OSC, IIROC to appeal Taub decision

Regulators are not giving up their fight to discipline former members of self-regulatory organizations (SROs). Both the Ontario Securities Commission (OSC) and the Investment Industry Regulatory Organization of Canada (IIROC, formerly the IDA) want to overturn an Ontario court decision from last week that effectively prevents SROs from holding hearings into the actions of former members.

Since 2005, Stephen Taub, a former securities broker with Toronto branches of Brant Securities and Research Capital Corporation, has been fighting the IDA, asserting its by-laws have no jurisdiction over him as a former member. Taub had voluntarily relinquished his membership in the fall of 2004, well before the IDA announced it would hold hearings into his alleged misconduct, in the fall of 2005.

On July 15, two of three Ontario Divisional Court justices agreed, and overturned a 2007 OSC decision that upheld the right of the IDA to pursue Taub.

The ruling by Divisional Court is being viewed as a slap in the face to securities regulation in Ontario, since Taub stood accused of helping shady clients who had past records of securities infractions to deceptively manipulate the market on certain securities. Unless the decision is overturned, his alleged infractions will go unchallenged.

Both the OSC and IIROC say they will seek leave to appeal the decision to the Ontario Court of Appeal. The OSC has declined to comment further on their decision to appeal, only offering up the following statement in a release.

“The Commission is concerned that investor protection would be weakened if a registered representative could avoid the consequences of breaching SRO rules by resigning from his or her SRO member firm,” says OSC executive director Peggy Dowdall-Logie. “An SRO’s ability to take disciplinary action against former members and former representatives of its member firms is fundamental to effective investor protection and the functioning of an effective SRO.”

At the heart of the Divisional Court’s decision was the wording of section 21.1 (3) of the Ontario Securities Act, which states, “A recognized self-regulatory organization shall regulate the operations and the standards of practice and business conduct of its members and their representatives in accordance with its by-laws, rules, regulations, policies, procedures, interpretations and practices.”

There is no mention of regulating “former” members. When Taub first directly challenged the IDA hearing panel’s jurisdiction to discipline him, the Ontario District Council of the IDA ruled that its bylaws, which Taub had consented to follow when he was a member, gave them jurisdiction to discipline former members for five years after they relinquished membership.

When Taub appealed that ruling to the OSC in 2007, an OSC commission panel upheld the IDA’s hearing panel’s previous ruling, offering the following reasoning in its decision.

“By-law 20.7 provides that the Association shall have continuing jurisdiction over former members in investigative and disciplinary proceedings for a period of five years following cessation of membership. In our view, the fact that the Applicant resigned from the Association does not bar the IDA from taking disciplinary proceedings against him under its by-laws. Accordingly, there is no error in law which would warrant the Commission overturning the decisions of the District Council.”

The two judges who ruled in favour of Taub asserted that it’s the wording of the Ontario Securities Act that subjects non-members of SROs to security regulation.

“Recognition of a self-regulatory organization under the Act makes the organization subject to the limitations and obligations of the Act. This legislative intent is reflected in s. 21.6 of the Act, which requires that by-laws of self-regulatory organizations must not contravene Ontario securities law. Regulation of ‘members’ rather than ‘former members’ is such a limitation,” they wrote in their majority decision.

In the dissenting opinion offered by Justice James Carnwath, he warned that the public interest for sound securities regulation is being undermined by the ruling.

“The interpretation of s. 21.1(3) advanced by Mr. Taub would undermine the IDA’s ability to discipline its members, and would be inconsistent with its obligations to protect the public interest,” he wrote. “Certainly, the public would have less confidence in capital markets, where sanctions for misconduct could be avoided by a simple letter of resignation.”

Alex Popovic, vice president of enforcement for the IIROC, says he can’t comment on the nature of the Taub decision since it is a matter before the courts. He does highlight however that fallout of the decision only affects Ontario.

In other provinces such as Alberta, the IIROC has the ability to enforce its decision and levy fines. In Ontario, the IIROC penalties are not legally binding for former members.

“In Alberta we have a statutory right to file a decision of the court of Queen’s Bench. Basically, our decisions are deemed to be civil decisions of the Court of Queen’s Bench, and as such we can get any types of orders we realize on the decision,” Popovic says. “The decision itself is an interpretation of the Securities Act in Ontario. That doesn’t mean somebody else won’t raise it elsewhere. The decision itself only has weight in Ontario.”

The full Ontario Divisional Court decision can be accessed here.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(07/23/08)

Mark Noble