Lawyer finds gaping hole in securities law
The Investment Dealers Association threw the book at Stephen Taub three years ago when it announced a series of allegations against the Toronto broker for failing to spot "manipulative or deceptive" trades by a shadowy cast of clients with criminal or regulatory histories.
The sweeping accusations were the culmination of one of the longest investigations ever by the IDA, a self-regulatory organization struggling to shed its reputation as a timid overseer of thousands of brokers, traders and other registered members. The regulator changed its name in 2006 to the Investment Industry Regulatory Organization of Canada (IIROC).
Mr. Taub and his lawyer Robert Brush, of Toronto's Crawley Meredith Brush LLP, mounted a spirited and improbable legal defence that has exposed disturbing gaps and contradictions in Canada's loosely stitched patchwork of provincial securities laws.
IIROC governs registered representatives across the country, but because securities laws are governed by the provinces, its powers are derived from often varying provincial securities acts.
Mr. Brush argued IIROC was not entitled to govern his client because the Securities Act of Ontario does not specifically grant self-regulatory agencies the power to discipline the province's former members. Mr. Taub was untouchable, he argued, because the broker had resigned from Research Capital Corp. in 2004 and was no longer a member of the self-regulatory organization.
Nice try, but no cigar, said a council of the IDA, which dismissed Mr. Taub's motion in 2006. The Ontario Securities Commission backed up the dismissal in 2007.
It is hard to think of any securities regime in the industrialized world that would drop-kick charges because a defendant had opted out of the profession. But Canada, as Mr. Brush and Mr. Taub learned to their delight last week, is not like other countries.
In a decision that has quickened the hearts of white-collar defence lawyers across the nation, a split panel of three judges on the Divisional Court of Ontario ruled last week that Mr. Brush was right. There is no specific language in the Securities Act of Ontario, the judges ruled, that entitles IIROC to regulate former members.
The offending passage in Ontario's Securities Act is a small, four-line paragraph known as Section 21.1 (3), which Mr. Brush can almost recite by heart. The clause recognizes the rights of self-regulating organizations such as IIROC to "regulate the operations and the standards of practice and business conduct of its members."
What the passage does not say is "former." The absence of that lone word, the divisional court ruled, meant the province's Securities Act "cannot be stretched to include the discipline of former members without doing violence to the meaning of the statute."
If the act was poorly drafted, Mr. Brush said in an interview, self-regulatory organizations such as IIROC cannot fix the oversight by "stretching interpretations of the act." Instead, he said, the law should be "fixed by amending legislation to fill the gap."
For Alex Popovic, head of enforcement at IIROC, the court decision is a painful reminder that "the whole financial regulatory sector is fractured too much in Canada."
The investment regulator and the Ontario Securities Commission said they will seek leave to appeal the court's decision. OSC executive director Peggy Dowdall-Logie said in a statement if the ruling stands, "investor protection would be weakened" because brokers will be able "avoid the consequences of breaching" by quitting.
The most vocal critic of this bizarre legal reality is Mr. Justice James Carnwath, who dissented on the majority decision by Madam Justice Helen Pierce and Mr. Justice Charles Hackland.
"Allowing a member to resign and therefore escape sanction for improper acts committed while a member of a [self-regulatory organization] can hardly be said to protect investors. ... Certainly, the public would have less confidence in capital markets where sanctions for misconduct could be avoided by a simple letter of resignation," Judge Carnwath wrote.
Experts said the resignation strategy will likely work in all provinces except for Saskatchewan and Alberta. These two provinces eliminated the loophole for former brokers in recent years by amending their securities acts. In Alberta, the act says "any former member" can be regulated by a self-regulatory organization. In Saskatchewan, regulators have up to two years to launch proceedings against former members.
For Phil Anisman, a Toronto lawyer who has tirelessly championed a national securities regulator, the Taub decision is an "inevitable outcome" of a fragmented regulatory system. "This shouldn't have happened. Despite all the efforts of the provincial regulators to achieve harmony, these kinds of regional dislocations continue to pop up."