Registered representatives who break their self-regulatory organizations’ rules are unable to avoid discipline simply by leaving the industry, according to a recent Ontario Court of Appeal decision.

In late August, the court reaffirmed an SRO’s jurisdiction over its former members, overturning a decision by the Divisional Court of Ontario involving former registered rep Stephen Taub and the Investment Dealers Association of Canada (now the Investment Industry Regulatory Organization of Canada).

The Appeal Court’s decision makes Ontario the third province, along with British Columbia and Quebec, whose courts have reaffirmed the ability of SROs to discipline former members for misconduct after they leave the industry, for up to five years afterward. This eliminates the possibility that individuals could avoid discipline for misconduct by quitting their jobs and leaving the industry.

Such scenarios could have emerged if the decision had gone the other way, says Jeff Kehoe, director of enforcement and litigation at IIROC: “Individuals would have essentially been able to walk away from any misconduct without ever being disciplined.”

In the Taub case, the former registered rep had challenged the jurisdiction of the IDA when it brought disciplinary action against him in October 2005 — more than a year after he had resigned from his brokerage firm and from the IDA. The IDA had alleged that Taub had engaged in four counts of misconduct related to his trading activity for clients and his dealings with his member firm between November 1998 and June 2003.

The IDA bylaws, to which members voluntarily agree upon joining, had specifically stated that the SRO had jurisdiction over members for five years after they ceased to be members. But Taub challenged this jurisdiction on the basis that the Securities Act states that SROs have jurisdiction only over members; the act does not stipulate current or former members.

An IDA tribunal rejected Taub’s argument in August 2006, and that decision was upheld on appeal by the Ontario Securities Commission. However, Taub appealed the OSC decision to the Divisional Court, which agreed with Taub’s argument that the IDA could not discipline him because he had resigned from its membership before discipline proceedings were launched.

The IDA and the OSC, in turn appealed the Divisional Court ruling. The Mutual Fund Dealers Association of Canada also participated in the appeal as an intervenor, as the decision would have affected that regulator in the same way as the IDA. In the Ontario Court of Appeal’s recent decision, it reversed the Divisional Court decision, agreeing with the OSC’s interpretation of the Securities Act: that an SRO’s jurisdiction is not limited to current members only.

“The OSC concluded… that it would be contrary to [public] interests if former members were allowed to resign from the association in order to avoid discipline,” according to Judge Kathryn Feldman in the decision. “In my view, the conclusion of the OSC is reasonable and should be upheld.”

The Taub decision has hefty implications, says Carol Hansell, a senior partner in the corporate securities practice of law firm Davies Ward Phillips & Vineberg LLP in Toronto, noting that it’s important for SROs to have jurisdiction over former members in order to preserve the integrity of capital markets in Canada.

“If somebody is about to face some sort of discipline and they can avoid it by simply quitting, [by] exiting the organization,” Hansell says, “that is a challenge not just to the organization; it’s a challenge to the ability of markets to impose discipline on participants in the public markets.”

IIROC is encouraged that the Taub decision reiterates rulings by courts in other provinces, including the B.C. Court of Appeal’s decision in October 2008 to uphold the IDA’s jurisdiction over former advisor Charles Dass.

“It sends a very, very strong message,” Kehoe says, “that it’s clear and unambiguous that IIROC has the ability to discipline these former members on the basis of contract.”

This issue is relevant to many SRO disciplinary cases, he says, as individuals guilty of misconduct are often terminated by their firm — or quit their positions — before disciplinary action is brought upon them.

“You need to have a period of time after the person has left the organization,” Hansell adds, “in order to allow the enforcement processes to work.”

IIROC and the MFDA are now proceeding with several other cases in Ontario involving former members, which had been in limbo until the Taubcase was resolved.

@page_break@But, says Robert Brush, Taub’s lawyer, his client plans to seek leave to appeal the recent decision to the Supreme Court of Canada. If he is successful, the backlog of related cases could again be put on hold.

Not everyone is convinced that Canada’s highest court will hear the case, however. Hansell says the Ontario Court of Appeal’s decision leaves little ambiguity or need for clarification: “The Court of Appeal decision is so clear and so consistent with other decisions.”

If the Taub case does reach the SCC, the recurring issue would be resolved for good, says Hugh Corbett, director of litigation with the MFDA: “The SCC is the highest court in the land. It has the final word on any matter.” IE