COR#96/045

John H. Frank, for Commission staff. John Philip MacKenzie Williams and Aristedes Mellios.

      This is a hearing under sections 144 and 144.1 of the Securities Act, S.B.C. 1985, c.83.  A Notice of Hearing was issued on November 17, 1995, alleging that:

-		John Philip MacKenzie Williams, in August and December 1993, represented himself to a member of the public as a mutual fund salesperson, contrary to sections 38 and 39 of the Act, and traded mutual funds without registration, contrary to section 20 of the Act; and
-		Aristedes Mellios participated in the unregistered trading activity of Williams by processing a trade on his behalf in August 1993 and attempting to process a trade on his behalf in December 1993; traded on behalf of a client he did not know and without determining the client's investment needs, contrary to section 43 of the Securities Regulation, B.C. Reg. 270/86 (now section 48 of the Securities Rules, B.C. Reg. 479/95); and falsely represented to his employer that he had known the client for one year and had determined the client's investment needs prior to trading on behalf of the client.

2.   BACKGROUND

      Williams joined Prudential Assurance in 1990, where he sold life insurance. From August 23, 1991, to April 16, 1993, he was also registered as a mutual fund salesperson for Strata Distribution Services Limited, a subsidiary of Prudential.  He left Prudential in April 1993 and joined Equinox Financial Group, where he became a financial planner and sold life insurance.  Since joining Equinox, Williams has not been registered in any capacity under the Act.

      Mellios was also employed with Prudential, where he first met Williams.  While at Prudential, he was registered to sell mutual funds, but only during December 1991.  In March 1992, Mellios moved to Ascot Financial Services Limited, where he was registered as a mutual fund salesperson from March 4, 1992, to December 1, 1993.  He subsequently joined Equinox as an insurance salesperson, on Williams' recommendation. Since joining Equinox, Mellios has not been registered in any capacity under the Act.

      Williams met Darrell Zbeetnoff in 1992, while Williams was with Prudential, and they had various discussions concerning insurance, RRSPs and mutual funds.  Williams advised Zbeetnoff at that time that he was qualified to do both insurance and mutual fund sales.  In May 1993, Zbeetnoff purchased life insurance through Williams, while Williams was employed by Equinox.  The documentation respecting the life insurance purchase contains the following notation, in Williams' writing: "RRSP investments to be handled under new agent". Zbeetnoff testified that he understood Williams to be the new agent.

      In July 1993, Zbeetnoff advised Williams that Mrs. Zbeetnoff's RRSP was up for renewal and that they wanted to invest it in different mutual funds.  During July and August 1993, Zbeetnoff and Williams had several meetings, during which Williams advised Zbeetnoff concerning which mutual funds they should invest in, and provided prospectuses for various funds. Zbeetnoff placed orders for purchases of several funds, on his wife's behalf, with Williams.

      Since Williams was no longer licensed to sell mutual funds, he contacted Mellios, who agreed to meet with him and the Zbeetnoffs to complete the paperwork. The night before the meeting, Mellios had to cancel. Williams and Mellios agreed that Williams would complete the paperwork and Mellios would submit it through Ascot, which he did.

      In December 1993, Zbeetnoff again approached Williams regarding the purchase of mutual funds for Mrs. Zbeetnoff's RRSP.  Williams completed the order forms, obtained Mrs. Zbeetnoff's signature and again contacted Mellios to place the order for him. When Mellios attempted to place the order through Ascot, he found that he was unable to complete the purchase because his registration as a mutual fund salesperson had expired on December 1, 1993.  Ascot then contacted both the Zbeetnoffs and the Commission with respect to the transaction.  In a letter to the Commission from the Vice President of Ascot, J. Isaacs, dated January 7, 1993 (sic), Isaacs stated:

Mr. Zbeetnoff was informed of the situation with Mr. Mellios' license.  Mr. Zbeetnoff advised me he did not know a Mr. Mellios and stated his transaction was completed with a Mr. John Williams.  He confirmed Mr. Williams presented himself as an agent for Ascot and was of the understanding the paperwork would be processed through Ascot accordingly.  Mr. Zbeetnoff did not receive a prospectus or financial statement.

      During his testimony, Mellios was asked by counsel for Commission staff what the obligation to "Know Your Client" meant to him.  Mellios replied:

	This is where I did my mistake.  I should have went and met the Zbeetnoffs but I couldn't at that time.  And to Know Your Client, we have to fill out this form, which we're told by the committee, which states that we are to the best of our knowledge not trying to take their money away and put it into another type of investment that will actually be worse than what it is already.
	I mean, the client form was filled out.

      Mellios also testified that he did the transactions as a favour to Williams, even though he knew it was wrong.  He had understood that he would be doing only one or two transactions until Williams again got registered to sell mutual funds.

3.   FINDINGS

Williams

      Section 20(1) of the Act provides that no person shall trade in a security unless he or she is registered as a dealer or as a salesperson, partner, director or officer of a registered dealer and is acting on behalf of that dealer. Section 1(1) of the Act defines a trade to include

-		the receipt by a registrant of an order to buy or sell a security, and
-		any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of a trade.

      Williams played a key role in Mrs. Zbeetnoff's purchase of mutual fund securities in August 1993, and aborted purchase of mutual fund securities in December 1993.  Williams met several times with Zbeetnoff, advised him regarding the mutual funds they should invest in, provided prospectuses for various funds, accepted orders from Zbeetnoff on Mrs. Zbeetnoff's behalf, completed the paperwork concerning the purchases, and gave the paperwork to Mellios so that Mellios could complete the transactions.  We find that Williams received orders to buy securities from Zbeetnoff and therefore traded in securities.  In addition, Williams carried out other activities, such as providing advice, that were acts in furtherance of these trades and therefore trades in themselves.  At the time Williams did these trades, he was not registered in any capacity under the Act, though he was clearly required to be.  Therefore, we find that Williams traded in securities without being registered, contrary to section 20(1) of the Act.

      Section 38 of the Act prohibits a person from representing that the person is registered under the Act unless the representation is true and, in making the representation, the person specifies their category of registration under the Act and  Regulation.  Section 39 of the Act prohibits a person who is not registered from directly or indirectly holding himself out as being registered.

      When Williams and Zbeetnoff first met in 1992, Williams told Zbeetnoff that he was registered as a mutual fund salesperson.  In April 1993, Williams joined a new firm and ceased to be registered under the Act.  In May 1993, Williams noted on Zbeetnoff's life insurance documentation that Zbeetnoff's RRSP investments would be handled under a new agent, who Zbeetnoff testified he understood to be Williams. During their meetings in 1993, Williams gave Zbeetnoff advice concerning various mutual funds, provided him with prospectuses, and accepted orders from him.  Williams asserted in a letter to Commission staff that he told Zbeetnoff at this time that he was no longer registered to sell mutual funds and that Zbeetnoff's orders would have to be processed through another person. He made a similar assertion in a subsequent interview with Commission staff.   However, Williams did not repeat this assertion in his testimony.  As well, Zbeetnoff was clear in his testimony that Williams did not tell him this. Zbeetnoff's testimony is supported by the letter from the Vice President of Ascot to the Commission, which refers to Zbeetnoff's statement that "his transaction was completed with a Mr. John Williams", who had "presented himself as an agent for Ascot".  This is consistent with Williams' testimony that he told the Zbeetnoffs that they were a client of Ascot.

      We accept Zbeetnoff's testimony in this regard and conclude that Williams said and did nothing that would have led Zbeetnoff to believe that Williams was no longer registered as a mutual fund salesperson under the Act.  We also conclude that Williams knew that Zbeetnoff believed him to be so registered and yet he did nothing to correct Zbeetnoff's misapprehension.  Therefore, we find that Williams falsely represented that he was registered under the Act, contrary to section 38 of the Act, and, while not registered, held himself out as being registered, contrary to section 39 of the Act.

Mellios

      In 1993, section 43(1) of the Regulation required a dealer to make enquiries concerning each client:

-		to establish the identity and, where applicable, credit worthiness of the client and the reputation of the client if information known to the dealer causes doubt as to whether the client is of good reputation, and
-		to determine the general investment needs and objectives of the client and the suitability of a proposed purchase or sale for that client.

      In addition, we find that Mellios' conduct, in knowingly facilitating Williams' contravention of section 20(1) of the Act, was prejudicial to the public interest.

4.   DECISION

      The courts and the Commission have recognized in several decisions that the Act is aimed at regulating the market and protecting the public, and that a cornerstone of the regulatory structure established by the Act is the requirement that people advising and trading in securities on behalf of others be registered.  This is intended to ensure that the investing public receives expert advice from competent and ethical people.  See: Brosseau v. Alberta Securities Commission, [1989] 1 S.C.R. 301; Gregory & Co. v. Quebec Securities Commission, [1961] S.C.R. 584; In the Matter of The Atlantic Trust Management Group [1995] 14 BCSC Weekly Summary 54; and In the Matter of Robert Anthony Donas [1995] 14 BCSC Weekly Summary 39.

      Williams knowingly contravened the registration requirements of the Act.  As well, he falsely represented that he was registered and held himself out as being registered, also in contravention of the Act.  We therefore consider it to be in the public interest to order:

1.		under section 144(1)(f) of the Act, that Williams be reprimanded and that, as a condition of any future registration under the Act, Williams take and pass the course or examination required for his category of registration, even if he had completed the course or examination prior to the date of this decision;
2.		under section 144.1 of the Act, that Williams pay an administrative penalty of $1,000 on or before May 31, 1996; and
3.		under section 154.2 of the Act, that Williams pay one half of the costs of or related to the hearing, in an amount to be determined following further submissions from the parties.

      Though we have found Mellios' conduct to be prejudicial to the public interest, we have not determined that he contravened a provision of the Act or the Regulation. Therefore, we are unable to order Mellios to pay an administrative penalty under section 144.1 of the Act, as requested by Commission staff.  However, we  consider it to be in the public interest to order:

1.		under section 144(1)(f) of the Act, that Mellios be reprimanded and that, as a condition of any future registration under the Act, Mellios take and pass the course or examination required for his category of registration, even if he had completed the course or examination prior to the date of this decision; and
2.		under section 154.2 of the Act, that Mellios pay one half of the costs of or related to the hearing, in an amount to be determined following further submissions from the parties.