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
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
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.