In a decision that sets a precedent in Canada, the Nova Scotia Court of Appeal has ruled that the province’s securities commission has as much authority to investigate and discipline a member of the Mutual Fund Dealers Association as does the MFDA itself.

“To the best of my knowledge, this is the first time a court of appeal in Canada has dealt with the question of exclusivity of jurisdiction of a self-regulatory organization,” says Nick Pittas, director of the Nova Scotia Securities Commission in Halifax.

For financial advisors, the court ruling means at least two organizations have the legal authority to take action at the same time against an individual who is alleged to have broken the rules of his or her SRO, whether the SRO is the MFDA or the Investment Dealers Association of Canada.

Jeff Kehoe, director of enforcement litigation at the IDA, notes that while the decision doesn’t change anything, “It reinforces the commission’s power.”

At issue in the case before the appeal court were the activities of Bruce Schriver, a registered salesperson who worked for Select Money Strategies Inc. , a member of the MFDA. Schriver was alleged to have entered into a referral arrangement with Portus Alternative Asset Management Inc. unbeknownst to Select. Doing this type of work on the side is contrary to MFDA rules.

NSSC staff argued that by breaking MFDA rules, Schriver also breached the Nova Scotia Securities Act, so the commission moved to take action. Schriver blocked that action by claiming the commission did not have the authority to determine whether he had contravened the MFDA’s rules. He contended only the MFDA could do that. He could not, however, find a court that agreed with him.

For its part, the Nova Scotia Court of Appeal found that the NSSC was not seeking to enforce the rules of another organization, specifically the MFDA, but rather its own.

And duplication was a moot point in this case. Only the NSSC was investigating Schriver. “There was nothing going on on the SRO side,” says Pittas. “The court case was a legal effort to avoid our proceedings. It failed.”

The court, however, went beyond looking at just one question. It also explored two related issues, and made significant determinations. First, the Court of Appeal reversed a lower court’s finding and determined that the “standard of review,” a legal term that describes the extent to which an organization or individual should be held accountable, is “reasonableness” not “correctness.”

Correctness is the harder standard to meet.

This means the NSSC only has to show that a decision it makes is reasonable. It does not have to demonstrate that the decision is right.

This has significant ramifications, says Pittas, because it shows the level of deference that should be paid to the commission. Nova Scotia Appeal Court Justice Thomas Cromwell clearly spelled out in his decision just how deferential the courts should be: “The Supreme Court of Canada has consistently recognized the considerable expertise of securities commissions. And, given the broad policy context within which securities commissions operate, courts have been held to have less expertise relative to the commissions in determining what is in the public interest in the regulation of financial markets and in interpreting their constituent statutes.”

Says Pittas: “This sends a powerful message to the [financial services] industry.”

The second issue dealt with an argument by Schriver that because a recognition order had been granted to the MFDA by the commission under the securities act, this constituted an implied delegation of authority to the MFDA. Not so, said the court. Any such delegation, it found, must be an express delegation in writing.

“This hasn’t been done in any jurisdiction in Canada,” says Pittas. “No securities commission has delegated any of its enforcement powers.”

Nor is that likely to happen.

And it appears to be business as usual. In Nova Scotia, the winding legal road has at last come to an end. Now the securities commission must return to where the journey began: investigating the allegations against Schriver.

“The matter will have to be brought back for a hearing,” Pittas says.

That process is just fine by the MFDA. “The securities commissions always retain and will always retain their legal authority to deal with issues directly,” says Shaun Devlin, vice president of enforcement at the MFDA.

@page_break@The IDA holds the same viewpoint. “The commissions all have the statutory power to do exactly what we do, but they have allowed us to do a lot of the front-line work,” says Kehoe.

“There is truly overlap in jurisdiction,” he adds. “We recognize that, but we complement one another.”

They also work well together, which is why there is little duplication of effort or butting of heads. “As a practical matter, not every issue is going to give rise to dual proceedings,” says Pittas, adding that the statutory regulator will have to consider whether it needs to act if there is already a pending proceeding or investigation underway by an SRO.

Indeed, according to Devlin, the organizations are adept at co-ordinating activities: “We work closely with commission staff. On some occasions, we both review a case, but this is the rare exception.” IE