If you violated Canadian securities law, would you rather live under the threat of being prosecuted for 74 years, or 12?
Most advisors would say neither. But a Supreme Court of Canada ruling released today picked the lesser of two evils.
The Court ruled on a case involving Patricia McLean, who contrary to reports in other media, was not a client-facing advisor (she was a director of Hucamp Mines Ltd., an Ontario junior mining company that traded in Ontario, B.C. and Alberta, between 1996 and 2001).
In 2001, she committed misconduct, which was later seen by the courts as being “aware of some trading in which other respondents were engaged which could be characterized as abusive.”
In 2008, McLean agreed to the following penalties in Ontario: a five-year trading ban (aside from two personal accounts), a $10,000 fine and a 10-year ban from being a director or officer for a reporting issuer.
Due to subsequent proceedings from the Manitoba and B.C. securities commissions, which were legal under what’s known as reciprocal orders, McLean feared she could potentially be under threat of litigation for 74 years if all 13 regulators chose to prosecute her, presuming she were registered coast-to-coast.
That’s despite the fact that the statute of limitations in all but one province is six years (it’s eight in Manitoba).
McLean appealed to the SCC. Her position? The statute of limitations expired six years after her 2001 misconduct. Her case is relevant to advisors because her troubles could’ve happened to anyone holding a securities registration in multiple jurisdictions. This nuance was not lost on Advocis, which testified during the case to argue advisors shouldn’t have to face the threat of decades-long prosecution.
For more on McLean, read: Regulatory daisy chain threatens advisors
SCC didn’t side with McLean’s interpretation that the statute clock starts at the point of misconduct. Instead, it said that if a home securities commission prosecutes a registrant, other commissions cannot stack other proceedings “on top of one another in the manner feared by the appellant [McLean].” So, secondary commissions would only have six years (or eight, in Manitoba) from the date of the settlement agreement with the first commission to prosecute a registrant.
(While the SCC didn’t mandate that, it stated it makes “eminent good sense” not to have that happen.)
Lou Brzezinski, a Blaney McMurty lawyer who represented Advocis, says, “We didn’t get everything we wanted” – Advocis would have preferred the limitation period end six years after first misconduct – “but this is a reasonable compromise. [We’re] happy to see the court adopt a reasonable, predictable model. [Previously,] there was no model of where the other commissions would go. Although this doesn’t give the appellant a complete victory, it provides more certainty.”
Read: Five reasons for a national regulator
Michael Feder, a partner at McCarthy Tétrault in Vancouver, calls the ruling sensible, because “for most people it’s a good thing not to be facing multiple proceedings at once,” spurred on by commissions fearing they’ll miss out on a chance to prosecute if the limitation period were shorter. He does, though, call McLean’s scenario of a 74-year pile-on by commissions “fanciful.”
John Fabello, a partner with Torys LLP in Toronto, sees a darker side to the SCC’s statement.
“This confirms that effectively, the limitation period is 12 years,” he says, because Commission One would have six years from date of first misconduct, and the remaining commissions would have another six years from the date of Commission One’s settlement agreement.
“There’s no way that was in the contemplation of the provincial legislatures. It’s completely out of whack with any limitation periods in the Commonwealth.” He hopes this triggers a legislative clarification, but concedes that’s unlikely.
Worse, Fabello says, the SCC judge wrote in the opinion that a six-year limitation period commencing from the date of misconduct, not the enforcement action, was a reasonable interpretation. But in a move that confirms the power of securities regulators, the judge still deferred to the commission’s ruling.
Read: Advocis to fight legal precedent
What advisors can do
Brzezinski says if one province issues an order (as opposed to an agreement), others only have until that order expires to go after you. So, the longer a sentence, the longer you’re exposed: “If you make a two-year sentence, nine other provinces have two years to start their own proceedings.”
Fabello says an advisor could try to avoid serving consecutive penalties in multiple jurisdictions by requesting a condition of his settlement with the first province be that there’s a similar settlement in the second province. “That’s the only time you have leverage – before you actually get the deal done.”
He adds advisors are no better off than before the ruling. Says Fabello, “The price of doing securities business in more than one province has doubled, and how could that be fair?”