Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Litigation/Securities Regulation, April 2009
On April 9, 2009, the British Columbia Securities Commission (the Commission) issued its reasons in Re Golden Capital Securities Ltd. and Investment Industry Regulatory Organization of Canada, overturning a decade of existing precedent regarding the conduct of investigations. The Commission concluded that the Investment Industry Regulatory Organization of Canada (formerly Investment Dealers Association of Canada) (IIROC) has no obligation to act reasonably in the initiation or conduct of an investigation of its members.
In the summer of 2006, Commission staff had provided information to IIROC regarding the handling of certain investment accounts by three employees at Golden Capital Securities Ltd. (Golden Capital). The Commission alleged that the employees had contravened the "Know Your Client" rule by failing to identify the beneficial owners of securities being traded through the accounts. IIROC staff commenced an investigation and sought to establish the identities of the beneficial owners. IIROC staff believed that information identifying the beneficial owners would likely exist on the hard drives of the computers used by the three Golden Capital employees.
Golden Capital expressed concern that records on the hard drives might be: (i) subject to solicitor-client privilege; (ii) not relevant to the investigation; or (iii) private in nature. IIROC staff agreed to give Golden Capital and the employees an opportunity to identify records that might be subject to claims of solicitor-client privilege. IIROC staff refused to deal with claims based on relevance or privacy on the basis of its 2005 decision in Union Securities Ltd.
In January 2007, IIROC and Golden Capital agreed on the process for dealing with records subject to claims of solicitor-client privilege (the Agreement). Under the Agreement, IIROC staff would not access the records on the hard drives directly but instead would provide a third party (the Consultant) with search terms that the Consultant would use to identify the records IIROC staff would review for the purposes of its investigation.
The Consultant began providing Golden Capital with copies of the records identified by IIROC staff's search terms. In April 2007, Golden Capital told IIROC staff that it would not comply with the Agreement. It said the search terms used by IIROC staff "must have been too broad" because they generated too many records, which included records clearly not relevant to the investigation and private records of the three employees. Golden Capital took the position that this showed IIROC was not acting reasonably in conducting its investigation.
On November 26, 2007, an IIROC panel found that Golden Capital contravened IIROC Dealer Member Rule 19, formerly By-law 19 under the IDA (Rule 19). Golden Capital requested a hearing and review before the Commission pursuant to section 28 of the Securities Act (British Columbia).
The Commission Decision
IIROC is permitted under Rule 19 to undertake investigations into the conduct, business and affairs of any member, or employee of a member, as they consider necessary or desirable in connection with any matter. IIROC investigators are entitled to free access to, and to make and retain copies of, all book of account, securities, cash documents, bank accounts, vouchers, correspondence and record of every description of the person concerned, and no such person shall withhold, destroy or conceal any information, documents or things reasonably required for the purpose of any investigation.
In reviewing the express wording of Rule 19, the Commission found that IIROC panels have compounded a misreading of Rule 19 dating back to a 1999 decision in Derivative Securities Inc. by including a reasonableness requirement.
The Commission concluded that pursuant to Rule 19, IIROC has: (i) no obligation to act reasonably in making decisions in connection with the initiation or conduct of an investigation; and (ii) sole discretion to determine what is relevant in an investigation. As grounds for its decision, the Commission stated that there are no words in Rule 19 that provide a basis for concluding that IIROC's authority to conduct an investigation must be exercised reasonably, or that a reasonableness standard applies to the initiation and conduct of IIROC investigations.
While IIROC is under a duty to act in good faith in respect of investigations, the Commission stated:
The notion that IIROC has an obligation to act reasonably in addition to its duty to act in good faith is...contrary to the public interest. The duty of good faith is long-established, well understood, and adequately protects the interests of the persons under investigation. It is the only duty that applies to [IIROC] investigations.
The Commission did not substantively address Golden Capital's concerns relating to documents protected by solicitor-client privilege. Rather, the Commission found that the issue was moot unless and until IIROC makes an application contesting a claim of privilege, which it had not yet done so.
In the result, the decision of the IIROC panel was confirmed, including Golden Capital's C$75,000 fine for contravention of Rule 19.
The issue of IIROC's reasonableness or lack thereof will likely be the subject of further litigation. The Commission itself noted that a determination of whether IIROC acted reasonably could be relevant in determining whether it acted in good faith.
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