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SRO powers under scrutiny
February 22, 2007 | Mark Brown

The Investment Dealers Association of Canada will defend its right to impose sanctions on members after they have left the industry in a Saskatchewan courtroom on March 12.

The IDA is appealing a Saskatchewan Financial Securities Commission panel decision involving Wade MacBain, Karl Neufeld and Fred Smith. The original case set out to resolve two key questions, the most important of which involves IDA bylaw 20.7 and whether the SRO has jurisdiction to discipline former members.

Bylaw 20.7 states "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."

But, last February, SFSC panel chair William Ready ruled the IDA's contract doesn't give the association the right to prosecute former members. In his decision, Ready relied on Chalmers v. the Toronto Stock Exchange, which found that the authority of domestic tribunals (including the IDA) 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 [beyond powers]," he wrote in his decision.

The case has wide-reaching implications not just for the IDA but for self-regulatory organizations in general, which has the Mutual Fund Dealers Association of Canada seeking intervener status on the file.

The MFDA has filed the papers and is waiting for the court to respond. Alex Popovic, the IDA's director of enforcement, says this sort of request is not uncommon. "The MFDA is in a similar position to the IDA in terms of continuing jurisdiction," he says.

The MFDA was not available for Saskatchewan by MacBain, Neufeld and Smith tells a story of three advisors' fall from grace. It describes their plight as being the "result of the publication of false allegations and spurious lawsuits by a group of disgruntled investors."

Back in 1995, the three were among a group of professionals who founded Matrix Financial Corp., Saskatchewan's only full-service brokerage. Over the next five years, the brokerage flourished. At its peak, MacBain had a book of about 750 clients and at times managed more than $90 million in assets.

According to the factum, by 2000, the downturn in the market coupled with the harsh conditions in the agriculture industry in the province took its toll on investors' savings. In particular, the Saskatchewan Wheat Pool, one of the stocks MacBain had recommended to a number of his clients, "saw a significant reduction in its share price."

Rumours began to swirl that MacBain "obtained kickbacks or secret commission for giving advice to his clients to invest in Saskatchewan Wheat Pool." According to the factum, the rumours are completely false and are not being pursued by the IDA. But the damage was done. Within a little more than a year, Matrix was destroyed, taking the reputation and the careers of MacBain and Neufeld along with it.

Following the collapse of Matrix, MacBain tried to salvage his career by joining Nesbitt Burns. As many as 85% of his former clients followed him to the new firm, but he was forced to resign a short time later when his new employer was threatened with lawsuits. MacBain is now working with a mining company in Saskatoon.

Neufeld, who was Matrix's compliance officer, was forced to leave the province with his family after his tattered reputation made it impossible to find work. He eventually landed a contract position with the Resort Municipality of Whistler as a financial administrator, a role that is well below his credentials.

Of the three, Smith has been the only one able to rebuild his reputation. The allegations against Smith, who held various positions at Matrix over the years including ultimate designated person, are similar to those made against MacBain. Since 2001, Smith has been an investment advisor with Raymond James in Saskatoon. He is still a member of the IDA.

The IDA's Notice of Hearings against MacBain alleges that he "recommended investments that were not appropriate for the circumstances, caused his clients to update investment objectives documents ex post facto to accord with trades that he had previously recommended, and acted as an investment advisor in British Columbia and the Northwest Territories without registering in those jurisdictions." The notices against Neufeld and Smith relate to allegations that they "failed to properly supervise MacBain."

Among some of the other arguments laid out in the factum, the three respondents now fear that hearings on the IDA's allegations will harm their new careers and personal lives. In the case of MacBain and Neufeld, the factum states that "they have already suffered the ultimate sanction that the IDA could have imposed banishment from the industry."

The IDA reasserted its position in its reply to the appellant's factum filed on Dec. 11, 2006. In that document, the IDA dismissed many of the respondents' arguments. "There is no evidence suggesting that MacBain and Neufeld will not suffer any additional stigma as a result of the disciplinary hearings," the IDA states in its factum before dismissing the concerns as being speculative.

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(02/22/07)