IDA appeal has wider implications

The IDA has quietly launched an appeal of a Saskatchewan hearing panel decision that threatens to unravel the regulator’s power to discipline its former members. Although the case has attracted little public attention, it could force Canada’s securities commissions to act if the IDA loses.

Last month, a Saskatchewan Financial Services Commission hearing panel determined that the IDA does not have the right to bring disciplinary action against brokers after they have left the industry. At the heart of the matter is IDA By-law 20.7 which says “any member and any approved person shall remain subject to the jurisdiction of the association for a period of five years from the date on which such member or approved person ceased to be a member.”

The case, which dates back 10 years, involves two former IDA registrants and a third who is still in the industry, who appealed an IDA hearing panel decision to the SFSC. The IDA accuses Wade MacBain, Karl Neufeld and Frederick Smith of Matrix Financial in Saskatoon of violating several IDA by-laws between 1996 and 2000. The hearing panel allowed the appeal of MacBain and Neufeld, while allowing the IDA to proceed with its disciplinary proceedings against Smith.

The IDA is taking this case seriously. Jeff Kehoe, the association’s director of enforcement litigation, says this is the first of its kind that deals with this issue (although there are others that have questioned the scope of the IDA’s powers in passing). It is also a major setback for the IDA, which has been looking to the provincial securities commissions to back its enforcement efforts.

“This is a very important case for the IDA,” Kehoe says. “Our ability to effectively regulate depends on our ability to discipline people allegedly involved in misconduct, even if they are terminated from their member firm.”

In its appeal motion, the self-regulatory organization says the commission erred in law in finding that the association “has no statutory authority to regulate its former members.”

Currently, Alberta is the only jurisdiction in Canada that has granted authority to the IDA to collect sanctions from former members, which, Kehoe concedes, could mean similar cases like the one in Saskatchewan could pop up in other provinces. The IDA also has expanded powers in Nova Scotia, which treats the association’s disciplinary rulings as commission orders.

And other regulators are paying close attention to this case. “If this ruling holds up in Saskatchewan you may see some of the other jurisdictions contemplating whether they will need similar legislation [to the legislation in Alberta],” Bill Rice, chair of the Alberta Securities Commission, said after a recent breakfast meeting in Toronto.

Rice says he isn’t aware of any other members of the CSA who are resistant to following Alberta’s lead. “I think there is perhaps a sense that it wasn’t necessary,” he says. “But in light of the court case that may be reviewed.”

The IDA doesn’t have any outstanding penalties in Saskatchewan that could be impacted by the panel’s decision, however Kehoe wouldn’t speculate whether former members who have been disciplined after they left the industry would see this as an opportunity to recoup their fines. “You never know, he said, “I think it would be very remote that someone would make that argument.”

Clarifying the IDA’s position in the appeal, Kehoe says whether the IDA has the statutory authority is irrelevant because this is a matter of contract law. “Our position is we don’t need it [statutory authority],” he says. “One of the terms of that contract is to be bound by that contract even after you leave.”

But in the opinion of SFSC panel chair William Ready, the IDA’s contract doesn’t give the association the right to prosecute former members. In his decision, Ready relied on Chalmers v. the Toronto Stock Exchange, which found that the authority of domestic tribunals (including the IDA) is restricted to those who have voluntarily submitted to that authority.

“Since the IDA has no statutory authority to regulate its former members or former approved persons, By-law 20.7 and even former By-law 20.21 are ultra vires [beyond powers]” he wrote in his February decision.

One of the cases the IDA will cite involves Robert Kyle, a former broker who has been fighting the IDA since 1998. In this case, which has been in and out of the courts numerous times, the Ontario divisional court confirmed that the IDA does have jurisdiction over its past members, although Kyle has applied for leave to appeal.

However, Kehoe notes that this case doesn’t completely follow the script of the one it is currently contesting in Saskatchewan. Kyle’s case, he says, focuses on the IDA’s ability to impose sanctions on former members, where as the SFSC case questions the association’s right to go through the steps to prosecute someone.

In Kyle’s opinion the differences are inconsequential. And just as the IDA will use his case in the Saskatchewan, Kyle plans to refer the SFSC decision in his case. (The IDA also filed its own appeal of Kyle’s case on March 6). “The SFSC decision exposes the IDA,” Kyle says. “It said what investors have said for a very long time that they don’t have the power to collect fines and penalties…because their contract is unenforceable.”

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(03/10/06)

Mark Brown

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