The Investment Dealers’ Association (IDA), now Investment Industry Regulatory Organization of Canada (IIROC), investigated Golden Capital, an investment dealer, for the failure of three of its employees to identify the beneficial owners of securities being traded in investment accounts. The IDA requested hundreds of documents from the traders’ hard drives, but Golden Capital refused asserting that the request was unreasonably broad. The IDA then tried to discipline Golden Capital for failing to cooperate. Golden Capital argued that it did not need to provide the requested documents since the IDA had failed to act "reasonably."
The requirement to submit to the investigative authority of industry regulators has been controversial in part because regulators, unlike the police, can demand any information they want directly from those they regulate without having to first satisfy a judge or other neutral party that their demand is "reasonable."
At the time of Golden Capital’s objection, it was at least arguable that the regulator’s investigative discretion was limited by a "duty of reasonableness." This duty was first alluded to by the District Council of the IDA in a 1999 case called Re Derivative Services Inc., and has popped up and been elaborated on in panel decisions every few years since.
In Golden Capital, an IDA hearing panel found that the IDA staff had in fact acted reasonably. Golden Capital appealed to the BC Securities Commission. To its surprise, the Commission looked closely at the duty of reasonableness and the line of cases that had developed and ruled that the duty of reasonableness does not exist. The Commission concluded that there is absolutely no principled legal basis for imposing such a duty and that, as a policy matter, imposing reasonableness criteria would undermine the IDA’s investigatory powers.
Although Golden Capital was a British Columbia decision, the provincial commissions share cooperative oversight of IIROC and the Mutual Fund Dealers Association (MFDA) so the decision will likely be applied across Canada.
As the BC Securities Commission made clear, the only duty the regulators currently owe in conducting investigations is the general administrative law duty of good faith. To resist an investigation, it is no longer sufficient to show that the regulator has acted in an objectively unreasonable way in conducting its investigation or asking for information. Instead, a member wishing to resist information requests will have to prove that the regulator is acting in bad faith – which is a much higher standard.
That said, given that nobody had ever been successful in arguing that the IIROC or MFDA violated a duty to act reasonably, it is not clear that this decision will make a significant difference in practice. The bottom line is that when your regulator asks you to cooperate in an investigation, you will want to reconsider your response if it is any thing short of "of course, with pleasure!"