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Power Appeal

Saskatchewan bill to give SROs statutory power in the works

March 2007

BY MARK BROWN

 

A panel of three judges with the Saskatchewan Court of Appeal has reserved judgment on whether the Investment Dealers Association of Canada can impose sanctions on members after they have left the industry.

 

The IDA was 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.

 

In his decision Ready deemed Bylaw 20.7 and former Bylaw 20.21 ultra vires [beyond powers].

 

The case has wide-reaching implications not just for the IDA but for self-regulatory organizations in general. Understandably, the Mutual Fund Dealers Association of Canada sought and was granted intervener status on the file, although its participation was limited to written submissions and to questions related to the scope of powers available to SROs.

 

Jeff Kehoe, the IDAs director of enforcement litigation, who was present at the appeal, says the judges asked quite a few questions of both sides. The appeal took an entire day even though it was only scheduled for the morning.

 

Fittingly, on the same day litigators were debating the IDA's appeal, Bill 19, an amendment to The Securities Act that would grant self-regulatory organizations like the IDA statutory powers over its members, passed second reading in the Saskatchewan legislature. Kehoe says the province was sufficiently concerned that it introduced the bill to grant the IDA jurisdiction over former members for a period of two years.

 

The bill explains that "this amendment gives self-regulatory organizations the power to discipline former members and their representatives with respect to their conduct when they were members." The bill explicitly notes that the SROs currently lose jurisdiction over firms and their employees when they cease to he members.

 

If the bill passes third reading it would make Saskatchewan only the second province to grant such powers to the SROs. At the centre is case that goes back seven years.  MacBain, Neufeld and Smith have been defending themselves ever since. The factum filed on Nov. 22, 2006, with the Court of Appeal for Saskatchewan by the three advisors 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 commissions 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, raking 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, but he was forced to resign a short time later when his new employer was threatened with law suits. 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 Hearing 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 fear that hearings on the IDA's allegations will harm their new careers personal lives.  In the case of MacBain and Neufeld, the factum states that "they have al ready suffered the ultimate sanction that the IDA could have imposed - banishment from the industry."

 

The IDA reasserted its position in its reply to the appellants factum filed on Dec. 11, 2006, dismissing the respondents' arguments. "There is no evidence suggesting that MacBain and Neufeld will suffer any additional stigma as a result of the disciplinary hearings," the IDA states.

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