Investment advisors cannot escape disciplinary sanctions by resigning, Court of Appeal says. But the new ruling may lead the way to further contesting of large fines.
All-Star Basketball player Kevin Garrett is right. Quitting is not an option.
After many years of back and forth, the debate around the impact of a resignation on self-regulatory organization disciplinary proceedings seems to be resolved by a recent judgment from the Ontario Court of Appeal in Taub v. Investment Dealers Association of Canada.1
Taub was an investment advisor. He resigned from his position with a brokerage firm and from the IDA.2
Taub’s resignation occurred before disciplinary proceedings could be instituted by the IDA against him for alleged market manipulation and use of confidential information.
Once accused, Taub argued that the IDA had no jurisdiction over him as he had resigned before the institution of the disciplinary proceedings and was no longer a member.
The IDA panel dismissed that argument and concluded that it retained jurisdiction.
On appeal, the Ontario Securities Commission upheld that decision.
On further appeal, the Divisional Court overturned the decision and determined that the IDA had no jurisdiction over Taub.
Ultimately the Ontario Court of Appeal had to decide who was right: the Court or the two disciplinary boards.
At the time, the IDA was a private voluntary association recognized by the Canadian authorities to regulate the activities of its members. Like all other members, Taub had originally agreed to be bound by the rules of the association.
One of those rules provided that the IDA had continued jurisdiction over a former member for five years after a resignation.
In 1989, the Ontario Court of Appeal had decided that the Toronto Stock Exchange had no power to extend its disciplinary jurisdiction to former members in the Chalmers case.3
In 2008, the British Columbia Court of Appeal determined that the IDA could discipline former members in the Dass case.4
Taub had to convince the Ontario Court of Appeal that the BC Court was wrong and that the Chalmers case should be followed.
His main argument was that having resigned, he had pre-empted the ultimate penalty — expulsion — and made the discipline proceedings effectively moot.
This argument had been accepted by the Court of Appeal ten years earlier in the Chalmers case.5 Taub was expecting the judges would be consistent.
But ten years is a long time.
The appeal judges felt that Chalmers had to be reversed.
Their new reasoning was simple: Expulsion is no longer the ultimate penalty. It is now outweighed by the large fines provided by the IDA by-laws.
According to the Court of Appeal, “If the IDA is able to impose the same significant fines when disciplining former members as it can when disciplining members and if those fines are legally collectable, then expulsion or removal of a person from membership (…) would not be the ultimate or necessarily the only significant disciplinary penalty that could be imposed on former members.”6
On that basis, the appeal judges dismissed Taub’s argument and concluded that the IDA retained disciplinary jurisdiction over him notwithstanding his resignation.
With that decision and the BC judgment in Dass, one may believe that the debate is over.
But the very basis of the Taub decision depends on whether the large fines are collectible. This is not obvious.
Indeed both common and civil law make the collection of contractual fines or penalties questionable in some circumstances when considered to be abusive or out of proportion.7 Further, in common law, the term “penalty” can itself raise enforcement issues.
So if large fines are now the ultimate penalty but they are not collectible under the law, they are not effective.
If large fines are not upheld as effective sanctions expulsion may be restored as the “ultimate” sanction and thus the Taub argument is successful. Based on the clear and consistent decisions in Dass and now Taub, however, in the end, Garrett is right. Quitting is not an option.
12009 ONCA 628 (C.A.)
2At the time, the IDA was the self-regulating organization recognized by the Canadian regulators. It has been replaced by IROCC in 2008.
3Chalmers v. Toronto Stock Exchange, (1989), 70 O.R. (2d) 532 (C.A.)
4Dass v. Investment Dealers Assn. of Canada (2008), 85 B.C.L.R. (4th) 53 (C.A.)
5Chalmers v. Toronto Stock Exchange (1989), 70 O.R. (2d) 532 (C.A.)
6p. 26, par. 60
7See Birch v. Union of Taxation Employees (2008), 93 O.R. (3d) 1 (C.A.), leave to appeal dismissed,  S.C.C.A. No. 29; Article 1623 of the Civil Code of Québec.