On July 15, 2008, the Ontario Superior Court (Divisional Court) ("Divisional Court") held that the IDA ("IIROC") did not have disciplinary authority over former members. Based on the specific wording of the provisions of the Ontario Securities Act (the "Act") which define IIROC’s regulatory and disciplinary powers vis-à-vis its members, the Divisional Court allowed an appeal by Stephen Taub on the basis that the Act does not authorize self-regulatory organizations (SRO’s) that have been recognized by the OSC to discipline former members. Mr. Taub worked in the securities industry from 1988 until he resigned in September 2004. At all material times, Mr. Taub was a registered representative with the Toronto branches of Brant Securities Ltd. and Research Capital Corp., both IIROC Member firms. Since his resignation, Mr. Taub had not been registered with IIROC and testified that he had no intention of returning to an occupation regulated by IIROC.
In October 2005, IIROC commenced disciplinary proceedings against Mr. Taub, alleging breaches of IIROC’s rules and by-laws. Specifically, he was alleged to have breached by-law 29.1 by engaging in conduct unbecoming, in that he failed in his role as gatekeeper and facilitated "trading activity that appeared to be or was consistent with market manipulation or deception". The Notice of Hearing contained a description of already questionable clients of Mr. Taub with criminal or regulatory histories, whose account activity should have caused a reasonable registrant to investigate further. Among those on the list were a fugitive accused of participation in a bank embezzlement scheme worth $88 million, and others who were implicated in bank fraud, money laundering and violating SEC Orders.
Mr. Taub took the position that the Act did not enable IIROC to discipline former representatives, even though by-law 20.7 provides that the Association shall have continuing jurisdiction over former members in investigative and disciplinary proceedings for a period of five years following cessation of membership. In support of this position, Mr. Taub relied on the fact that the Act does not mention in s. 21.1 (3) that the SRO can regulate former members. Rather, it states, "A recognized self-regulatory organization shall regulate the operations and the standards of practice and business conduct of its members and their representatives in accordance with its by-laws, rules, regulations, policies, procedures, interpretations and practices." (Our emphasis added.)
Mr. Taub brought a motion relating to jurisdiction over former members. On September 5, 2006, the District Council dismissed Mr. Taub’s motion and concluded that IIROC retains jurisdiction over former members. Mr. Taub appealed this decision to the OSC, which dismissed the appeal.
Mr. Taub appealed the decision of the OSC to the Divisional Court, which ruled that IIROC was not entitled to discipline Mr. Taub, since the legislation could not be interpreted so as to extend to former members. The Court noted that this is not the case in Alberta and Saskatchewan, where the relevant legislation explicitly gives SRO’s such authority. In a dissenting opinion, Carnwath, J. stated "the public would have less confidence in capital markets, where sanctions for misconduct could be avoided by a simple letter of resignation."
The Ontario Securities Commission and IIROC are currently seeking leave to appeal the decision of the Divisional Court. Recently, proceedings commenced by IIROC against two former members, Paul Van Benthem and Anthony Petriccione, were quashed on the basis of the Divisional Court’s decision in Taub.
More recently, the Court of Appeal for British Columbia released its decision in Investment Dealers Association of Canada v. Dass, a case with material facts that were almost identical to those in Taub. The Court of Appeal upheld the British Columbia Securities Commission (the "BCSC") decision that IIROC retained jurisdiction over former members for five years pursuant to its by-laws. The unanimous court held that s. 26(1) of the British Columbia Securities Act (substantially the same as s.21.1(3) of the Act) did not authorize IIROC (or any SRO) to regulate their members, but rather imposed a duty on them to do so. As such, the omission of the words "former members" did not constitute a limitation on IIROC’s jurisdiction.
The Court of Appeal noted that, not only was the BCSC’s decision reasonable using the Dunsmuir analysis, but any contrary outcome would have been unacceptable:
… a decision that the IDA could not discipline former members despite their agreement to submit to IDA jurisdiction for five years after termination of their membership would undermine the regulatory scheme. A non-complaint member would be able to avoid any oversight of his conduct simply by resigning and any general deterrence to be gained by findings of misconduct and consequential penalties would be lost. Such a result would diminish investor protection and damage public confidence in the regulatory system.
IIROC Hearing Panel – By-law 19.6 and Golden Capital Securities Ltd.
The importance of cooperating with IIROC regarding investigations cannot be overemphasized, and the failure to do so may result in significant sanctions.
In November 2007, an IIROC Hearing Panel found that Golden Capital Securities Ltd. had, since November 2006, refused or failed to provide IIROC with free access to records that were reasonably required by IIROC staff for the purpose of ongoing investigations, contrary to IIROC’s by-laws.
On April 19, 2008, the Panel rendered its penalty decision, imposing a fine of $75,000 and costs of $76,760 against Golden Capital Securities Ltd.