On May 8, 2012, an MFDA Hearing Panel of the Atlantic Regional Counsel (the “Panel”) released its reasons on what was essentially a motion to strike a Notice of Hearing issued by the Mutual Fund Dealers Association (“MFDA”) against the respondent, Gabriele Gentile (the “Respondent”). In the Notice of Hearing, MFDA Staff alleged that the Respondent, as branch manager, had failed to adequately supervise the activities within the branch when he failed to advise his head office compliance department of information that he had that an insurance agent working from the branch location (the “Insurance Agent”) had borrowed money from clients that had not been repaid. The Respondent’s position on the motion was that he had no obligation to escalate the reports he had received because the Insurance Agent was not an MFDA Approved Person.
At the hearing, MFDA Staff took the primary position that it was inappropriate to decide the issue raised by the Respondent on a preliminary motion and that argument on the matter should be left to the end of a full hearing of the merits.
In the alternative Staff argued that the test applicable on motions to strike in civil litigation was equally applicable to this motion, with which the Respondent took no issue. Based on the submissions of the parties, the Panel determined that the question it had to answer on the motion was: “… is it plain and obvious that [the Respondent] had no obligation to escalate [the information he had about the Insurance Agent]?”
The Panel determined that it was unable to answer this question at this stage in the proceedings, even assuming that the facts alleged in the Notice of Hearing were true. For instance, the Panel considered that it had no information as to whether the Respondent was acting in his capacity as Branch Manager, or in some other capacity on the insurance side of the business, when he began monitoring the Insurance Agent. It also had no evidence as to whether the Member had communicated to the Respondent the nature and extent of his duties and obligations as Branch Manager. The Panel concluded:
In our view, it is clear that Staff is not alleging that the Respondent “failed to supervise” [the Insurance Agent]. The allegation is that the Respondent, in his capacity as Branch Manger, failed to escalate to the Member’s Compliance Staff information acquired concerning potential financial harm to clients and other individuals occasioned by the activity of an unregistered individual … who was operating within the Branch.
Rule 2.5.3 … required the Branch Manager to “supervise the trading activities at the branch office.” If, as was the case here on the assumed facts, the Respondent became aware of matters which either did or could have had a deleterious effect on this activity, did he have an obligation to make further inquiries even though the impugned conduct was by a person in the position of [the Insurance Agent]? In our view, it is not “plain and obvious” that such an obligation could not exist.
As such, the Respondent failed to meet the test to strike the Notice of Hearing. In the circumstances, the Panel felt that evidence and submissions that would be made at a full hearing was needed for a full analysis of the nature and extent of the obligations of the Respondent and whether he had complied with those obligations.