Many in the ontario investment community were caught offguard this past summer when former advisor Stephen Taub sidestepped a raft of allegations related to securities offences.

The Divisional Court of Ontario agreed with Taub’s argument that he could not be disciplined by his regulatory organization because he had resigned from its membership before discipline proceedings were launched.

Enforcement issues raised by the case, as well as similar situations in British Columbia, have become a headache for regulators and advisors concerned about protecting investors and the integrity of the financial services community.

Disciplinary hearings were launched against Taub in October 2005 by the Investment Dealers Association of Canada (now the Investment Industry Regulatory Organization of Canada). IIROC has the power to discipline its members under the Ontario Securities Act, which states that self-regulatory organizations have authority to “regulate the operations and the standards of practice and business conduct of its members.”

But Taub’s lawyer in Toronto, Robert Brush, successfully argued that by resigning from the IDA, Taub became a former member and thus moved outside its reach. “The current law in Ontario is: if you resign [from the IDA/IIROC], it no longer has jurisdiction over you,” Brush says. “That’s the bottom line.”

He adds that this remarkable result would also apply to former advisors who resign from the Mutual Fund Dealers Association of Canada, the other industry SRO. It does not apply, however, to dealer-firm members, since the MFDA’s rules state that member firms (but not their individual representatives) may not resign without the permission of the MFDA.

Reaction has been swift. IIROC and the Ontario Securities Commission announced shortly after the ruling that they will seek leave to appeal to the Ontario Court of Appeal.

The ruling in the Taub case has focused attention on similar cases underway in B.C. Because of similarities in regulatory structures in most provinces, other jurisdictions could be affected. Although IIROC is a national SRO, it applies its rules across the country in conjunction with local securities laws. While each province has its own securities legislation, this same loophole is present in most provinces: statutes typically refer to organization members and representatives, but they do not specifically state that former members can be disciplined after they have resigned from an SRO.

The exception is Alberta. That province changed its securities legislation around the same time that TSX Group Inc. acquired the Calgary-based Canadian Venture Exchange in 2001 and renamed it the TSX Venture Exchange. Alberta securities law now states that SRO authority extends to any former member, any former representative of a member and any former representative of a former member.

Saskatchewan recently altered its securities legislation to extend SRO jurisdiction to former members after a little noticed case in early 2006, in which the Saskatchewan Financial Services Commission held that it did not have jurisdiction over former IDA members. But that legislation has not yet been declared in force.

For now, regulators are awaiting the outcome of rulings from higher courts in Ontario and B.C. In addition to Taub, who faces discipline for a range of offences including failing to flag possibly “manipulative or deceptive” trades, Brush is representing Charles Dass, a former advisor in Vancouver. Dass resigned from Dundee Securities Corp. in July 2004 and his membership in the IDA expired. The IDA notified him in January 2005 that it would be launching an investigation into the circumstances of the resignation. The B.C. Securities Commission (like the OSC did in Taub’s case) upheld the IDA’s jurisdiction over Dass even though he is a former member. An appeal of that ruling was heard by the B.C. Court of Appeal in May and a decision is pending. (The allegations against Dass are sealed until the jurisdictional issue is resolved.)

Both the Taub and the Dass cases were discussed in a July 31 decision by an IIROC panel dealing with John Collias, an advisor with Gateway Securities Inc. in Vancouver. The IDA investigation against Collias began in September 2007; he retained his status with the IDA until April 2008. In granting an adjournment until the release of the Dass appeal decision, the IIROC panel stated: “The issue of the jurisdiction of IIROC is of seminal importance to IIROC, its members and the investing public. Having extant decisions reaching opposite conclusions [Taub and Dass] is a matter requiring rectification, and that process is underway.”

@page_break@This doesn’t mean all cases are being adjourned; rather, they are being dealt with on a case-by-case basis, says Alex Popovic, vice president of enforcement with IIROC in Toronto. “If the matters are before a panel, we are obligated to hold public hearings and let the panel determine what to do with those matters,” he says. “It is a panel’s decision as to what it believes is the appropriate response.”

Meanwhile, the OSC is standing its ground. “The commission is concerned that investor protection would be weakened if a registered representative could avoid the consequences of breaching SRO rules by resigning from his or her SRO-member firm,” says OSC executive director Peggy Dowdall-Logie. “An SRO’s ability to take disciplinary action against former members and former representatives of its member firms is fundamental to effective investor protection.”

At least one member of Ontario’s Divisional Court in the Taub case seemed to agree with that view. In a dissenting opinion, Justice James Carnwath wrote: “The public would have less confidence in public markets where sanctions for misconduct could be avoided by a simple letter of resignation.”

At a time when the financial services community is striving to convince investors that its members are held to exacting standards, many advisors would agree. IE