The Thomson Kernaghan debacle has spawned an application for leave to appeal to the Supreme Court of Canada.

The plaintiffs are seeking to add the Investment Dealers Association of Canada and its senior officers as defendents. If the SCC chooses to hear the appeal, it’s decision will have either a devastating or an affirming impact on the regulatory role of the IDA.

The leave application stems from a motion brought last April by Christopher and Joanne Morgis, and their holding company, to amend their $5.75 million claim against TK, after the brokerage firm was petitioned into bankruptcy.

In the motion, they sought to add the IDA as well as its chair, vice chair and president, as defendents. The motions court judge ruled against the Morgises. They appealed to the Ontario Court of Appeal, but lost the second round, too.

An appeal to the Supreme Court of Appeal is not automatic, so a motion for “leave to appeal” must be brought. The Morgises lawyer, Darryl Cruz, a litigation lawyer practicing with the Toronto office of McCarthy Tetrault, says an application for leave will soon be filed.

This aspect of the Morgis’s overall case centers on the IDA’s duty to the public. The Morgises allege that the IDA should have acted more quickly to investigate TK’s operations, possibly saving them from the extent of the losses that they suffered.

The appeal court examined several cases dealing with regulators’ duty to the public. Agreeing with the motions judge, the appeal court decided that the IDA’s relationship to the Morgises was not “proximate” enough to find “IDA parties” liable.

And on “public policy” grounds, the appeal court ruled that the IDA is a professional association designed to monitor broker activity on behalf of the public at large — not on behalf of each investor who lodges a complaint. “The motions judge correctly observed that the issue of indeterminate liability is a limiting principle in economic loss claims and the IDA is powerless to limit potential claims from all investors of all members IDA firms.”

But unlike other professions that are self-regulated, the activities of the investment industry’s self-regulator isn’t also monitored by government regulators, says Neil Gross, a Toronto-based lawyer with specializing in investment advisor negligence. The added layer of securities commissions implies that there is more impact on the public interest when an investment advisor goes awry, than if a doctor or lawyer breaks the rules, says Gross. “It will be interesting to see whether the court looks at the broader issues.”