Mutual Fund Dealers Association Considers Rule Change
On January 23, 2009, the Mutual Fund Dealers Association (the “MFDA”) issued bulletin #0354-P seeking comment regarding potential rule changes which would extend suitability obligations and know your client requirements to dealings in principle protected notes (“PPNs”). PPNs are defined in the bulletin as investment products offering potential returns based on the performance of an underlying investment and a guarantee that the investor will receive, on maturity, not less than the principle amount invested.
The bulletin was the result of a request from the Canadian Securities Administrators (the “CSA”) that the MFDA take appropriate action to ensure that KYC and suitability obligations apply to all dealings in PPNs by Approved Persons of its Members. The CSA confirmed that it expected the MFDA to enforce KYC and suitability obligations, irrespective of whether PPNs fell within the definition of “security” in all jurisdictions. The CSA had previously issued CSA Notice 46-303, which addressed KYC and suitability obligations in relation to PPNs.
British Columbia Court of Appeal Reduces Thow Penalty
On February 12, 2009 the British Columbia Court of Appeal allowed an appeal from a decision of the British Columbia Securities Commission (the “Commission”) and reduced an administrative penalty against Ian Thow from $6 million to $250,000. Mr. Thow had been a licensed mutual fund salesperson. In a previous decision of the Commission (2007 BCSECCOM627), it found that between January 2003 and May 2005 Mr. Thow had misappropriated a total of $8.7 million provided to him by clients for investment on their behalf.
In a subsequent decision (2007 BCSECCOM758), the Commission commented:
“This case represents one of the most callous and audacious frauds this province has seen. Thow preyed on his clients by offering them non-existent securities and instead using the funds to support his lavish lifestyle. He took their money and betrayed their trust. He has left a trail of financial devastation and heartbreak.”
The Commission made a number of orders to prohibit Mr. Thow from participating in the securities industry and imposed the $6 million administrative penalty mentioned above.
The British Columbia Court of Appeal considered the statutory regime and noted that the relevant provisions of the Securities Act (the “Act”) at the time of Thow’s contravention provided for an administrative penalty of not more than $250,000. Amendments which were enacted after the contravention of the Act but before the hearing provided for administrative penalties which did not exceed $1 million.
The British Columbia Court of Appeal reviewed the law relating to the retroactive or retrospective application of penalties. Previous cases had drawn distinctions between penalties, imposed in order to punish prior conduct, and sanctions (such as disqualification) which would protect the public from further misconduct by an individual who poses a particular risk.
The British Columbia Court of Appeal found that the Commission had erred by taking an overly narrow view of whether the $6 million administrative penalty was “punitive”. Although the penalty might not have been imposed as a punishment for Mr. Thow’s moral failings, it was designed to penalize Mr. Thow and to deter others from similar conduct. The measure went beyond merely preventing future misconduct.
Ontario Securities Commission Issues Decision in Norshield Asset Management Case
On February 3, 2009, the Ontario Securities Commission (the “Commission”) issued a decision dismissing an application by respondents seeking a stay of the proceeding against them on the basis of an alleged reasonable apprehension of bias.
The reasonable apprehension of bias allegedly arose after the CBC news program “Saturday Night” ran a segment entitled “Who Is Guarding Your Money”. In the course of that program a video clip was included in which Commission Chair David Wilson, referring to cases such as Norshield, noted that there is no “litmus test for honesty or dishonesty”. The respondents alleged that this statement amounted to an expression of opinion that the problem with Norshield was caused by the dishonesty of the individuals involved. Since the respondents were identified as the individuals who ran Norshield, this suggested a pre-determination of their dishonesty. It was alleged that the reasonable apprehension of bias extended to the panel assigned to the substantive proceeding relating to the alleged wrongdoing, as well as to other members of the Commission. It was submitted that although the Chair was not a member of the relevant hearing panel, a reasonable person informed of the facts would conclude that the views of the Chair are shared by the other members of the Commission.
The Commission ruled that the appropriate test to determine whether there was a reasonable apprehension of bias should be based on the standard of a reasonable person, informed of all the relevant circumstances. It reviewed the statutory and practical framework for proceedings before it and focused on the independence of panel members and the multi-functional roles of Commission members. It found that a person properly informed of those circumstances would not reasonably conclude that the comments of the Commission Chair suggested bias on the part of members of the hearing panel.