Advisor’s Costly Conflict: Court Upholds OSC’s $500K Penalty and Industry Ban against Advisor who inherited from elderly client

Summary

In Marrone v Ontario Securities Commission, 2024 ONSC 4750, the Ontario Divisional Court recently upheld a 2023 decision of the Ontario Securities Commission (OSC) sanctioning the appellant, a former mutual fund representative, for failing to disclose conflicts of interests involving an elderly client. Marrone had been appointed as the client’s power of attorney, alternate executor, and a beneficiary of her estate, ultimately inheriting $1.8 million after her death. The OSC determined that Marrone’s actions violated securities regulations and industry standards, leading to significant penalties.

Background

Aurelio Marrone was a mutual fund representative registered with a firm that was a member of the Mutual Fund Dealers Association of Canada (MFDA) (currently known as CIRO). One of his long-term clients was an elderly woman who had significant financial assets. Over time, Marrone developed a close friendship with this client. At some point, and at a time when the client was diagnosed with cancer, Marrone was appointed to several significant roles in managing her estate and financial affairs:

• Power of Attorney for Property: This role gave him control over her financial decisions.
• Alternate Executor of her will: If the primary executor could not fulfill their duties, Marrone would take over.
• Beneficiary of her estate: Under her will, Marrone was set to inherit a substantial sum of money.

The OSC and MFDA investigated Marrone’s conduct, focusing on whether he had:

1. Failed to disclose his conflict of interest to his employer and regulatory bodies.
2. Used his professional position for personal financial gain without proper disclosure or safeguards.
3. Breached securities industry rules that require advisors to act with fairness, honesty, and in their clients’ best interests.

The investigation concluded that Marrone had not informed his employer or regulators about his appointments in the client’s estate. This failure to disclose was a serious violation of industry rules designed to prevent undue influence and financial misconduct, especially when dealing with vulnerable clients.

The OSC tribunal ruled that Marrone’s actions violated industry rules and were a serious ethical breach. As a result, the tribunal imposed the following sanctions on Marrone:

• Permanent industry ban preventing Marrone from working in the financial sector
• $500,000 administrative penalty for his misconduct
• $85,000 in costs awarded to the OSC
• No order for disgorgement of the $1.8 million inheritance, as the tribunal declined the OSC’s request for restitution

The Ontario Divisional Court Decision

 Both Marrone and the OSC appealed aspects of the tribunal’s ruling to the Ontario Superior Court of Justice. Marrone’s appeal challenged the tribunal’s finding that he breached securities laws, arguing that the OSC lacked the authority to enforce Mutual Fund Dealers Association (MFDA) rules. He claimed the OSC should only have jurisdiction over breaches of Ontario securities law, not MFDA policies. He also disputed the severity of the $500,000 fine and the industry ban.

The OSC cross-appealed, arguing that the tribunal erred in not requiring Marrone to disgorge the $1.8 million inheritance obtained from the client’s estate. The OSC sought a reconsideration, asserting that Marrone had benefited financially from his misconduct and should be required to return the funds.

 The Court dismissed both appeals, affirming the tribunal’s findings and penalties.

 Jurisdictional Authority

The Court ruled that the OSC had jurisdiction to find Marrone in breach of his professional duties. It held that violations of MFDA rules and industry policies could still constitute a breach of Ontario securities laws. The Court emphasized that the OSC and the MFDA have overlapping jurisdiction, meaning the OSC could enforce broader ethical and professional standards.

Findings Against Marrone

The Court agreed with the tribunal’s reasoning, stating that its conclusions were well-founded in law and logic. The Court upheld the $500,000 fine as appropriate and reflective of the seriousness of Marrone’s misconduct. The Court confirmed Marrone’s permanent industry ban, reinforcing the need for financial professionals to maintain ethical standards.

Disgorgement of Inheritance

The Court upheld the tribunal’s decision not to require Marrone to return the $1.8 million inheritance. It found that the tribunal had carefully considered the issue and had discretion not to order restitution.

Key Takeaways:

• Financial professionals must fully disclose conflicts of interest when dealing with client estates or financial matters.
• Regulatory bodies like the OSC have broad jurisdiction over industry rules, even when they overlap with self-regulatory organizations like the MFDA.
• Courts will uphold significant penalties for professionals who violate ethical standards, including lifetime bans and large fines.
• Disgorgement of financial gains is not automatic, and tribunals have discretion in determining whether to order restitution.