CORNER BROOK — A Corner Brook man terminated from his job as a financial planner in May 2010 may soon find himself barred from being licensed in the profession for good.
Arthur George Pretty is the subject of a disciplinary proceeding by the Mutual Fund Dealers Association of Canada, which is alleging professional misconduct in relation to at least six of his clients between March 2005 and July 2008.
At the time, Pretty was working in the Corner Brook and Deer Lake areas for Berkshire Investment Group, which later became part of Manulife Securities Investment Services Inc. in July 2008.
The Mutual Fund Dealers Association of Canada is a self-regulated entity recognized by the Securities Commission of Newfoundland and Labrador, not a trade association.
In addition to having the power to revoke Pretty’s eligibility to be licensed in the financial planning profession, the association can also levy fines for violations of its rules.
There are no criminal charges against Pretty, but there are three allegations against him related to his recommending and facilitating leveraged investment strategies for the half-dozen clients identified in the proceedings.
These strategies involved Pretty advising the clients to borrow large sums of money — ranging from $150,000 in one case to $650,000 in another — to purchase return of capital mutual funds.
The selling point was that the strategy would generate enough cash flow from the distributions paid by the mutual funds to cover the costs of the investment loans and provide additional amounts that could be used to either pay down the loans quicker, to buy big ticket items or to save for a children’s education fund.
Pretty would have received a commission for any mutual funds sold through him.
The six clients included two younger couples who bought into the strategy for the education fund, and three couples ranging in age from their 50s to their 70s and one 73-year-old who thought they would essentially get new cars, a recreational vehicle or home renovations for free.
The Mutual Fund Dealers Association of Canada has accused Pretty of not performing due diligence in learning more about the particular situations of his clients and ensuring the strategies were suitable for them. The association is also alleging Pretty misrepresented or failed to adequately explain the benefits, risks, material assumptions and features of the strategies they were being asked to buy into.
In its notice of hearing against Pretty, the association said these particular clients were unsophisticated investors who did not understand the high risks of borrowing money to invest in this manner. Most, if not all, of the clients had low investment risk tolerances and were dependent on Pretty for advice.
The older clients had limited time horizons in which they could recover from any investment losses or little resources to help them recover. One couple had significant savings, but had that money earmarked to pay for the roughly $3,000 per month in medical and home care their son required for the rest of their lives and beyond.
During the economic downturn of 2008, the clients experienced difficulty in repaying the loans. Some had to sell all or part of their investments. Some increased the mortgages on their homes, depleted their personal savings, had to return to the workforce or made significant changes to their lifestyle and standard of living.
According to the association, when the clients expressed concerns about the strategy, Pretty told them they were experiencing normal market fluctuations and advised them to stay the course.
When the downturn continued, the clients were eventually unable to contact Pretty and, in October 2008, began filing complaints with Manulife.
Manulife investigated the allegations against Pretty between November 2008 and April 2010, terminating him in May 2010.
The notice of hearing against Pretty also alleges that he failed to cooperate with Manulife staff as the company conducted its investigation into complaints made about him.
Later this week, Pretty is scheduled to have his first appearance before a panel of the association’s Atlantic Regional Council, at which a date will be set for a hearing.
Shaun Devlin, the Mutual Fund Dealers Association of Canada’s vice-president of enforcement, said it is still not sure if Pretty will participate in the first appearance or the hearing that he is entitled to have.
Pretty has been personally served notice of this week’s first appearance. If he does not participate, the proceedings can go ahead in absentia.
“If he is found to have done the things we say he did, we would likely be seeking a suspension or permanent prohibition from ever acting as an approved person for another mutual fund dealer again,” said Devlin.
According to the notice of motion, the association could possibly fine Pretty as much as $5 million per offence or three times the amount of profit he may have made.
Devlin said the association actually has no authority to collect the fines, but levies the fines for three reasons, the first of which is to show the public how seriously it views these sorts of allegations.
The second reason is that, from time to time, the association does ask the Securities Commission of Newfoundland and Labrador for the legislative power to collect on fines it levies.
Thirdly, the fines provide a safeguard against a person attempting to be licensed in a category other than that which they have been banned.
“We would ask the commission not to register that person until the fine has been paid, so it would have to be paid before they could ever get re-registered to work in the industry again,” said Devlin.
As for clients recovering their losses, Manulife’s efforts to compensate them is ongoing. They could also take their case to the Ombudsman for Banking Services and Investments or pursue the matter through a civil court.
The Western Star was unable to reach Pretty for comment as of press time Monday.