Investment Dealers Assn. of Canada v. MacBain

Between
The Investment Dealers Association of Canada,
Appellant (Respondent on Cross-appeal), and
Wade Douglas MacBain and Karl Edward Neufeld,
Respondents (Non-Parties on Cross-appeal), and
Frederick Henry Smith, Respondent (Appellant on
Cross-appeal), and
Saskatchewan Financial Services Commission
Party (Pursuant to s. 11(5) of The Securities Act,
1988), and
Mutual Fund Dealers Association of Canada,
(Intervenor)

[2007] S.J. No. 292
2007 SKCA 70
Docket: 1273

Saskatchewan Court of Appeal
Cameron, Sherstobitoff and Lane JJ.A.

Heard: March 12, 2007.
Judgment: June 20, 2007.
(42 paras.)

Administrative law — Judicial review and statutory appeal — Review for lack or excess of jurisdiction — Appeal by Investment Dealers Association from decision that it had no jurisdiction over former members dismissed — Bylaw barred Association from proceeding with discipline proceedings against former members.

Professional responsibility — Regulation — Governing body — Jurisdiction —Appeal by Investment Dealers Association from decision that it had no jurisdiction over former members dismissed — Bylaw barred Association from proceeding with discipline proceedings against former members.

Professional responsibility — Discipline — Appeals and judicial review — Jurisdiction — Appeal by Investment Dealers Association from decision that it had no jurisdiction over former members dismissed — Bylaw barred Association from proceeding with discipline proceedings against former members.

Appeal by the Investment Dealers Association (IDA) from a decision that it had no jurisdiction over former members. Matrix Financial Corporation, a retail brokerage firm, carried on business from 1995 to 2001. MacBain and Smith were co-founders of the firm, and Neufeld was a senior employee. Smith was the designated person responsible for the supervision of MacBain. IDA bylaw 18 prescribed the conditions under which individuals could be registered and employed to work in the securities industry. Between August 2000 and May 2001, the IDA received 84 public complaints alleging misconduct on the part of MacBain. MacBain ceased to be member of the IDA in the summer of 2000, and Neufeld in the fall of 2001. Smith remained a member of the IDA. The IDA investigated the conduct of MacBain and the supervision of him by Neufeld and Smith. Forty-two of the complaints were investigated, and resulted in the commencement of disciplinary proceedings against the respondents alleging conduct in breach of the bylaws, rules and policies of the IDA. The respondents filed responses and simultaneously filed motions to stay the disciplinary proceedings on the grounds of unreasonable delay. MacBain and Neufeld also filed motions for a stay on the grounds that the IDA had no jurisdiction over them since they were no longer members. A Hearing Panel dismissed all of the motions, and the respondents appealed. An Appeal Panel declined to hear the appeals of the interlocutory matters and directed the Hearing Panel to hear the case on its merits. The respondents then applied to the Commission for a Hearing and Review of the decision of the Appeal Panel. The Commission stayed the proceedings against MacBain and Neufeld on the ground that the IDA had no jurisdiction over them since they were no longer members. It dismissed Smith's motion for a stay on the basis that the delay was not unreasonable. At issue was whether the IDA, as a self-regulatory organization, could exercise disciplinary powers over former members in respect of activities occurring while they were members, and whether it had lost jurisdiction to proceed with disciplinary hearings because of unreasonable delay.

HELD: Appeal dismissed. The IDA was barred by bylaw 20.7 from proceeding with discipline proceedings against MacBain and Neufeld, as they were no longer members. Smith's appeal was allowed and the decision of the Commission was set aside. The Commission was directed to dismiss the disciplinary proceedings against him.

Statutes, Regulations and Rules Cited:

Securities Act, s. 11

On appeal from Saskatchewan Financial Services Commission

Counsel:

James S. Ehmann, Q.C., Tamara Brooks and Marc Kelly for the Appellant.

Gregory A. Thompson and David Stack for the Respondents.

Barbara Shourounis for Saskatchewan Financial Services Commission.

Hugh Corbett for Mutual Fund Dealers Association.


       The judgment of the Court was delivered by

 1      SHERSTOBITOFF J.A.:— The three basic issues in this appeal are whether the appellant, the Investment Dealers Association (IDA), a self-regulatory organization (SRO), can exercise disciplinary powers over former members in respect of activities occurring while they were members; whether it has lost jurisdiction to do so because of a limitation period in its bylaws for exercise of those powers; and whether it has lost jurisdiction to proceed with disciplinary hearings because of unreasonable delay.

 2      The IDA was created in 1916 without statutory authority. It is an unincorporated organization of companies that carry on the business of providing retail investing services. It operates in ten provinces as the national self-regulatory organization of the securities industry by regulating the activities of investment dealers in terms of both their capital adequacy and conduct of business. It governs in accordance with its own bylaws, regulations and policies.

 3      Member Firms and their employees who deal with the public are licensed by the IDA. Upon approval, Member Firms and Approved Persons (also referred to as Registrants or Investment Advisors) enter into contracts to be bound by the IDA rules. Bylaw 20.7 provides that the IDA has continuing jurisdiction over them for five years following the date membership in the IDA ends.

 4      In Saskatchewan, the Saskatchewan Securities Commission (now the Saskatchewan Financial Services Commission by reason of s. 3 of The Saskatchewan Financial Services Commission Assignment Regulations made under the authority of The Saskatchewan Financial Services Commission Act, S.S. 2002, c S-17.2), acting under the authority of s. 21 of The Securities Act, 1988, S.S. 1988, c. S-42.2, issued an order recognizing the appellant as a self-regulatory organization, upon the following conditions:

a.

The IDA will maintain a staff complement sufficient to ensure that all necessary investigations, disciplinary actions, and enforcement proceedings on complaints from Saskatchewan investors are conducted and concluded within a reasonable period of time following receipt of a complaint or other information that leads to the investigation, disciplinary action, or enforcement proceeding.

b.

The IDA will maintain a staff complement sufficient to ensure that all financial reviews and audits, and sales practices reviews that the IDA is required to perform on its member firms operating in Saskatchewan are performed in a timely and thorough manner.

c.

The IDA will not after [sic], in any material way, its functions or objectives, without the consent of the Commission.

d.

The IDA will agree with the Commission through the Canadian Securities Administrators to a plan providing for the ongoing oversight of the self-regulatory function of the IDA.

 5      No legislation in Saskatchewan confers any powers upon the IDA.

 6      Matrix Financial Corporation, a retail brokerage firm, carried on business from 1995 to 2001. The respondents MacBain and Smith were co-founders of the firm; Neufeld was a senior employee. Smith was the Ultimate Designated Person responsible for the supervision of MacBain.

 7      IDA bylaw 18 prescribes the conditions under which individuals may be registered and employed to work in the securities industry. Bylaw 18.2 requires the following:

No Member shall employ any person as a registered representative or investment representative in any province in Canada unless:


(a)

Such person is registered or licensed to sell securities under the statute relating to the sale of securities in the province in which the person proposes to act as a registered representative or investment representative; and

(b)

Approval as a registered representative or investment representative has been granted by the Association in accordance with the provisions of this By-law.

 8      In Saskatchewan, Reg. 1 of The Securities Regulations, S-42.2, requires applicants for licenses to sell securities to complete a Uniform Application for Registration Approval. The application requires a certificate and agreement of the applicant and sponsoring member firm to the following standard clause:

We agree that we are conversant with the by-laws, rulings and regulations of the self-regulatory organizations listed in Question 4.

       We agree to be bound by and to observe and comply with them as they are from time to time amended or supplemented and we agree to keep ourselves fully informed about them as so amended and supplemented. We submit to the jurisdiction of the self-regulatory organizations and, wherever applicable, the Governors, Directors and committees thereof, and we agree that any approval granted pursuant to this application may be revoked, terminated or suspended at any time in accordance with the then applicable by-laws, rulings, rules and regulations. ...

 9      Such applications were completed and signed by Matrix as the sponsoring member, and by each of the respondents as the applicants in 1995. They thereby bound themselves to the bylaws, rules, rulings and regulations of the IDA.

 10      Between August 2000 and May 2001, the IDA received 84 public complaints, both directly and indirectly, alleging misconduct on the part of MacBain.

 11      MacBain ceased to be member of the IDA in the summer of 2000, and Neufeld in the fall of 2001. Smith has remained a member of the IDA and is registered with the securities commissions of Saskatchewan, Alberta, British Columbia and the Northwest Territories.

 12      As a result of the complaints against MacBain, the IDA investigated the conduct of MacBain and the supervision of him by Neufeld and Smith. Forty-two of the complaints were investigated, and resulted in the commencement of disciplinary proceedings against the respondents by way of Notices of Hearing dated October 26, 2004 respecting MacBain; November 24, 2004, respecting Neufeld; and October 2004, respecting Smith. The Notices alleged conduct in breach of the bylaws, rules and policies of the IDA.

 13      Each of the respondents filed responses to the Notices of Hearing, and simultaneously filed motions to stay the disciplinary proceedings on the grounds of unreasonable delay. MacBain and Neufeld also filed motions for a stay on the grounds that the IDA had no jurisdiction over them since they were no longer members. On November 24, 2004, a Hearing Panel dismissed all of the motions.

 14      The respondents appealed. An Appeal Panel declined to hear the appeals of the interlocutory matters and directed the Hearing Panel to hear the case on its merits.

 15      The respondents then applied to the Commission for a Hearing and Review of the decision of the Appeal Panel. The Commission, after a hearing, ordered that the proceedings against MacBain and Neufeld be stayed on the ground that the IDA had no jurisdiction over them since they were no longer members. It dismissed Smith's motion for a stay on the basis that the delay was not unreasonable.

 16      It is against the decision of the Commission respecting MacBain and Neufeld that the IDA brought the appeal to this Court. Smith also appealed the decision to this Court.

 17      The right to appeal a decision of the Commission to this Court is found in s. 11 of The Securities Act, the relevant parts of which are as follows:

11(1)

A person or company directly affected by a decision of the Commission, other than a ruling pursuant to subsection 83(1), may appeal the decision to the Court of Appeal.


. . .


(6)

Where an appeal is taken pursuant to this section, the Court of Appeal may by its order direct the Commission to make any decision or to do any other act that:


(a)

the Commission is authorized and empowered to do pursuant to this Act or the regulations; and

(b)

the Court of Appeal considers proper having regard to the material and submissions before it and to this Act and the regulations;


and the Commission shall make that decision or do that act accordingly.

In determining the standard of review in such appeals, the pragmatic and functional approach, most recently defined in Dr. Q v. College of Physicians and Surgeons of British Columbia, 2003 SCC 19; [2003] 1 S.C.R. 226 must be employed. The parties are agreed that the appropriate standard respecting questions of law is correctness. With respect to questions of fact, the parties differ. In our view some deference is due to the Commission in respect of findings of fact notwithstanding that the legislation grants a full and unrestricted right of appeal, and, in effect, empowers this Court to do anything the Commission was empowered to do. The appropriate standard respecting matters of fact is reasonableness.

 18      The IDA's main concern is with the following determination by the Commission:

It was held in Chalmers v. Toronto Stock Exchange (1989), 70 O.R. (2d) 532 that if a self-regulating association does not have statutory authority to regulate its former members any bylaw adopted purporting to so regulate is ultra vires. However it was stated that while domestic tribunals (and the IDA is one of them) cannot make laws of general application it is significant to note that it is not what they regulate but whom they regulate, and that their authority is restricted to those who have voluntarily submitted to that authority.

Since the IDA has no statutory authority to regulate its former members or former approved persons, bylaw 20.7 and even former bylaw 20.21 are ultra vires. Accordingly the IDA has no authority to regulate MacBain and Neufeld thereunder.

The IDA had argued that Chalmers should not apply because the IDA's authority to discipline arose from its bylaws by which the respondents were contractually bound, rather than by statute. The Commission did not accept these arguments because, as noted in Chalmers, the only effective sanction a domestic tribunal could impose was expulsion, a remedy unavailable in the case of those who were already non-members.

 19      Before considering the IDA's case in this respect, it is appropriate to deal with a matter raised on the appeal by the respondents, MacBain and Neufeld. Bylaw 20.7 provides as follows:

20.7 Former Members and Approved Persons


(1)

For the purposes of By-law 19 and By-law 20, any Member and any Approved Person shall remain subject to the jurisdiction of the Association for a period of five years from the date on which such Member or Approved Person ceased to be a Member or an Approved Person of the Association, subject to subsection (2).

(2)

An enforcement hearing under Part 10 of this By-law may be brought against a former Approved Person who re-applies for approval under Part 7 of this By-law, notwithstanding expiry of the time period set out in subsection (1).

(3)

An Approved Person whose approval is suspended or revoked or a Member who is expelled from membership or whose rights or privileges are suspended or terminated shall remain liable to the Association for all amounts owing to the Association.

Although the bylaw did not come into effect until 2004, a transitional provision in the 2004 bylaw (article 20.57) provided that in the event of conflict between the 2004 bylaw and existing bylaws, the 2004 bylaw should prevail. Neither party disputed, on the appeal, that bylaw 20.7 applied.

 20      The respondents say, that according to the plain and ordinary words of bylaw 20.7, any jurisdiction the IDA had to discipline the respondents MacBain and Neufeld expired 5 years after they ceased to be members, a time now passed in both cases.

 21      Although this argument was not dealt with by the Commission (the respondents say they raised it) the respondents are entitled to raise it by way of defence to an appeal. In Perka v. The Queen, [1984] 2 S.C.R. 232, the Court held that it was open to a respondent to advance any argument to sustain the judgment below, and he is not limited to the appellant's points of law.

 22      The IDA says that bylaw 20.7 should be read as requiring only that discipline proceedings be commenced by service of the Notices of Hearing within the five year limitation period. In support, they rely on the judgment of the Manitoba Queen's Bench in Odim v. College of Physicians and Surgeons (Manitoba), 2003 MBQB 118; [2004] 2 W.W.R. 370, in which a statute provided that disciplinary proceedings against a doctor "may ... be dealt with within five years of the date of the suspension, cancellation or non-renewal ...". It was held to require only that proceedings be commenced within the limitation period.

 23      However, the circumstances are quite different in this case.

 24      First, Odim dealt with a statute while this case dealt with a contract, the terms of which were drafted by the appellant. In interpreting statutes, the Court must consider the intent of the legislature which passed the legislation and the purpose of the legislation as a whole. Interpreting a contract, and a fundamental part of the appellant's case was that the bylaws created a contract with the respondents, can involve quite different rules. While the courts must defer to the intention of the legislature in the case of statutes, a party to a contract which it drafted is not entitled to the same deference in terms of intention. The emphasis must be on the meaning of the words.

 25      Second, the words of the bylaw in this case are more precise than the words in the statute in Odim. The words "deal with" were interpreted as meaning only that disciplinary proceedings be commenced. In this case the words "shall remain subject to the jurisdiction of the Association for a period of five years" are precise and unambiguous. To arrive at the meaning argued for by the IDA would require the reading in of words that are not there: "plus any additional time required to complete the proceedings after the notice of hearing has been served."

 26      Third, bylaw 20.1, which was in effect at the time of the events that gave rise to these proceedings, and which was replaced by bylaw 20.7, provided that no proceedings be commenced against former members unless a notice of hearing and particulars were served on the former member no later than five years from the date the former member ceased to be a member. Some meaning must be given to the decision to remove the reference to the issue of the Notice of Hearing. The deliberate change in wording from bylaw 20.1 to bylaw 20.7, certainly invites the inference that the intention of new bylaw 20.7 was to limit jurisdiction to the five year period irrespective of when the Notice of Intention and Particulars was served. Indeed, it is impossible to see any other reason for the change and none was advanced in argument.

 27      We accordingly find that the IDA is barred by bylaw 20.7 from proceeding with discipline proceedings against MacBain and Neufeld. Its appeal is dismissed with costs to be taxed.

 28      In view of our decision, it is unnecessary for us to consider the question of whether the IDA has any jurisdiction over former members in respect of disciplinary proceedings.

 29      That brings us to Smith's appeal.

 30      The Commission correctly took the law respecting unreasonable delay from Blencoe v. British Columbia (Human Rights Commission), 2000 SCC 44; [2000] 2 S.C.R. 307. Following the framework of analysis set forth in that case, it found the delay not to be inordinate and that Mr. Smith was not prejudiced by it.

 31      The Commission found the case against Smith not to be complex. It also found that Smith did not contribute to the delay, and did not waive the delay. With respect to the delay, it found that the investigation commenced on June 3, 2003, and the decision was made to prosecute on August 25, 2003 (although proceedings were not commenced against Smith until October.) It referred only to the period of 83 days between the commencement of the investigation and the decision to prosecute and found this to be not an inordinate delay. The Commission presumably chose the June 3, 2003, date as the commencement of the investigation because that is the date on which the IDA formally advised Smith by letter that it was investigating his conduct as the Ultimate Designated Person responsible for the supervision of MacBain. However, the investigation into Smith's conduct began prior to January 11, 2001, when IDA sent a letter to Mr. Smith advising him that the IDA had commenced an investigation into the activities of Mr. MacBain which would include the supervision of MacBain. Smith was clearly under investigation from at least that time. The time from commencement of the investigation until the commencement of the proceedings against Smith was, accordingly in the order of three years and eight months, rather than the 83 days counted by the Commission.

 32      Given the finding that the case was not a complex one, and the lack of any real explanation for the delay from the IDA, the Commission erred in finding that the delay was not inordinate.

 33      The following is the Commission's finding respecting Smith's claim of prejudice by the delay:

Now the question is whether or not Smith was prejudiced by this time period. He says he was because:


1.

important evidence is no longer available to him, both oral and documentary;

2.

crucial witnesses will be not available to testify or assist him in his defence;

3.

there is no power in the IDA to subpoena witnesses;

4.

his reputation, career and personal life will be adversely affected by a continuance of the disciplinary hearing.


The concerns expressed in (1) and (2) above may be largely speculative. There is no evidence before this Panel to prove otherwise. It may even be that the loss of evidence complained of, did not occur after the investigation of Smith was commenced, but rather prior thereto, bearing in mind that Matrix Financial Corporation ceased doing business in the year 2000. So far as (3) above is concerned there never was any ability in the IDA to subpoena witnesses, so that nothing is lost in this regard. As to (4) above it may well be that Smith's reputation was irretrievably damaged by the initial scandal relative to Matrix such that the disciplinary hearing would not result in any more significant stigma.

We do not think Smith was prejudiced by the time it took the IDA to launch its proceedings against him. We hold that there was no unreasonable delay. [at pp. 5-6, Decision of Commission, February 6, 2006]

 34      The finding of lack of prejudice by the delay is flawed in several respects.

 35      First, as noted above, the delay caused by the time taken by the IDA to conduct its investigation was in fact three years and eight months rather than the 83 days found by the Commission.

 36      Second, respecting loss of reputation, career, and personal life, the Commission seems to have failed to take into account Smith's evidence, given by affidavit, as to how the publicity surrounding the original investigation in 2000 affected his business, how he recovered in the following years, and how the Notices of Hearing issued in 2004 rekindled the negative publicity.

 37      Mr. Smith was a founder of Matrix Financial Corporation, the employer of MacBain, Neufeld and himself, and at all relevant times an officer of the corporation. In the past, he was an officer, at various times, of the Saskatchewan Chapter of the Canadian Association of Financial Planners and at other times a Director and President of the national organization; a board member of the Financial Planners Standards Council of Canada; a board member and chair of the Saskatchewan District Council of the IDA; and a member of the National Advisory Committee of the IDA.

 38      Mr. Smith described the effects of the negative publicity in 2000, and in 2004:

27.

That the negative publicity surrounding these allegations as well as those against Mr. MacBain tarnished very badly the reputation of Matrix and me.

28.

That one cannot underestimate the extent of negative publicity being generated in the summer and fall of 2000 which was nothing short of an attempt to convey to the general public that Matrix and its advisors were involved in all sorts of illicit activities tantamount to theft, kickbacks, fraud, and the like. All of which are absolutely false with there being no evidence of any illicit activity put forward to this date, now more than four years later. The damage however has been done.

29.

That I was not reappointed to the position of Chair of the Saskatchewan Life Insurance Council solely because of the negative publicity of these spurious allegations.

30.

That the negative publicity also led to a loss of a number of clients as well as many inquires from others who were obviously concerned with many of the allegations and the impact such allegations would have on their relationship with me as their financial planner. Prior to this negative publicity, my practice had $12 million a year of new business. This dwindled to zero within two years of the negative media coverage received.

31.

That through the efforts of Mr. MacBain and others to bring the true purpose of these allegations and civil suits to light, I believe that we have done much to rebuilt [sic] our tarnished reputation over the course of the past 4 years. This is demonstrated by the fact new business received was back up to $1 million per month last quarter.

32.

That despite our efforts to repair our reputation, I fear that a hearing so late after the allegations going back to the 90's will only rekindle the old rumors and will have a direct impact on my present employment and cause undue concern and hardship on my existing clients.

33.

That there is no better example of this than the publication of the Notice of Hearing which has generated an article in our local newspaper on October 28, 2004. See Exhibit "A" to this my affidavit. Ignoring the fact that it appears interviews were conducted with lawyers in the civil suits prior to me even receiving a copy of the Notice of Hearing, it is obvious that I will once again suffer as a result of the persistent repeat of allegations which caused me damage 4 years ago. This is further demonstrated by the news generated on November 9, 2004 by the adjournment of the hearing as evidenced in Exhibit "B" to this my affidavit.

34.

That I have had response from clients as well as my employer following these articles with individuals indicating concern. I see a repeat of hysteria and personal and financial damage that I suffered 4 years ago leading to a decline in new business and possible loss of clients as previously.

 39      Today, almost seven years after the commencement of the investigation, Mr. Smith has not yet had a hearing on the merits respecting the disciplinary proceedings brought against him (or for that matter respecting the lawsuits brought against him, MacBain and Neufeld), and faces the prospect of having the matters revived with the accompanying publicity that will undoubtedly cause further harm to his business. Even if the delay of three years and eight months caused by the IDA were not inordinate, the entire process is obviously grossly unfair to Mr. Smith. Guilty of any conduct warranting discipline or not, he should have had a hearing on the merits before the end of nearly seven years. The unfairness is greater in that the offence alleged against him is lack of supervision of Mr. MacBain, the employee alleged to be the actual wrongdoer, who has not, and cannot be, disciplined because of expiration of the limitation period for discipline proceedings.

 40      In Misra v. College of Physicians and Surgeons of Saskatchewan, (1988), 52 D.L.R. (4th) 477, this Court found that a delay of four years in bringing disciplinary proceedings against a doctor, based on a decision to await a decision on criminal proceedings arising out of the same matter, constituted an abuse of process and a breach of natural justice. The judgment in Misra was one of the judgments considered by Bastarache J., in arriving at the following conclusion in Blencoe:

[115]      I would be prepared to recognize that unacceptable delay may amount to an abuse of process in certain circumstances even where the fairness of the hearing has not been compromised. Where inordinate delay has directly caused significant psychological harm to a person, or attached a stigma to a person's reputation, such that the human rights system would be brought into disrepute, such prejudice may be sufficient to constitute an abuse of process. The doctrine of abuse of process is not limited to acts giving rise to an unfair hearing; there may be cases of abuse of process for other than evidentiary reasons brought about by delay.

 41      While the circumstances of Mr. Smith are not quite as severe as those of Dr. Misra, who was barred from the practice of his profession during the four year delay, the effects upon his reputation, career and personal life, of the continuation of the prosecution for a period of seven years, and possibly several years more given the time needed for hearings and possible appeals, amounts in our view, to an abuse of process. His reputation was harmed by the bad publicity in 2000 to the extent that his new business dwindled from $12 million annually to zero within two years. By 2004, he had recovered new business levels to what they were previously, when the Notices of Hearing resulted in more negative publicity. We have no evidence as to what happened after 2004, but can infer that the results would have been the same as before, with a wave of more new bad publicity to come when the IDA resumes its proceedings now, if allowed to do so. This is the sort of harm contemplated by Bastarache J. in the above quotation. In our view, allowing continuation of the proceedings would bring the disciplinary system of the IDA into disrepute.

 42      Mr. Smith's appeal is allowed and the decision of the Commission is set aside. The Commission is directed to dismiss the disciplinary proceedings against him. Mr. Smith will have his costs of the appeal.

SHERSTOBITOFF J.A.

CAMERON J.A.:— I concur.

LANE J.A.:— I concur.