Recent case law confirms that now more than ever before dealers and advisors registered with self-regulatory organizations have little choice but to comply with investigators.
The rules and by-laws of both IIROC and the MFDA specifically provide that members under investigation must co-operate,1 and both organizations have authority to impose hefty fines on members who refuse, neglect or fail to do so. Nevertheless, members under investigation have attempted to argue that special circumstances absolve them of their obligation to cooperate. However, one recent case has wiped out one of the most promising of these: Just leave the Industry!
The Investment Dealers Association ("IDA"), IIROC’s predecessor, suspected that Stephen Taub, a registered representative, had engaged in conduct unbecoming and launched an investigation into his activities. However, Taub had ceased to be a registered representative a year before the investigation was launched. Taub brought a motion before the hearing panel arguing that the IDA lacked jurisdiction to proceed against him because he was no longer a registered representative.
The IDA Hearing Panel disagreed with Taub and found that the IDA has jurisdiction from its by-laws which provide that it can investigate and discipline former members for 5 years. Taub appealed to the OSC. The OSC reviewed the Hearing Panel’s decision and agreed with it. Taub further appealed to the Divisional Court; this time, he was successful. This Court concluded that the IDA did not have jurisdiction over ex-members and overturned the earlier decisions because the definition under the Securities Act did not specifically include "former" members.2 This ruling immunized former investment advisors and other registrants, and left the door open for registrants to avoid anticipated discipline by resigning their memberships.
Finally, the matter was appealed to the Court of Appeal which put a stop to that exemption and held that former members can in fact be investigated and disciplined by their regulators.3 The Court of Appeal extended this ruling to the MFDA as well.
Although the Court of Appeal’s ruling in Taub settles the legal question of whether IIROC and the MFDA can investigate and discipline former members, the question of whether such discipline will have any significant practical effect remains open. Suspensions are obviously not practical penalties in such circumstances, leaving fines as the only alternative. Taub himself recently agreed to pay a fine of $50,000 as part of a settlement agreement with IIROC. Will the SROs turn to courts to enforce fines imposed by regulatory panels in instances where former members resist payment? That remains to be seen!