge told him that he was free to go, this meant that he was pardoned. He indicated that he only understood the distinction between a pardon and a conditional discharge when he discussed this with his lawyer after being informed that OSC staff recommended his application for registration be denied.

[23] The Applicant took the position that he was advised by his probation officer to answer “no” to Item 14(b). However, upon further questioning at the opportunity to be heard hearing, the Applicant clarified that he did not put the actual question before his probation officer and merely said to his probation officer: “They’re asking about something to do with my criminal record. Should I answer ‘yes’ or should I answer ‘no’?”

The Law

[24] Subsections 27(1) and (2) of the Act provide that:

Registration, etc.

27. (1) On receipt of an application by a person or company and all information, material and fees required by the Director and the regulations, the Director shall register the person or company, reinstate the registration of the person or company or amend the registration of the person or company, unless it appears to the Director,

(a) that, in the case of a person or company applying for registration, reinstatement of registration or an amendment to a registration, the person or company is not suitable for registration under this Act; or
(b) that the proposed registration, reinstatement of registration or amendment to registration is otherwise objectionable.

Matters to be considered

(2) In considering for the purposes of subsection (1) whether a person or company is not suitable for registration, the Director shall consider,

(a) whether the person or company has satisfied,

(i) the requirements prescribed in the regulations relating to proficiency, solvency and integrity, and
(ii) such other requirements for registration, reinstatement of registration or an amendment to a registration, as the case may be, as may be prescribed by the regulations; and

(b) such other factors as the Director considers relevant.

The Issue

[25] The issue in this case is whether the Applicant is not suitable for registration, or whether his proposed registration is otherwise objectionable, by reason of his failure to accurately and completely provide the required criminal disclosure in his application for registration.

Analysis

General Principle

[26] As the Commission has repeatedly stated in numerous decisions, registration is a privilege and not a right. For example, the Commission states this in Re Trend Capital Services Inc. (1992), 15 OSCB 1711, as follows:

The regime of securities regulation established by the Act and the Regulations, and discussed in decision of the Commission and the Courts makes it clear that obtaining registration entitling persons to deal with the public is a privilege and not a right and that this must constantly be borne in mind.

Determining whether an applicant is not suitable for registration

[27] The fit and proper standard for registration is both an initial and an ongoing requirement for registrants. The fit and proper standard is based on three well established criteria that have been identified by the Commission:

The [Registrant Regulation] section administers a registration system which is intended to ensure that all Applicants under the Securities Act and the Commodity Futures Act meet appropriate standards of integrity, competence and financial soundness … (Ontario Securities Commission, Annual Report 1991, Page 16)

These three criteria are codified in subsection 27(2) of the Act as matters that may be considered by the Director in considering whether a person or company is suitable for registration.

[28] The Commission has, over time, considered the following in analyzing these three criteria:

• integrity – honesty and good faith, particularly in dealings with clients, and compliance with Ontario securities law;
• competence – 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 can be an indicator of the risk that an individual will engage in self-interested activities at the expense of clients.

[29] In the matter before me, no issue has been raised regarding the Applicant’s competence and financial soundness. However, OSC staff argued that the Applicant failed to meet the requisite integrity for registration as a dealing representative.

Determining whether an applicant’s proposed registration is otherwise objectionable

[30] The determination of whether an applicant’s proposed registration may be otherwise objectionable goes beyond the three suitability criteria noted above.

[31] As stated in section 1.1 of the Act:

The purposes of this Act are,
(a) to provide protection to investors from unfair, improper or fraudulent practices; and
(b) to foster fair and efficient capital markets and confidence in capital markets.

[32] Therefore, in considering whether an applicant’s proposed registration may be otherwise objectionable, public interest considerations are of particular importance, as one of the main objectives of the Act is to protect the public. This is noted in Re Michalik (2007), 30 OSCB 6717, as follows:

In pursuing the purposes of the Act, including protecting the investing public, the Commission is required to have regard to certain fundamental principles, such as the requirements to maintain high standards of fitness and business conduct to ensure honest and reputable conduct by registrants. Registrants have a very important function in the capital markets and they are also in a position where they may potentially harm the public. Regulating conduct of registrants is a matter of public interest.

[33] In considering the public interest, past conduct may be of particular relevance as an indicator of future conduct. This is stated in Re Mithras Management Ltd. (1990), 13 OSCB 1600, as follows:

… the role of this Commission is to protect the public interest by removing from the capital markets -- wholly or partially, permanently or temporarily, as the circumstances may warrant -- those whose conduct in the past leads us to conclude that their conduct in the future may well be detrimental to the integrity of those capital markets. We are not here to punish past conduct; that is the role of the courts…. We are here to restrain, as best we can, future conduct that is likely to be prejudicial to the public interest in having capital markets that are both fair and efficient. In so doing we must, of necessity, look to past conduct as a guide to what we believe a person's future conduct might reasonably be expected to be; we are not prescient, after all.

[34] An application for registration may be objectionable on broader public interest grounds, regardless of the suitability determination. That said, in most cases, the determination as to whether an applicant’s proposed registration may be otherwise objectionable is likely to coincide with the determination of whether an applicant is not suitable for registration.

Relevant decisions

[35] Applications for registration have been denied where individuals fail to be forthright and fully disclose their criminal records on their application for registration.

[36] For example, in Re Jay Peter Thompson (1986), 9 OSCB 6219, the applicant’s application for registration was denied on the basis he failed to disclose his criminal record and continued to refuse to acknowledge his criminal record. Under the applicant’s name, OSC staff uncovered a criminal record consisting of both drinking and driving convictions and convictions for possession of narcotics. At first, the applicant swore that the criminal record was of a different person. Upon subsequent questioning, the applicant admitted to the driving convictions shown in the criminal record but refused to admit the narcotic convictions. The Deputy Director, Registration stated:

Had Thompson been forthright in Thompson’s application or at the other levels of questioning outlined above, it is possible that registration may well have issued. However, the issue here is not the nature or quality of the Criminal Code convictions, but disclosure, especially given the number of opportunities Thompson was given to set the record straight.

[37] Similarly, in Re Doe (2007), ABASC 296, the Executive Director at the Alberta Securities Commission (the ASC) denied the registration of an applicant who had failed to disclose a criminal charge against her that was later disposed by way of a guilty plea and conditional discharge. On two occasions, ASC staff brought to the attention of her sponsoring firm that she was to reconsider the criminal disclosure. The response from the firm was that the applicant “is not aware of any criminal items/activity that has not been disclosed”. The Executive Director found that there was insufficient evidence to conclude that the applicant had been dishonest on the basis of the underlying circumstances of the criminal charge and another incident where the applicant was sanctioned by another regulator. However, the Executive Director found that the applicant’s credibility surrounding the failure to disclose her criminal charge problematic. In considering the applicant’s integrity, the Executive Director stated

Integrity is broader than dishonesty. It encompasses a certain duty of care in one's work product. One may not be dishonest and yet be reckless or lackadaisical over whether one complies with the rules or requirements of one's industry. … As for her application for registration, the explanation as to why the Applicant failed to comply with the clear wording requiring disclosure of the offence was that she failed to notice the requirement to disclose "even if an absolute or conditional discharge has been granted" (emphasis added) [emphasis in original] because she focused only on the question of whether she had been convicted of a criminal offence. Notwithstanding having had three separate opportunities to complete the form correctly, two of which involved specific direction to the problematic portion of the form, the Applicant either did not reread the form, or did so in such a careless manner so that she failed to appreciate the requirement to disclose, which requirement is in the same sentence as the requirement to disclose an offence. The Applicant's actions reveal a lack of attention to detail in complying with formal requirements. This, in my mind, reflects either a lack of integrity, based on a reckless or wilful disregard of matters critical to her responsibilities, or a lack of competence, either of which is fatal to her registration application.

Application to the facts in this case

[38] In the matter before me, the main issue is the Applicant’s integrity – in particular, the Applicant’s behaviour in failing to disclose his convictions of two counts of Indecent Act in his Form F4 and his subsequent failure to completely and accurately disclose the required information. I need not analyze the nature or quality of the criminal convictions, except to say that had the Applicant been forthcoming in disclosing his convictions, it is quite possible that registration may well have been granted.

[39] Based on the information before me, I have a difficult time concluding that the Applicant made an honest mistake in his failure to provide complete and accurate information on his Form F4. The Form F4 question relating to criminal disclosure is plain on its face: “Have you, since attaining the age of 18, ever been convicted of, pleaded guilty to … an offence that was committed in any province, territory, state, or country?” The preamble to the question makes it clear that if an individual has pleaded guilty to an offence, that offence must be reported even if an absolute or conditional discharge has been granted with respect to the offence.

[40] I also have difficulty with the Applicant’s submission that he thought he was pardoned. He knew that his conditional discharge was conditional on completion of two years of probation. When he updated his disclosure on September 24, 2009, he acknowledged in writing that he understood that he would have to fulfill the term of his probation and only then will the criminal charge be removed from his record:

… On June 24, 2009, the trial concluded that I was given a conditional discharge which ordered that I stay away from the neighbour and serve probation for a period of 24 months. If I comply with the requirements of the conditional order then the criminal charge will be removed from my record . [Emphasis added.]

[41] In my view, one false statement is enough to discredit the Applicant’s credibility and raise an issue as to his integrity. In other words, one false statement is sufficient to result in the Applicant’s application for registration being denied on the basis that the Applicant lacks the requisite integrity required of a securities industry professional and is, therefore, not suitable for registration.

[42] The matter before me, however, involves not only one false statement, but a chain of inaccurate and misleading disclosures provided by the Applicant.

[43] In the Applicant’s first update to Form F4 on September 18, 2009, the Applicant noted that he had pleaded guilty to the offence of Criminal Harassment when, in fact, he had pleaded guilty to two counts of Indecent Act. I cannot see how the Applicant could have mistakenly confused the offence for which he had pleaded guilty.

[44] In the Applicant’s second update to Form F4 on September 22, 2009, the Applicant corrected the offence from Criminal Harassment to Indecent Act. However, the Applicant still did not disclose that, in fact, he had pleaded guilty to two counts of Indecent Act and not one.

[45] In the Applicant’s third update to Form F4 on September 24, 2009, the Applicant provided a description of the events leading to his convictions. Without going into the further details of the underlying events surrounding the Applicant’s convictions, the Applicant’s disclosure in his Form F4 differed radically from the information eventually obtained by OSC staff.

[46] In my view, the Applicant recognized the seriousness of the underlying events for which he pleaded guilty and intentionally misrepresented the circumstances surrounding them in an attempt to minimize their significance to OSC staff reviewing his registration application.

[47] Moreover, even if the Applicant somehow was honestly mistaken in the chain of inaccurate disclosure he provided to OSC staff (which I doubt) I agree with the statement in Re Doe that integrity is broader than dishonesty and encompasses a certain duty of care in one's work product. The Applicant had a duty to carefully complete documents relating to his registration, including his initial application for registration. In my view, he did not meet this duty.

Decision

[48] The Applicant did not accurately and completely disclose his criminal history as required in his application for registration. Considering all of the circumstances, I find that the Applicant has not demonstrated the high standards of integrity required of a professional in the securities industry. Accordingly, I find that the Applicant is not suitable to be registered and, therefore, refuse to grant registration in this matter.

February 5, 2010