On May 15, 2018, the Ontario Superior Court of Justice in Ontario Securities Commission v. Tiffin confirmed that the "family resemblance" test cannot be used to answer one of the central questions of securities law: what constitutes a security?
Background
In July 2014, the Ontario Securities Commission (OSC) prohibited Mr. Tiffin from trading in securities or relying upon any exemption under Ontario securities law. Mr. Tiffin subsequently issued fourteen promissory notes on behalf of his company, Tiffin Financial Corporation (TFC), to six clients. As a result, Mr. Tiffin and TFC were charged with breaches of s.122(1)(c) of the Securities Act (the Act) and stood trial before Kenkel, J of the Ontario Court of Justice.
As we discussed in a prior post, the question before Kenkel, J was whether the promissory notes fell within the definition of a "security" under the Act. In finding that the notes were not "securities", Kenkel, J cautioned against a literal interpretation of the term, holding that such an approach in Mr. Tiffin's case would conflict with the purposes of the Act. Kenkel, J held that exemptions may be found outside the legislative scheme of the Act and accordingly adopted the "family resemblance" test established by the United States Supreme Court in the case of Reves v. Ernst & Young1. The family resemblance test presumes that a note is a security unless it bears a strong resemblance to an instrument falling within a enumerated list of categories. In applying the test, the charges against Mr. Tiffin and TFC were dismissed.
Ontario Superior Court of Justice Allows Appeal
On appeal, Charney, J of the Ontario Superior Court of Justice held that Kenkel, J erred in law. Because the term "security" is defined in the Act, the court held that importing the family resemblance test was unnecessary and undesirable. The court found that the legislature's deliberate decision to "cast the net wide" in its definition of the term "security" is consistent with the remedial purpose of the Act as it protects vulnerable members of society.
Charney, J disagreed with Kenkel, J's interpretation of British Columbia (Securities Commission) v. Gill2, holding that in Gill the BCCA did not "adopt and apply" the family resemblance test to determine whether the instrument was a security; it applied the test to support the reasonableness of the Commission's decision. Instead, Charney, J relied on the Alberta Court of Appeal's recent decision in R. v. Stevenson which rejected the family resemblance test, refusing to create exemptions not otherwise found in the statute.3
Ultimately, Charney, J allowed the appeal and held that the TFC promissory notes were "notes or other evidence of indebtedness" and were therefore "securities" within the meaning of the Act.
The author would like to thank Samantha Black, Summer Student, for her contribution to this article.
Footnotes
[1] Reves v Ernst & Young, 494 US 56, 58 USLW 4208 (1990).
[2] British Columbia (Securities Commission) v Gill, 2003 BCCA 169, (CanLII).
[3] R. v Stevenson, 2017 ABCA 420, (CanLII).
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