A British Columbia appeal court has kicked a case back to the B.C. Securities Commission, ruling that the regulator didn’t really answer the right question in a case challenging the limits of the Investment Industry Regulatory Organization of Canada’s investigative powers.

In the case, Golden Capital Securities Ltd. appealed a decision from the BCSC on the issue of IIROC’s access to certain records. The case has its roots in an investigation that was started back in 2006 by IIROC into whether three of Golden’s reps violated KYC rules. As part of that investigation, IIROC staff sought copies of the reps’ hard drives. The firm expressed concern that irrelevant or private information, or information subject to solicitor-client privilege, might be subject to search by IIROC.

IIROC held a hearing into the firm’s refusal to turn over the hard drives, ruling that its investigators should have access to them, and levying penalties on the firm for failing to comply. Golden appealed that decision to the BCSC, which upheld IIROC’s liability and penalty decisions against the firm.

Golden then took that case to Court of Appeal for British Columbia. Golden argued that the commission erred in concluding that IIROC’s rules permit investigators to gain access to all data on the mirrored drives not subject to solicitor-client privilege, “pressing again its position that some of the records will inevitably be irrelevant or private to the representatives.”

The appeal court found that the BCSC hearing essentially answered the wrong question at its hearing. “The commission’s decision focused entirely on the standard of conduct to which IIROC would be held — good faith or reasonableness. It seems clear that both IIROC and the commission focused on the issue of IIROC’s conduct rather than Golden Capital’s conduct because Golden Capital’s essential argument was that its refusal to allow access to its records was not a breach of [the rules] because IIROC was not acting reasonably,” the court’s decision dated July 22 states.

“In my opinion, Golden Capital’s argument diverted both IIROC and the commission from the essential question that should have been asked: were the records reasonably required for the investigation?” “the Honourable Madam Justice Kirkpatrick states.

“There can be no question that during an investigation IIROC is entitled to free access to records,” the decision states. However, it finds that the BCSC interpretation of the rules equates ‘reasonably required’ with ‘relevance’, which it says, “denudes the rule of the inquiry of whether the records are, in fact, reasonably required.”

“It may be that, in a given case, all relevant records produced under Rule 19.5 will be reasonably required under Rule 19.6. But there must first be a determination that they are reasonably required for the investigation,” the decision states.

“Because the resistance to free access has, as here, potentially significant financial penalties, it is crucial that the question I have posed be asked and answered: were the records reasonably required for the investigation? The reasonableness of the conduct of either party is not the issue,” Kirkpatrick states.

“Unfortunately, the inquiry focused on relevance and the reasonableness of IIROC’s conduct of the investigation. The decision was thus converted from determining whether the records were reasonably required for the investigation to determining whether IIROC acted reasonably in the investigation. In the result, the question of whether the records were reasonably required for the investigation, quite apart from relevance, was never answered,” it concludes. “In these unfortunate circumstances, I would remit the matter to the commission to decide, or to direct IIROC to decide, whether the records were reasonably required for the investigation.”

IE