Saskatchewan regulator rules against IDA

Regulators in Saskatchewan have ruled that the IDA does not have the right to bring disciplinary action against brokers after they have left the industry. This is a major setback for the IDA, which has been looking to the provincial securities commissions to back its enforcement efforts.

The case dates back 10 years, and involves two former IDA registrants, and another who is still in the industry. The trio appealed an IDA hearing panel decision to the Saskatchewan Financial Services Commission. According to the SFSC panel, chaired by William Ready, the IDA does not have the authority to regulate former members either under its by-laws or in contract.

The decision effectively nullifies the IDA’s by-law 20.7 in that province which states that “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 panel’s decision would seem to contradict an Ontario ruling on a case involving former registrant Robert Kyle. In that case, after see-sawing between the courts and the commission, the Ontario divisional court finally confirmed that the IDA does have jurisdiction over its members for a period of five years after the decision, although Kyle has applied for leave to appeal.

“These are not laws, they are terms of a contract between the IDA and its members,” Kyle insists, saying he will be adding the Saskatchewan ruling to his case.

“We are disappointed obviously,” says Alex Popovic, vice-president of enforcement for the IDA. The Saskatchewan hearing panel relied heavily on a case involving Chalmers v. the Toronto Stock Exchange which debated the reach of domestic tribunals, but Popovic feels the Saskatchewan panel misinterpreted that decision.

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 SFSC hearing panel in its judgment notes that the Chalmers case states that “the only effective sanction a domestic tribunal can impose on its members is expulsion.” The panel went on to conclude, “So far as MacBain and Neufeld are concerned the IDA cannot now expel them because they are no longer approved persons.” As a result, the panel allowed the appeal and stayed the disciplinary proceeding against them.

Smith, who is still an approved person, wasn’t as lucky. The panel denied his appeal and his request for a stay of the disciplinary proceedings against him.

MacBain faces a litany of IDA charges. He is alleged to have provided services to clients in jurisdictions where he was not registered to do so, having recommended unsuitable investments and strategies to clients, having made recommendations to clients without presenting them with a balanced picture and having improperly amended client documentation.

As for Smith and Neufeld, who held senior posts in Matrix at the time, they are accused of failing to supervise the activities of MacBain.

If the IDA was successful in disciplining the three registrants, Popovic says they could have faced some stiff fines. Under the old by-laws, which were in effect at the time of the alleged offence, the penalties can be up to three times disgorgement of any profits realized, in addition to a $1 million fine per allegation, and a ban from being registered with the IDA. Although the IDA would still face the challenge of making them pay since it does not have the court authority to seize assets, except in Alberta.

The decision puts the IDA in a difficult position. “I suspect we are going to see a flurry of others making similar applications until the Saskatchewan decision is either overturned or confirmed,” says Popovic. Since the SFSC applies only in Saskatchewan, it’s too soon to say how much impact it will have in the rest of Canada. “I think the Ontario divisional court decision trumps the Saskatchewan commission decision,” Popovic says. “We’ll have to wait and see.”

Popovic also believes that the SFSC extended its jurisdiction beyond Saskatchewan, since the brokers also provided services to clients in B.C. and the Northwest Territories. “That would be an appeal point.”

The IDA has until March 6, 2006 to decide whether to appeal.

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

(02/10/06)

Mark Brown

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