Frost, Richard Derek and RDF Capital Management Inc. -- s. 26(3)
IN THE MATTER OF
THE REGISTRATION OF
RICHARD DEREK FROST AND RDF CAPITAL MANAGEMENT INC.
OPPORTUNITY TO BE HEARD BY THE DIRECTOR
Subsection 26(3) of the Securities Act, R.S.O. 1990, c. S.5
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Date of decision:
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May 24, 2011
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Director:
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Erez Blumberger
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Deputy Director, Registrant Regulation
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Ontario Securities Commission
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Written Submissions by:
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Michael Denyszyn, Senior Legal Counsel
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For staff of the Ontario Securities Commission
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and
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Ellen Bessner,
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Counsel for Mr. Frost and RDF Capital Management Inc.
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Introduction
By letter dated March 3, 2011, staff (Staff) of the Ontario Securities Commission (the OSC) advised Richard Derek Frost that it was recommending to the Director that his registration as a dealing representative, chief compliance officer (CCO) and ultimate designated person (UDP) in the category of exempt market dealer with RDF Capital Management Inc. (RDF) be suspended. In that same letter, Staff advised Mr. Frost that it was also recommending to the Director that RDF's registration as a dealer in the category of exempt market dealer be suspended.
Staff based this recommendation on allegations that Mr. Frost as UDP and CCO and RDF as an exempt market dealer, among other things, (a) failed to meet their Know Your Product obligations; (b) failed to meet their suitability obligations; and (c) failed to make adequate disclosure of product information.
On March 17, 2011, Ellen Bessner of Cassels Brock & Blackwell LLP, counsel for Mr. Frost and for RDF, requested an opportunity to be heard (OTBH) in relation to Staff's recommendation that the registrations of RDF and Mr. Frost be suspended.
Staff, RDF and Mr. Frost (through counsel) have agreed to resolve this OTBH through a joint recommendation that: (i) RDF consents to its registration being suspended, (ii) Mr. Frost is prohibited from seeking reinstatement of registration in the individual categories of UDP or CCO for a period of 4 years from today's date; (iii) Mr. Frost is prohibited from applying for registration as a dealing representative until he successfully passes the Conduct and Practices Handbook examination and the Exempt Market Products examination; (iv) subject to item (iii), Staff will not recommend that an application by Mr. Frost for registration as a dealing representative with an appropriately registered firm in the category of exempt market dealer be refused unless conduct impugning Mr. Frost's integrity, proficiency or solvency occurs after the date of this joint recommendation, and (v) Staff will recommend that Mr. Frost's reinstated registration be subject to strict supervision by his sponsoring firm for a period of 1 year, beginning with the date of reinstatement of registration.
Agreed Statement of Facts
Staff, RDF and Mr. Frost agree as to the following facts:
Mr. Frost's Registration History
1. Mr. Frost was first registered under the Securities Act (Ontario) as a salesperson in the category of limited market dealer with Nova Bancorp Capital Management Ltd. from November 24, 1994 until June 30, 1998. Mr. Frost was next registered with Malcolm Silver & Co. Inc. (Malcolm Silver) as a salesperson in the category of limited market dealer from June 18, 1999 to August 23, 2000.
2. While registered with Malcolm Silver, Mr. Frost was the subject of terms and conditions requiring Malcolm Silver to submit quarterly reports to the OSC's General Manager, Registration, regarding Mr. Frost's sales and client service activity. These terms and conditions arose because Mr. Frost did not become registered in the category of non-trading officer despite using the title "Executive Vice-President" while at Noram Capital Management Inc. in 1998 and 1999.
3. Following his registration with Malcolm Silver, Mr. Frost became registered as a salesperson in the category of limited market dealer with Windstar Equities Ltd. (Windstar) from September 13, 2000 to December 20, 2001. Next, Mr. Frost became registered as a salesperson in the category of limited market dealer with Blue Heron Wealth Management Ltd. (Blue Heron), from January 15, 2002 to February 3, 2003, at which point Blue Heron changed its name to Avenue Wealth Management Ltd.
4. Mr. Frost was registered as a salesperson in the category of limited market dealer with Avenue Bancorp Ltd. (Avenue) from February 10, 2003 to April 1, 2004, when Avenue was suspended. From September 16, 2004 to December 31, 2004, Mr. Frost was once again registered as a salesperson in the category of limited market dealer with Windstar, from which he resigned in good standing.
5. Mr. Frost became registered with RDF, his own firm, on January 17, 2006. Mr. Frost was registered as a registered trading officer and director, a shareholder, and the designated compliance officer in the category of limited market dealer with RDF. With the coming into force of National Instrument 31-103 Registration Requirements and Exemptions (NI 31-103), Mr. Frost became registered as a dealing representative, CCO and UDP in the category of exempt market dealer with RDF, and has remained registered in those categories up to the pending suspension of RDF's registration.
6. Prior to the events involving the Newstart Canada Group of Companies (Newstart), which are described below, Mr. Frost had no history of disciplinary action involving the OSC except for the events giving rise to the terms and conditions on his registration while at Malcolm Silver in 1999 and 2000.
7. RDF does not hold any client assets and has discharged all financial obligations to its clients.
RDF's Distribution of Newstart
8. RDF first began distributing securities of Newstart on April 28, 2010, when Wendy Bickers became registered as a dealing representative with RDF. Ms. Bickers distributed Newstart securities to RDF clients. Mr. Frost did not personally distribute any Newstart securities.
9. Ms. Bickers was, at the time she became registered with RDF, and remains, a paid employee of Newstart.
10. Although Ms. Bickers was registered solely with RDF, Ms. Bickers provided clients with her Newstart business cards.
11. Ms. Bickers engaged in registerable conduct in Newstart's head office where RDF's signage was not clearly displayed.
12. Ms. Bickers dealt with investor clients using her Newstart e-mail address.
Failure to Supervise the Activities of RDF and its Dealing Representatives
13. During Staff's compliance field review, Mr. Frost was unable to answer certain of Staff's questions about Newstart, despite being a product distributed by RDF, of which Mr. Frost acted as CCO and UDP.
14. Mr. Frost admitted to Staff that he never reviewed the financial statements of Newstart Acceptance Inc. (NAI), one of the Newstart issuers, prior to RDF distributing securities of NAI to its investor clients.
15. RDF maintained no, or inadequate, Know Your Client (KYC) information for some of its investor clients to whom Ms. Bickers sold Newstart securities.
16. Even where RDF maintained adequate KYC information, RDF did not ensure that Newstart securities were suitable for its investor clients. For example, although Newstart securities were high risk investments, Ms. Bickers sold Newstart securities to an investor client who indicated a minimal risk tolerance.
17. Ms. Bickers did not ensure that all of RDF's investor clients who purchased Newstart securities qualified as "accredited investors" or for any other exemption from the prospectus requirement set out in National Instrument 45-106 Prospectus and Registration Exemptions.
18. In 23 of the 26 client files maintained by Ms. Bickers at the time of Staff's review, Mr. Frost received them and states that he reviewed them and responded to some electronically and others by telephone, but did not maintain evidence of his review and approval of the KYC information collected by Ms. Bickers.
19. Certain of the Newstart documents provided to RDF's investor clients did not disclose that Newstart securities were high risk investments. Mr. Frost states that Newstart revised these documents so as to disclose this fact following Staff's review.
20. The Newstart documents provided to RDF's investor clients did not disclose that the use of funds raised by Newstart issuers may include transfers to related parties at no interest and with no fixed terms of repayment.
Admissions by Mr. Frost
21. Mr. Frost admits that he failed to discharge his responsibilities as UDP within the meaning of s. 5.1 of NI 31-103. Specifically, Mr. Frost failed to supervise the activities of the firm that are directed towards ensuring compliance with securities legislation by the firm and each individual acting on the firm's behalf, and failed to promote compliance by the firm, and individuals acting on its behalf, with securities legislation.
22. Mr. Frost admits that he failed to discharge his responsibilities as CCO within the meaning of s. 5.2 of NI 31-103. Specifically, Mr. Frost failed to establish and maintain policies and procedures for assessing compliance by the firm, and individuals acting on its behalf, with securities legislation, and failed to monitor and assess compliance by the firm, and individuals acting on its behalf, with securities legislation.
23. Mr. Frost admits that, as a registered firm, RDF was responsible for ensuring that the products sold to all of its investor clients were suitable and that all of its investor clients qualified to purchase these products, but did not.
24. Mr. Frost acknowledges the seriousness of his failure to discharge his responsibilities as UDP and CCO, and accepts full responsibility for his actions.
Joint Recommendation
Staff, RDF and Mr. Frost jointly recommend that in light of the facts agreed to above, the appropriate sanctions to address the agreed facts in this case are that:
(i) RDF will consent to a suspension of its registration;
(ii) Mr. Frost shall be prohibited from seeking reinstatement of registration in the individual categories of UDP or CCO for a period of 4 years from the date this Memorandum is signed by counsel to RDF and Mr. Frost;
(iii) Mr. Frost shall be prohibited from applying for registration as a dealing representative until he successfully passes the Conduct and Practices Handbook examination and the Exempt Market Products examination, and until he furnishes Staff with evidence of the successful completion of these examinations;
(iv) subject to item (iii), Staff shall not recommend that an application by Mr. Frost for registration as a dealing representative with an appropriately registered firm in the category of exempt market dealer be refused unless conduct impugning Mr. Frost's integrity, proficiency or solvency occurs after the date of this joint recommendation; and
(v) Staff will recommend that Mr. Frost's reinstated registration be subject to strict supervision by his sponsoring firm for a period of 1 year, beginning with the date of reinstatement of registration. Mr. Frost will accept these terms and conditions on his reinstated registration.
Staff, RDF and Mr. Frost submit that their joint recommendation is reasonable in light of the sanctioning considerations identified by the Commission in decisions such as Re Al-tar Energy Corp. (2011), 34 O.S.C.B. 447.
Acknowledgements
1. Mr. Frost acknowledges, both in his own capacity and in his capacity as UDP of RDF, that if the Director accepts this joint recommendation:
a. He agrees to waive all rights to a full hearing, judicial review, or appeal of this matter on behalf of himself and on behalf of RDF; and
b. A copy of the Director's decision accepting this joint recommendation, which may include reference to all or part of the agreed statement of facts, may be published on the OSC website and in the OSC Bulletin;
2. Staff, RDF and Mr. Frost acknowledge that if the Director does not accept this joint recommendation:
a. This joint recommendation and all discussions and negotiations between Staff and counsel for RDF and Mr. Frost in relation to this matter shall be without prejudice to Staff, RDF or Mr. Frost; and
b. RDF and Mr. Frost will be entitled to all available proceedings in relation to Staff's recommendation contained in its letter of March 3, 2011 that his registration be suspended.
May 24, 2011
May 24. 2011
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Having reviewed and considered the agreed statement of facts, representations, and submissions contained in this memorandum, I, Erez Blumberger, in my capacity as Director under the Securities Act (Ontario):
√ Accept the joint recommendation of the parties, and hereby order that (i) Richard Derek Frost shall be prohibited from seeking reinstatement of registration in the individual categories of ultimate designated person or chief compliance officer for a period of 4 years from the date this Memorandum is signed by counsel to RDF and Mr. Frost, and (ii) Richard Derek Frost shall be prohibited from applying for registration as a dealing representative until he successfully passes the Conduct and Practices Handbook examination and the Exempt Market Products examination, and until he furnishes Staff with evidence of the successful completion of these examinations. I make this order on the express understanding that:
• RDF will consent to a suspension of its registration
• subject to item (ii) of my order, Staff shall not recommend that an application by Mr. Frost for registration as a dealing representative with an appropriately registered firm in the category of exempt market dealer be refused unless conduct impugning Mr. Frost's integrity, proficiency or solvency occurs after the date of this joint recommendation
• Staff will recommend, and Mr. Frost will accept, that Mr. Frost's reinstated registration be subject to strict supervision by his sponsoring firm for a period of 1 year, beginning with the date of reinstatement of registration
Do not accept the joint recommendation of the parties.
"Erez Blumberger"
Deputy Director, Registrant Regulation
Ontario Securities Commission