Rep fined after OSC rules that regulatory panel erred

A self-regulatory organization (SRO) hearing panel erred when it failed to order financial sanctions against a mutual fund representative who admitted to misappropriating money from a client, the Ontario Securities Commission (OSC) has ruled.

An OSC hearing panel upheld an appeal filed by staff of the Mutual Fund Dealers Association of Canada (MFDA), ordering that a former rep with Royal Mutual Funds Inc., Omar Enrique Rojas Diaz, should have been fined by the SRO panel charged with sanctioning his misconduct.

In a disciplinary case brought by the SRO, Diaz entered into an agreed statement of facts with MFDA staff, admitting to misappropriating approximately $39,270 from a client’s line of credit and using the money for his own benefit.

While he admitted the misconduct, the two sides couldn’t agree on a penalty. That was left to an SRO hearing panel, which ruled that he should be permanently banned but declined to impose a fine on the basis that this would amount to punishing past conduct.

MFDA staff appealed the ruling, arguing that the panel erred and seeking a fine of $52,270.

The OSC sided with the SRO’s enforcement staff, ruling that “the MFDA panel erred in law, proceeded on an incorrect principle, and adopted and applied a perception of the public interest that is inconsistent with that of the commission by deciding not to order disgorgement or any financial penalty against the respondent.”

In its decision, the OSC also said, “By permitting the respondent to retain the benefit of his misconduct, the MFDA panel ordered a penalty that failed to satisfy the protective and preventative objectives of securities regulation and that failed to achieve the desired level of specific and general deterrence that is required when applying sanctions.”

Additionally, the commission found that the panel erred “by treating the bank’s reimbursement to the client and the fact that the bank, not the client, ultimately suffered the loss, as mitigating factors.”

And it found that, in setting sanctions, the panel improperly considered the rep’s motivation for misappropriating the money — because he was in financial difficulty rather than to support a lavish lifestyle, along with his inability to pay a financial penalty.

Ultimately, the OSC ordered that Diaz be fined $52,270 — comprising $32,270 in disgorgement (he repaid $7,000 of the $39,270 that was misappropriated) and an additional $20,000 as an administrative penalty.

“The seriousness of the misconduct and the principles of public protection and deterrence require a more onerous financial penalty than simply disgorgement,” the OSC said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.