Tribunal calms SRO worries about enforcement disclosure

The Canadian Investment Regulatory Organization (CIRO) can use evidence that it uncovered in an enforcement investigation in a separate but related proceeding without getting an order from Ontario’s Capital Markets Tribunal, the regulatory panel ruled.

In a previously confidential hearing, the self-regulatory organization asked the tribunal for relief to allow it to use certain evidence — bank records of a former mutual fund rep that it obtained during an investigation — in a separate proceeding against another rep.

The allegations relate to alleged violations of SRO rules involving “stealth advising.”

In 2022 an SRO hearing panel found that a former rep with Sterling Mutuals Inc., Muhamad Asghar Sadiq, misappropriated money from several clients. As a result, he was permanently banned, fined $750,000, and ordered to pay almost $50,000 in costs.

In a separate case, CIRO alleged that another rep opened accounts and processed transactions for four clients that were actually advised by Sadiq.

Those allegations have not been proven.

CIRO sought permission from the tribunal to disclose confidential evidence collected in the Sadiq investigation — banking records that it obtained via a summons issued by the Ontario Securities Commission (OSC) — in the second case.

According to the tribunal, CIRO sought permission to disclose the evidence as part of the other enforcement proceeding out of an “abundance of caution,” as it didn’t want to violate privacy provisions of the securities law.

These concerns arose in the wake of the Bridging Finance Inc. receivership proceeding, which saw the tribunal rule that the OSC shouldn’t have disclosed compelled evidence in court filings without first obtaining an order allowing disclosure.

In this case, both CIRO and OSC staff submitted that there was no need for CIRO to get an order allowing disclosure in its own proceedings, and the tribunal agreed, ruling that an order is not required.

“The facts in [the Bridging case] are clearly distinguishable from the present case,” the tribunal said in its decision, noting that case “focused on the balancing between the legitimate interest of the regulator, and the privacy interests of compelled witnesses, and how that is reflected in legislation and jurisprudence.”

In the CIRO case, the tribunal found that “the rational connection between the investigation orders and the CIRO proceeding is clear,” and that using and disclosing the evidence in a CIRO enforcement proceeding “are clearly permitted uses of the documents by CIRO.”

Had the tribunal found that a disclosure order was necessary, the ruling could have disrupted CIRO enforcement proceedings by requiring separate litigation to obtain a disclosure order before its own enforcement proceedings could go ahead, in certain cases.