IDA - TIME LIMITATION
Sometimes brokers or member firms query whether they can or should be the subject of IDA disciplinary proceedings when the broker has left the industry or the matters in question otherwise seem to be "ancient history". Various regulatory decisions have established that the IDA is empowered to investigate and discipline former members who are no longer working in the industry. As for time limitations, a recent decision of the IDA’s Pacific District Council (Re Global Securities Corporation) determined that an IDA Panel does not have jurisdiction to proceed with a hearing where more than six years have passed since the events in question. IDA Staff argued that limitation periods should not start until they are aware of the facts giving rise to the complaint since "discoverability" is generally an important component of limitations law. The Panel disagreed that discoverability principles apply to a limitation period concerning IDA bylaw violations.
The six year period was determined through a consideration of two British Columbia statutes:
- the Limitation Act provides for a six year limitation in contractual situations in B.C. This is pertinent because the relationship between the IDA and its members is based in contract; and
- the Securities Act - like its counterparts in other provinces such as section 129.1 of the Ontario Act and section 201 of the Alberta Act - provides a six year limitation period from the occurrence (not discovery) of the event in which a Securities Commission can bring enforcement proceedings against a member firm, broker or anyone else. It would be inconsistent if the IDA was able to prosecute a member firm in circumstances where the applicable Securities Commission could not do so, and where the appellate powers of the applicable Securities Commission could no longer be exercised.
In a recent Ontario Superior Court action, Clark v. BMO Nesbitt Burns, an issue arose about a broker’s book of business. The court found that the broker had been wrongfully dismissed. It awarded 18 months income in lieu of notice because he was 52 years old and had worked at the firm for 17 years. On the book of business issue, the court made the finding that, had the broker been given reasonable notice of termination, he would have been entitled and able to sell his book of business to another broker in the firm via a transition agreement. The court attributed a value of $90,000 to the book although there was conflicting evidence supporting both higher and lower amounts. In the particular circumstances of this case, the broker was unable to relocate his book to new employment because outstanding criminal charges made it unlikely that anyone would hire him. His employer had argued that a broker dismissed without cause might be entitled to a severance package or to a transition agreement, but not both. The court disagreed with that and awarded damages representing a reasonable severance package on top of the value of the book.
Two cases are pending in the British Columbia courts where clients, Madiuk and Hryhorchuk, are suing their brokers on the basis that they were not sufficiently informed about the risks of an investment in assetbacked commercial paper (ABCP). In Madziuk’s case, he allegedly deposited $150,000 into his account in February 2007. He further alleges that the broker told him that his investment was a safe money market investment devoid of risk. The cases are only at the pleadings stage and we will follow them as they unfold.
BROKER GATEKEEPER DUTIES
In August 2007 an IDA Panel concluded that a broker had engaged in unbecoming conduct related to his unwitting involvement in a "pump and dump" stock manipulation scheme. In late December, the broker received a one year suspension, a $40,000 fine and a costs award of $25,000. (Parenthetically, we note that the IDA costs were approximately $100,000, but as many Panels have in the past, this one declined to saddle the broker with full costs liability on the theory that fear of a huge costs award could intimidate respondents from exercising their legal right to dispute the charges in the first place.) Partnership The broker’s counsel had argued that since his client was not aware of the manipulation scheme, he lacked the necessary moral turpitude required to justify a charge of conduct unbecoming. The Panel acknowledged that the broker might have lacked moral turpitude but concluded that "gross negligence can amount to conduct unbecoming". It drew a distinction between gross negligence and mere ordinary negligence. There is no bright line between these standards. There were a number of circumstances associated with the trading in question that the Panel felt should have triggered the broker’s suspicions, and which took the case from regular negligence to gross negligence. The Panel felt that he did not make sufficient efforts to know his client and to ensure that the orders were within the bounds of good business practice, due to the unusual circumstances of the trading. These included:
- unusually high volume;
- the simultaneous opening of a number of accounts from apparently related parties;
- all of the orders were unsolicited and each account dealt only with the one security in question;
- some commonality in the source of funds and instructions;
- the knowledge by the broker that one of the parties involved had been untruthful in a client application form;
- on at least two occasions, the broker was informed who would be on the other side of the trade before it was posted in the market;
- the acceptance of trading orders from at least one individual who did not have proper authority to do so.
This case underscores the duty of brokers to act as "gatekeepers", including proper checks of clients and making further enquiries if trades are conducted in circumstances that should raise questions or suspicions.
Edited by David Di Paolo
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.