Ontario
Securities
Commission
Commission des
valeurs mobilières
de l’Ontario
22nd Floor
20 Queen Street West
Toronto ON M5H 3S8
22e étage
20, rue Queen Ouest
Toronto ON M5H 3S8
File No. 2018-31
IN THE MATTER OF
ROYAL MUTUAL FUNDS INC.
ORAL REASONS FOR APPROVAL OF A SETTLEMENT
(Subsection 127(1) and 127.1 of the Securities Act, RSO 1990, c S.5)
Hearing:
June 13, 2018
Decision:
June 13, 2018
Panel:
Janet Leiper
William J. Furlong
Commissioner and Chair of the Panel
Commissioner
Appearances:
Daniel Bernstein
For Staff of the Commission
Doug McLeod
For Royal Mutual Funds Inc.
ORAL REASONS FOR APPROVAL OF A SETTLEMENT
(Subsection 127(1) and 127.1 of the Securities Act, RSO 1990, c S.5)
The following reasons have been prepared for publication in the Ontario Securities Commission Bulletin, based on the reasons delivered orally in the hearing, and as edited and approved by the Panel, to provide a public record.
1The Panel would like to begin by thanking counsel for completing the settlement agreement and for their helpful submissions and thoroughness in dealing with the matter.
2On June 8, 2018 the Ontario Securities Commission (the Commission) issued a Notice of Hearing to consider whether it is in the public interest for the Commission to make certain orders in respect of Royal Mutual Funds Inc. (RMFI).
3RMFI is a member of the Mutual Fund Dealers Association of Canada (MFDA) and is registered with the Commission as a mutual fund dealer. RMFI is the principal distributor of proprietary funds, including the RBC Portfolio Solutions suite of mutual funds (RBC PS Funds) and other proprietary funds (the RBC Funds) and a participating dealer of non-proprietary mutual funds (the Third Party Funds), which accounts for a small proportion of RMFI’s gross sales.
4Between November 2011 and October 2016 (the Material Period), RMFI provided its representatives ten basis points more in commissions (the Enhanced Compensation) for the sale of units of RBC PS Funds than for the sale of units of Third Party Funds , in contravention of section 4.2(1) of National Instrument (NI) 81-105 Mutual Funds Sales Practices. As a result, RMFI made additional payments to its “Investment & Retirement Planning” (IRP) financial planners in the aggregate amount of $24,517,931; at an average of $5,500 per IRP per year.
5In addition, RMFI failed to establish, maintain and apply policies and procedures to establish a system of controls and supervision to ensure that it and each individual acting on its behalf complied with subsection 4.2(1) of NI 81-105 in contravention of section 11.1 of NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.
6The parties recommend settlement of the proceeding against RMFI on the following terms, which were the subject of a settlement agreement:
a. RMFI is reprimanded pursuant to paragraph 6 of subsection 127(1) of the Act1;
b. RMFI pay an administrative penalty in the amount of $1,100,000 to the Commission; and
c. RMFI pay costs of the investigation by the Commission in the amount of $20,000.
7The Panel understands from Staff that the payments to the Commission have been made.
8The role of the Panel is to decide whether the proposed settlement agreement as a whole, on the terms presented and agreed to, falls within an acceptable range and should be approved as being in the public interest.2
9Settlement proceedings serve the public interest in resolving regulatory proceedings efficiently, thus using enforcement resources prudently. Settlements allow registrants to have an opportunity to cooperate and demonstrate a willingness to redress regulatory breaches. Having regard to the conduct, the mitigating factors and prior regulatory decisions, we have concluded that the proposed settlement is reasonable and appropriate. For the reasons that follow, we will approve this settlement and make the order in the terms it contemplates.
10The seriousness of the conduct in this case arises from the $24,517,931 inducement paid to IRP financial planners over the Material Period.
11In considering whether it is in the public interest to approve the proposed settlement agreement, we note the following mitigating factors:
a. RMFI asserts that the Enhanced Compensation was intended to encourage the IRPs to recommend the RBC PS Funds in relation to both the RBC Funds and the Third Party Funds, rather than specifically target Third Party Funds which account for a small proportion of RMFI’s gross sales;
b. Staff do not allege any harm to clients as a result of investments in the RBC PS Funds during the Material Period;
c. The Enhanced Compensation had no bearing on the fees charged to clients for any of the RBC PS Funds, RBC Funds or Third Party Funds;
d. RMFI cooperated with MFDA and Staff during their investigation;
e. RMFI reported the Enhanced Compensation to Staff of the Commission following inquiries made by MFDA staff into RMFI’s compensation practices;
f. Effective October 28, 2016, RMFI eliminated the Enhanced Compensation incentive to its financial planners; and
g. RMFI engaged in an extensive review and testing of its systems of control and supervision, and developed enhanced procedures and controls designed to prevent the reoccurrence of a breach of subsection 4.2(1) of NI 81-105.
12This is the fourth settlement agreement to come before the Commission relating to breaches of NI 81-105. While the settlement agreements in Sentry Investments, Mackenzie Financial, and 1832 Asset Management focus on breaches of a different section of NI 81-105, the underlying purpose of the instrument remains the same – to ensure that the interests of investors remain uppermost in the actions of participants in the mutual funds industry.3
13As such, these settlement agreements assist us in deciding whether the proposed settlement agreement falls within an acceptable range and should be approved as being in the public interest. By focusing on the duration of the misconduct, the amount of the inducement paid, and the mitigating factors in particular, we conclude that the administrative penalty proposed in the settlement agreement falls within an acceptable range.
14While the duration of the misconduct of RMFI was similar to Sentry and 1832, the amount of inducement paid by RMFI as part of the Enhanced Compensation incentive was higher than in these cases. However, a significant mitigating factor specific to this case is that the Enhanced Compensation was advantageous relative to both the RBC Funds and the Third Party Funds, the latter of which accounted for only a small proportion of RMFI’s gross sales. This provides evidence that the intention of Enhanced Compensation was not predatory towards the Third Party Funds, but rather an incentive to recommend the RBC PS Funds. Indeed the substantial majority of the effect of the Enhanced Compensation would be borne by the RBC Funds for which RMFI is a principal distributor, not a participating dealer.
15Further, an administrative penalty in excess of $1,000,000 is appropriate and serves as a meaningful deterrent given the role of RMFI in the marketplace and the significant amount of inducement.
16Staff’s costs submissions of $20,000 reflect the fact that this settlement has saved the expense of a full hearing.
17For the reason provided, it is in the public interest for the Panel to approve the settlement agreement and make an order as requested by the parties.
18The order to be made today includes a reprimand of RMFI. To the representative of RMFI who is here today, Mr. Walker, this is a symbolic reprimand given that it is being issued against the company. Your presence here today allows the Panel to convey to RMFI the importance of these matters. We trust that RMFI, through its l directors, officers, and employees accepts the reprimand on that basis, and will continue make comprehensive, effective and sustained efforts to avoid a recurrence.
Approved by the Panel on this 13th day of June, 2018.
“Janet Leiper”
“William J. Furlong”
Janet Leiper
William J. Furlong
Footnotes
- Securities Act, RSO 1990, c S.5
- Rankin (Re) (2008), 2008 ONSEC 6, 31 OSCB 3303; 2008 ONSEC 6 at para 18.
- Companion Policy 81-105CP to NI 81-105, Part 2.2(1) and 2.2(2)(a)