OSC Fines Mutual Fund Manager $1.5 Million in Relation to Prohibited Payments and Gifts Violations
The Ontario Securities Commission has ordered Sentry Investments Inc. (“Sentry”) to pay a $1.5 million administrative penalty for payments and gifts improperly made to dealing representatives as part of a recent Settlement Agreement [PDF]. Sentry’s Chief Executive Officer and Ultimate Designated Person also received sanctions under the OSC’s Order. This settlement is particularly noteworthy because it is the first OSC proceeding that has addressed prohibited payments and gifts made by an investment fund manager, as well as the lack of internal oversight which allowed these violations to occur.
Sentry, through its predecessor companies, has been a mutual fund manager since 1997 and manages over $18 billion in client assets. In the Settlement Agreement entered into, Sentry agreed that it had:
(i) “failed to meet the minimum standards of conduct expected of industry participants in relation to certain sales practices”;
(ii) failed to “have an adequate system of controls and supervision in place around its sales practices to ensure compliance with [legislative requirements]”; and
(iii) failed to “maintain adequate books, records and other documents to demonstrate Sentry’s compliance with [legislative requirements].”
The legal landscape
Investment fund managers are prohibited from making payments or providing non-monetary benefits to dealing representatives in connection with the distribution of securities, except in certain prescribed circumstances. As the Settlement Agreement sets out, the legislative regime was developed to “discourage sales practices and compensation arrangements that could be perceived as inducing dealers and their representatives to sell mutual fund securities on the basis of incentives they were receiving rather than on the basis of what was suitable for and in the best interests of their clients.”
Sentry and Driscoll’s improper gifts
One of the key impugned events in the Sentry matter was a mutual fund conference that Sentry hosted at a mansion in Beverly Hills in September 2015. Sentry provided guests with gifts of Dom Perignon, jewelry from Tiffany & Co., and engraved silver cufflinks. Guests were treated to rounds of golf, wine tastings, or, in some cases, helicopter rides. Sentry admitted that these gifts failed to comply with legislative requirements as they were not of minimal value and not promotional in nature. Additionally, on various other occasions between 2011 and 2016, Sentry’s spending on non-monetary gifts to dealing representatives exceeded $4,000 per dealing representative.
Former CEO Sean Driscoll was sanctioned for his role in providing a top performing dealing representative with Montreal Formula One tickets in 2015 and 2016, worth approximately $28,000. Driscoll acknowledged that his conduct in this regard “breached Ontario securities law” and that he had “acted contrary to the public interest”. As part of the settlement, Driscoll was ordered to resign from any and all director or officer positions held at any investment fund manager and any Sentry affiliate. Driscoll was further prohibited from holding any such role for a period of two years, and from acting as an ultimate designated person or Chief Compliance Officer of any investment fund manager or other registrant for a period of five years. Both Driscoll and Sentry’s Chief Compliance Officer had resigned from their roles in December 2016.
A number of mitigating factors were mentioned in the Settlement Agreement, including, (i) the fact that Sentry itself, not its investment fund products, paid for the benefits at issue; (ii) the performance of Sentry’s investment fund products had not improved as a result of the impugned conduct; and (iii) a third party consultant had been retained to assist Sentry in enhancing its compliance program to ensure consistency with securities laws, and an undertaking had been provided to the OSC in this respect.
With respect to Driscoll’s conduct, the OSC considered it a mitigating factor that a special committee promptly investigated the matter and reported its findings to the OSC. The special committee had also recommended that Driscoll pay Sentry a $100,000 reparation payment, which had in fact been paid.
This settlement underscores the importance of having internal checks and balances to ensure compliance with securities regulations in respect of monetary and non-monetary benefits. In particular, investment fund companies ought to have clear policies and guidelines setting boundaries and limits for monetary and non-monetary benefits. What’s more, these policies and guidelines should include mechanisms to ensure regular oversight and reporting. Finally, this settlement illustrates the growing trend of securities regulators seeking higher financial penalties on a voluntary basis.