Canada: Brokers’ Report (October 2007)

Last Updated: November 12 2007
Most Read Contributor in Canada, November 2017

By Carole J. Brown, with the assistance of Tamara Despres and Marc Whiteley, articled students-at-law in the Ottawa offices of Borden Ladner Gervais LLP.
Edited by David Di Paolo

THE COURTS – Paciorka v. TD Waterhouse, [2007] O.J. No. 2890 On July 24, 2007, Nolan J. of the Ontario Superior Court of Justice released his decision in Paciorka v. TD Waterhouse dismissing an investor’s claim for damages against TD Waterhouse ("TD") after it made three credit sell-outs on the investor’s margin account.

The plaintiff had opened a margin account with TD and signed a margin agreement. On three separate occasions, TD made credit sell-outs on the plaintiff’s account and on each occasion, sent a demand letter to the investor setting out the number of days the investor had to deposit either cash or stocks to cover the margin call. The investor never responded to the demand letters and did not make the requested deposits. On each occasion, TD sold more shares than required to cover the margin call and in two instances, sold the plaintiff’s shares prior to the deadline date set out in the demand letter.

The plaintiff alleged that TD had breached (1) industry standards and was negligent in its handling of his account by failing to honour the deadline provided for in the demand letters and by selling more securities than was necessary to cover the margin calls; (2) its statutory duties pursuant to the Securities Act to "deal fairly, honestly and in good faith" with him; and (3) its fiduciary obligations to him as an investor.

With respect to the alleged breach of industry standards and negligence in its handling of the investor’s account, the Court stated that "the law respecting reasonable time for payment and notice does not extend to circumstances involving margin accounts and margin calls". The Court determined that although TD had a public relations policy of attempting to notify customers when a margin call was being made, this was not required where the margin agreement specifically provided that the brokerage firm was entitled to act in its sole discretion. Nolan J. reiterated that the courts give deference to these types of provisions because of "clear policy concerns respecting the position of brokers who must be able to act quickly to preserve their own financial position". Further, the nature of the securities and the volatility of the market required that agreements, such as the margin agreement in this case, be respected. The Court recognized that the obligation to make a demand and give reasonable notice before acting that is typically imposed on a creditor is narrowed with margin accounts where the security is publicly traded securities.

As for the allegation by the plaintiff that TD failed to discharge its statutory obligations to "deal fairly, honestly and in good faith", the Court held that, at all material times, TD had been in compliance and acted in accordance with the margin agreement entered into with the plaintiff. In reaching this conclusion, the Court found that TD had the authority to take the market action it did and acted fairly in relation to Mr. Paciorka.

Finally, the Court also rejected the plaintiff’s claim that TD breached its fiduciary relationship with the plaintiff and determined that Mr. Paciorka, a knowledgeable investor with over 20 years experience investing, was "by no means vulnerable to the investment world." In addition, the margin agreement did not impose an obligation on TD to provide the plaintiff with investment advice and overall, the relationship created by the margin account did not create the requisite degree of trust, confidence or reliance to elevate it to one that could be characterized as being fiduciary. As a result, TD was held not to be in breach of any fiduciary obligation to Mr. Paciorka.

THE COURTS - Bahcheli v. Alberta (Securities Commission), [2007] 158 A.C.W.S. (3d) 154

On May 18, 2007, the Alberta Court of Appeal ruled that the Investment Dealers Association ("IDA") could not appeal one of its own decisions to the Alberta Securities Commission ("ASC"). In the events leading up to Court’s ruling, the IDA had charged Mr. Bahcheli, a registered representative with a securities dealer, with breaching an IDA by-law by "engaging in business conduct or practice unbecoming and not in the public interest". In late 2003, a hearing panel of the Alberta District Council of the IDA heard and subsequently dismissed the charges. The IDA filed an appeal with the ASC.

At the ASC, Mr. Bahcheli brought an application challenging the IDA’s ability to appeal the decision of its own District Council. The ASC held that the IDA could bring the appeal, finding that there was a separation of roles within its structure, making the bodies sufficiently separate to allow the IDA to have standing. On that basis, it distinguished this case from legal authority which holds that a decision-maker is not entitled to appeal its own decision absent an express statutory provision permitting it to do so. It further held that the IDA was a person "directly affected" by the decision of the District Council, within the meaning of section 73(1) of the Alberta Securities Act, R.S.A. 2000, c. s-4 (the "Act") and therefore was entitled to appeal its decision. Mr. Bahcheli appealed to the Alberta Court of Appeal.

The questions before the Court of Appeal were two-fold: 1) whether the Act recognized the division of roles and responsibilities inside the IDA such that a person directly affected could include the decision-maker itself, and 2) whether the IDA could be said to be "directly affected" under the Act.

In its reasons, the Court held that the right of appeal, if it exists, must be found in the legislation. Here, the Act granted a right of appeal to a person directly affected by the decision of the decision-maker, not to the decisionmaker itself. It concluded that the section, especially given its context within the statute, could not be reasonably interpreted as permitting a decision-maker to appeal its own decision. The Court was of the opinion that if the IDA was entitled to appeal, it would only be on the basis that the decision of the District Council was a decision of a self-regulatory organization, that is, the IDA itself. In this case, the relevant section of the Act did not differentiate between the self-regulatory organization and any separate committees created within its broader structure. As such, the decision of the District Council had to be recognized as being a decision of the IDA itself. It followed that the IDA did not have a right of appeal to the ASC, as it would be appealing its own decision.

Further, the Court held that the IDA could not be considered "directly affected" by the decision of its District Council within the meaning of the Act. At best the IDA may disagree with the reasons or the result of the District Council, and have a concern for precedent, but it had not demonstrated that it was directly affected. It reasoned that the phrase "directly affected" was a narrower expression than a "person who feels aggrieved". Instead, the Court applied a higher standard requiring a proposed appellant to demonstrate the decision’s direct effect and not a mere dissatisfaction with the decision and the reasons for arriving at that decision. On the basis of previous Ontario Court of Appeal jurisprudence, it held that "directly affected" meant a personal and individual interest, as distinct from a general interest.

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