A former mutual fund representative has been fined and banned by regulators for failing to disclose the conflicts of interest that arose when an elderly client named him as the sole heir of her estate; however, Ontario’s Capital Markets Tribunal declined to order that he return the inheritance.
The tribunal granted most, but not all, of the sanctions sought by enforcement staff of the Ontario Securities Commission (OSC) against Aurelio Marrone, a former rep with IPC Investment Corp., after finding he “acted unfairly, dishonestly and in bad faith towards his vulnerable client,” which was conduct that breached the rules of the Mutual Fund Dealers Association of Canada (MFDA) and the policies of his dealer, amounting to a breach of securities law.
That conclusion stemmed from its findings that in 2017 Marrone failed to report conflicts of interest involving his client’s estate “while she was clearly vulnerable” — including being named a beneficiary and alternate executor, and accepting a power of attorney.
At a hearing on sanctions, the OSC sought a permanent ban on Marrone, a $500,000 penalty and an order for costs of $100,000, and that he be ordered to disgorge the inheritance, which the regulator valued at almost $1.9 million.
The tribunal ordered the permanent ban and the $500,000 fine, but imposed a slightly smaller costs order of $85,000 and declined to order any disgorgement, after concluding that his inheritance didn’t come as a result of a breach of securities law.
In its decision on sanctions, the tribunal noted that the ruling that Marrone breached securities law did not find that he was named sole beneficiary of his client’s estate as a result of that breach.
“Marrone was found to have breached Ontario securities laws because, in part, he failed to immediately disclose to IPC the conflict or potential conflict of interest arising from his being designated as sole beneficiary and alternate executor under [the client’s] will and being appointed attorney for property,” it said. However, it noted that there is “nothing in the merits decision that supports a conclusion” that the failure to disclose the conflict led to him being named as a beneficiary.
While the tribunal noted that disclosing the conflicts to his dealer may have put his inheritance at risk, that is “very different than a finding on a balance of probabilities that Marrone’s failure to disclose the conflict accounts for or resulted in” him being named the sole beneficiary, the panel said.
“Based on the available record, we are not in a position to know or decide what would have transpired had Marrone immediately disclosed [the client’s] testamentary gift to IPC,” it said. “Nor can we know or decide what [the client] would have done and whether she might have revoked the bequest had she been advised of the conflict.”
According to the decision, OSC staff argued that the failure to disclose the conflict is the only reason that it’s impossible to know what would have happened had the conflict been disclosed.
“Staff submitted that it would be regulatory mischief if a disgorgement order is not made and Marrone is entitled to retain benefits under [the client’s] will, especially given that Marrone could not properly have accepted money from [the client] when she was alive,” the tribunal said.
Yet, the tribunal maintained that it still wasn’t persuaded it could order disgorgement in this case.