Allegations of inadequate supervision against a fund dealer’s branch manager highlight how Canada’s system of financial services regulation, fragmented as it is by geography and industry sector, can create challenges to effective oversight and investor protection.
The more that responsibilities of regulation are divided up, both by province and industry silo, the more numerous the gaps in the overall framework and the greater the risk that clients can fall through those gaps. For example, a person banned in one province for securities-law violations could try turning up in another province to ply his or her trade. Or he or she could resort to the exempt market, or cross into the insurance business. The result is greater risk to consumers and a bigger headache for regulators.
These risks are illuminated by a case that is underway before the Mutual Fund Dealers Association of Canada. In December, the MFDA initiated an enforcement case against Gabriele Gentile, a branch manager in the Halifax office of Desjardins Financial Security Investments Inc.
According to the MFDA’s notice of hearing, the regulator alleges that between March 2007 and October 2008, Gentile failed to act after discovering that an individual working out of Desjardins’ Halifax office under Gentile’s supervision was allegedly borrowing money from clients. The MFDA’s notice claims that Gentile violated MFDA rules by failing to report the activity to the dealer’s head-office compliance staff; in turn, this prevented compliance staff from investigating the incidents. The case has not yet been heard and the allegations have not been proven.
The twist in the case is that the person doing the alleged borrowing was not a licensed mutual fund rep but was an insurance agent who didn’t work for the fund dealer but was employed by an affiliated firm (Desjardins Financial Security Independent Network) at the same location.
Gentile is seeking to have this case dismissed before it even gets to a hearing. According to material filed by Gentile in support of his motion to have the case against him dismissed, his supervisory obligations extend only to the employees of the fund dealer; Gentile is arguing that the actions of insurance agents are properly under the oversight of the province’s superintendent of insurance, not the MFDA – and thus not Gentile’s responsibility.
Gentile also is arguing that neither the MFDA nor its members are responsible for regulating the conduct of people who aren’t reps, employees or agents of a mutual fund dealer: “In view of this, it would be bizarre for the panel to find that branch managers are responsible to the MFDA or the manager’s [dealer] for regulating the conduct of a person who is not an approved person, employee or agent of the [MFDA] member.”
Moreover, Gentile’s filing says that accepting the premise that the MFDA can discipline a branch manager for failing to supervise an insurance agent who is not employed by a fund dealer would “validate an incursion by the MFDA into the territory of another financial services regulator.”
The MFDA’s Atlantic regional council, which is hearing the case, has not yet ruled on Gentile’s motion, and MFDA staff have yet to file their response to Gentile’s argument. (That response is due by March 30, after Investment Executive goes to press.)
Shaun Devlin, vice president of enforcement at the MFDA, says the case is not about a branch manager’s duty to supervise an individual. Rather, he says, it’s about whether there’s a duty to report to head office “situations where, to his knowledge, clients and other individuals are suffering ongoing harm as a result of activity being conducted by another individual at the branch premises.”
The next hearing in the case is scheduled for April 5, to consider whether the motion to dismiss the allegations can be heard in writing or if there needs to be an oral hearing (which, if it’s deemed necessary, would be slated for April 19).
Another twist is the fact the insurance agent in question also has a notable history with regulators. According to the MFDA’s notice of hearing against Gentile, the insurance agent who was allegedly borrowing money from clients was Bruce Schriver, who had worked as an insurance agent in the Desjardins office until he was terminated in July 2009.
Schriver was banned for life from the mutual fund industry by the MFDA in February 2010 after the MFDA found that Schriver had borrowed money from clients when he was licensed as a mutual fund rep and working for a different firm, Select Money Strategies Inc.
In that case, the MFDA found that Schriver had: borrowed money from clients in 2003 and 2004, which was paid back but without the interest he had promised them; and between 2000 and 2004, he had redeemed more than $100,000 in client assets that was not returned to clients. In addition to the lifetime ban, Schriver was fined $200,000 and $10,000 in costs. He has yet to pay that fine, the MFDA reports.
Prior to MFDA’s action in 2010, the Nova Scotia Securities Commission had accused Schriver in 2004 of improperly funnelling $2.7 million of client money to Portus Alternative Asset Management Inc., the Toronto-based hedge fund firm that was ultimately shuttered by regulators in 2005. Schriver’s case related to the Portus action was settled in 2006, with him agreeing to a two-year registration ban, a $12,500 fine and $6,000 in costs.
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