In early December, the Ontario Securities Commission (OSC) published reasons for its decision in Re Marek, a case examining, among other things, when a registrant-client relationship is created between two individual investors and a registered representative of a firm. The case is an important reminder to registrants that if they are interacting with investors who might reasonably believe that they are clients, the registrant should make clear to such investors whether or not that belief is correct.
The OSC decision flows from a request by Earl Marek for a review of a decision by a hearing panel of the Investment Industry Regulatory Organization of Canada (IIROC). The IIROC panel decided that Marek had contravened an IIROC rule when he facilitated off-book share purchases in Facebook for two investors (the “L Brothers”) without the knowledge or approval of Mr. Marek’s employer (“M Co”), an IIROC member firm. Their decision turned on whether the L Brothers were clients of Mr. Marek at the relevant time.
In brief, the L Brothers were referred to Mr. Marek by his son, who told them that Mr. Marek had a block of pre-IPO Facebook shares and wanted to sell some of them. The OSC found that, among other things, at the first meeting between Mr. Marek and the L Brothers in January 2012, he discussed the merits of investing in Facebook and recommended that they buy shares at the pre-IPO price, including instructing for payment of proceeds.
Following a hearing into their complaint, the IIROC panel fined Mr. Marek $50,000 and ordered that his registration be suspended for a year. He then applied to the OSC for a review of that decision.
The OSC’s Decision
The OSC noted that Ontario securities laws and IIROC rules do not define the term “client” or expressly answer the question when a client relationship arises. (As an aside, this missing definition has created problems in other areas of the securities law regime, including aspects of CRM2.)
The OSC concluded that a context-specific analysis was appropriate and found that all of the relevant factors pointed to the conclusion that the L Brothers were in fact Mr. Marek’s clients at the time of the Facebook transaction. In particular:
- At his first meeting with the L Brothers, Mr. Marek engaged in a registrable activity by giving advice as to the merits of a specific securities transaction;
- He told the L Brothers that the transaction would go through M Co. (his employer) and that M Co. would be paid an administrative fee;
- He orchestrated all steps of the transaction, including giving direction as to the payment of funds;
- He told the L Brothers that he hoped this was the beginning of a longer-term client relationship; and
- The L Brothers reasonably believed that they were clients of Mr. Marek, and there was no evidence that he did anything until June 2013 to disabuse them of that belief.
The OSC upheld the IIROC panel’s decision.
The OSC stressed that, when dealing with a registrant, an investor typically is at a disadvantage with respect to matters that are within the registrant’s expertise, including the processes involved in completing trades in securities. Investors, therefore, are vulnerable to unfair, improper and fraudulent practices. The principle of investor protection dictates that the investor should receive the benefit of any reasonable uncertainty in determining when a client relationship arises.
Although this case involved an IIROC Member firm, OSC’s approach and reasons are relevant for nonIIROC firms and individuals as well. It is important for registrants to know when someone becomes a client,