On January 17, 2012, IIROC released a decision in respect of an application brought by Penson Financial Services Canada Inc. (“Penson”). The Hearing Panel was constituted to conduct a disciplinary hearing brought against Loretta Carbonelli and Gerald Trevor Conway (collectively, the “Respondents”), employees of Evergreen Capital Partners Inc. (“Evergreen”). Penson acted as a Type 2 Carrying Broker for Evergreen. Prior to the hearing against the Respondents, Penson, which was not a party to the proceedings, brought an application to obtain an order prohibiting IIROC enforcement staff (“Staff”) from disclosing to the Respondents materials over which Penson claimed legal privilege.

At the heart of the materials was a report prepared by Navigant Consulting, Inc. entitled Report on the Financial Exposure to Evergreen Capital Partners Inc. (the “Report”) and transcripts of examinations conducted by Staff of representatives of Penson on matters related to the Report. The Report was obtained by counsel for Penson and was delivered to Staff in the course of an investigation into the adequacy of the internal controls existing at Penson at the relevant time. Penson provided the Report to Staff but had its counsel indicate to Staff that the Report was subject to legal privilege and that Penson would disclose the report on the condition that Staff would, among other things, maintain the confidentiality of the Report and not disclose the Report to any third party, except to the extent that Staff determined that the disclosure was otherwise required by law or would be in furtherance of the discharge of its duties and responsibilities. Staff agreed to these terms.

The IIROC Hearing Panel (“Panel”) granted Penson standing to argue its application. The Panel held that there was no IIROC Rule of Procedure that dealt with Penson’s request for standing, but noted this was a narrow and special circumstance that involved two very important competing interests. Absent the claim of privilege, the Panel would not have granted standing.

With respect to Penson’s application prohibiting disclosure of the Report, the Panel permitted disclosure of the Report and the related transcripts, but imposed restrictions on the use of the materials, such as prohibiting the Report from being used for any collateral or ulterior purpose. The Panel permitted disclosure of the Report for the following reasons:

  • Given that the threshold for finding relevancy is low, the Report was relevant to Staff’s allegations against the Respondents and triggered Staff’s duty to disclose;
  • There was no suggestion that Staff, in making the decision to disclose the Report, was acting in bad faith or made a clear error;
  • Staff made a determination that disclosure of the Report was “required by law or would be in furtherance of the discharge of its duties and responsibilities.” The terms of the agreement between Staff and Penson regarding the Report permitted disclosure of the Report in these circumstances;
  • The evidence was unclear as to whether there was a factual basis that could support a claim for privilege in respect of the Report; and
  • It is unlikely that disclosure in the given circumstances of the case would discourage cooperation in future IIROC investigations.  

This decision calls into question whether claims of privilege over an investigation report are supportable, particularly once disclosure is made to IIROC.