The Ontario Securities Commission (OSC) recently imposed harsher sanctions than were ordered by a panel of Investment Industry Regulatory Organization of Canada (IIROC) following a contested proceeding. The OSC’s decision has important implications in enforcement proceedings before IIROC.

The IIROC Decision (no suspension)

After a contested hearing, an IIROC Panel determined that Lucy Lukic, a registrant at an IIROC member firm, recommended off-the-book investments to her clients.[1] Lukic had recommended securities in an investment fund that was owned and promoted by her husband, a fact that was disclosed to her clients. However, the securities were sold without a prospectus or exemption, and without the knowledge and hence, supervision of her employer. This constituted conduct unbecoming of a registrant and not in the public interest.

Lukic was ordered to (a) pay a $50,000 fine, (b) pay $45,000 in costs, (c) be subject to close supervision from her employer for 6 months, and (d) re-write and pass an industry examination. IIROC did not suspend Lukic, as sought by IIROC Staff.[2]

The OSC Decision (2 year suspension)

In Re Lucy Marie Pariak-Lukic,[3] the OSC considered IIROC Staff’s application for a hearing and review of the IIROC Panel’s sanctions decision.[4] Generally, IIROC Staff argued that the IIROC Panel erred by not imposing a suspension on Lukic. IIROC Staff took the relatively rare step of appealing a decision of its own panel to have a suspension ordered.

The OSC determined that a 2 year suspension was necessary in the circumstances, overturning the IIROC Panel’s decision to impose no suspension. The OSC recognized that in general, it accords deference to factual determinations central to an IIROC Panel’s specialized competence, including on sanction matters. In this case, the OSC’s decision turned on the following three factors:

  • Consistency of sanctioning: The same sanction should be imposed for the same misconduct, regardless of whether a respondent appears before IIROC or the OSC. The IIROC Panel had not sufficiently considered that Lukic had participated in the illegal distribution of securities, and that the OSC routinely imposed a suspension for such misconduct.[5]
  • A suspension is not unusual for innocent but egregious misconduct: A registrant’s misconduct can lead to suspension even if it was not deliberate or undertaken in bad faith. The OSC cited its decision inRe Sterling Grace,[6] where it disagreed with the proposition “that only matters of integrity merit periods of suspension” and, found that in “appropriate circumstances, a lack of proficiency may require regulatory responses beyond that of education and supervision.” In Lukic, it was significant that the IIROC Dealer Member Disciplinary Sanction Guidelines recommends a period of suspension for breaches of theSecurities Act and in egregious cases involving large value high risk off-book distributions.[7]
  • Trauma experienced by registrant as a result of enforcement hearing is not a mitigating factor: The IIROC Panel erred in law by considering the “trauma” suffered by Lukic from her participation in the IIROC hearing as a factor to be weighed in assessing sanctions. The OSC noted that the embarrassment and cost which a respondent incurs in connection with a hearing should not be viewed as mitigating factors in determining an appropriate sanction[8] — especially when (as in Lukic) there are breaches of the Act and significant losses to investors.[9] Lukic, her husband and clients lost around $3 million from their investments.

Takeaways

The OSC’s decision in Lukic has important implications for respondents in enforcement proceedings before IIROC.

  1. Prior to Lukic, respondents had successfully argued that suspensions were not warranted when their misconduct was not tainted by dishonesty or bad faith. In such circumstances, respondents argued that a suspension would cause disproportionate prejudice to their careers. After Lukic, an IIROC Panel may be reluctant to accept these arguments.
  2. Staff’s willingness to appeal an essentially favourable decision rendered after a 7 day contested hearing[10] has policy implications. An appeal by IIROC of a dismissal of disciplinary charges is one thing. Pursuing a higher penalty is perhaps another.
  3. Respondents often settle because they lack resources to contest enforcement proceedings. Lukicshows another advantage of settlements. Staff will not appeal those.

On June 30, 2015, the OSC stayed its decision in Lukic pending a potential appeal.[11]