The Ontario Securities Commission (“OSC”) recently granted an application by Enforcement Staff of the Investment Industry Regulatory Organization of Canada (“IIROC”) from a sanction decision in a case involving a breach of the IIROC by-laws, and in doing so, imposed a greater penalty than was imposed by the IIROC Panel at first instance.

IIROC Decision

In Re Pariak-Lukic, an IIROC Panel determined that Lucy Marie Pariak-Lukic made recommendations to her clients concerning their off-book investments in Lakepoint, a company owned by her husband, without the knowledge or approval of her employer firm. Furthermore, the Panel found that Ms. Pariak-Lukic failed to make any reasonable inquiries to satisfy herself that the issue of the securities of Lakepoint to her clients was exempt from prospectus requirements under securities laws or that the distribution had been properly qualified for a prospectus exemption. As a result, the Panel found that these actions constituted conduct unbecoming and not in the public interest contrary to by-law 29.1.

In its sanction decision, the Panel ordered the following:

  1. a fine of $50,000;
  2. close supervision by Ms. Pariak-Lukic’s employer firm, for six months from the date of this decision and in the event that she recommends investments in any financial product other than listed securities or firm-approved investments, she must inform the firm;
  3. a requirement that Ms. Pariak-Lukic rewrite and pass the Canadian Securities Course and the Conduct and Practices Handbook examinations within one year from the date of this decision; and
  4. $45,000 in costs.

While IIROC Staff requested the imposition of a two-year suspension for Ms. Pariak-Lukic (in addition to the above-noted sanctions), the Panel declined to impose one, noting that the role of the securities regulator is not to punish past conduct, but rather:

“is to protect the public interest by removing from the capital markets- wholly or partially, permanently or temporarily as the circumstances may warrant- those whose conduct in the past leads us to conclude that their conduct in the future may well be detrimental to the integrity of those capital markets. We are not here to punish past conduct…”

Indeed, according to the Panel, the misconduct was not a result of dishonesty or acting in bad faith, but rather the result of an inexcusable and incomprehensible lack of understanding of the nature of the investments as securities. As such, retaking the Canadian Securities Course and a period of close supervision for six months was, in the view of the Panel, an appropriate remedy. Moreover, the IIROC Panel noted that it was unlikely that Ms. Pariak-Lukic’s misconduct would be repeated, and that she would be more cautious and questioning in the future whenever any potential investment activity out of the ordinary course might arise.

OSC Decision

IIROC Staff made an application to the OSC for a hearing and review of the IIROC penalties. Staff argued that the Panel had erred in law and had proceeded on an incorrect principle because without a period of suspension, the sanctions imposed would not provide a sufficient general deterrent which should have been the Panel’s primary concern.

In its decision, the OSC found that the IIROC Panel did, in fact, err in not imposing a suspension and overturned the IIROC Panel’s decision on the penalty and imposed a two year suspension.

In its reasons for overturning the penalty and imposing the suspension, the OSC noted the following:

There must be Consistency between IIROC and the OSC

The OSC noted that the IIROC Panel erred in its approach to determining the appropriate sanctions for participation in an illegal distribution of securities. Specifically, the IIROC Panel erred in concluding that the conduct must be deliberate for a suspension to be imposed. Indeed, this is inconsistent with the approach taken by the OSC, which has held that significant sanctions will be imposed for unregistered trading in securities and participation in the illegal distribution of securities, and has consistently imposed market bans for such conduct. As stated by the OSC, “Industry expectations of the consequences of a breach of the Act should not significantly differ because a respondent appears before IIROC and not the Commission.”

Trauma is Not a Mitigating Factor

The OSC noted that General Principle 3.5 of the IIROC Sanction Guidelines refers to the attendant stigma attached to a regulatory proceeding, not trauma. As such, “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…” Furthermore, the OSC found that any trauma should not be considered as mitigating a suspension particularly in light of the breaches of the Securities Act, as well as the significant losses suffered.

This decision marks another example of the OSC imposing increasingly strict penalties for breaches of the Securities Act, whether in its own hearings or in reviews of decisions by other regulators.