Policy Documents
Decisions & Orders

Document Sub-category:Decisions
Document No.:2009/04/09
Subject:Golden Capital Securities Ltd., et al. [Decision]
Amendments:
Published Date:04/15/2009
Effective Date:04/09/2009

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2009 BCSECCOM 192.pdf
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2009 BCSECCOM 192


Golden Capital Securities Ltd.
Investment Industry Regulatory Organization of Canada
(formerly Investment Dealers Association of Canada)

Section 28 of the Securities Act, RSBC 1996, c. 418
Hearing and Review

Panel Brent W. Aitken Vice Chair
David J. Smith Commissioner
Suzanne K. Wiltshire Commissioner



Date of Hearing March 13, 2009

Date of Decision April 9, 2009

Appearing
Roger D. McConchie For Golden Capital Securities Ltd.
Alan McConchie

Robert W. Cooper For the Investment Industry Regulatory Organization of Canada
Joelle Walker

Bronwyn Turner For the Executive Director
Decision
¶ 1 This is a hearing and review under section 28 of the Securities Act, RSBC 1996, c. 418 of three decisions of a hearing panel of the Pacific District Council of the Investment Dealers Association of Canada relating to IDA member Golden Capital Securities Ltd.

¶ 2 After the events relevant to this hearing and review occurred, the IDA merged with Market Regulation Services Inc. The name of the merged entity is the Investment Industry Regulatory Organization of Canada. We refer to the IDA as IIROC, the acronym for the name of the merged organization.

¶ 3 Summarizing chronologically the three panel decisions under review, the first decision found that Golden Capital contravened paragraph 19.6 of IIROC By-law 19 by withholding information reasonably required for the purpose of an IIROC investigation. The second decision established a procedure to deal with documents relating to the investigation that are subject to claims of solicitor-client privilege. The third decision imposed penalties and costs.

¶ 4 Golden Capital asks that we set aside all three decisions.
¶ 5 In June and July 2006 Commission staff provided information to IIROC staff about the handling of some investment accounts by three employees at Golden Capital. All of the employees were registered under the Act and were “approved persons” under IIROC rules. The Commission suspected that the employees had contravened the Know Your Client rule by failing to identify the beneficial owners of securities being traded through the accounts.

¶ 6 IIROC staff started its own investigation. Seeking to establish the identities of the beneficial owners, IIROC staff requested information from Golden Capital, which Golden Capital provided. None of the information requests resulted in information that identified the beneficial owners of the securities being traded in the accounts.

¶ 7 IIROC staff believed that information identifying the beneficial owners would likely exist on the hard drives of the computers used by the three Golden Capital employees. IIROC staff informed Golden Capital of their intention to take mirror images of the hard drives.

¶ 8 Golden Capital expressed concern that records on the hard drives might be subject to solicitor-client privilege, might be not relevant to the investigation, or might be private in nature. IIROC staff agreed to give Golden Capital and the employees an opportunity to identify records that may be subject to claims of solicitor-client privilege. IIROC staff refused to deal with any claims based on relevance or privacy and referred Golden Capital to Union Securities Ltd. [2005] IDACD No. 51 – a case in which an IIROC panel found that a member contravened paragraph 19.6 by refusing to provide IIROC with records from a computer hard drive used by the member’s employee.

¶ 9 Golden Capital cooperated with the mirror-imaging of the hard drives. A third-party consultant mirror-imaged the drives in November 2006.

¶ 10 In January 2007 IIROC and Golden Capital made an agreement on the process for dealing with records subject to claims of solicitor-client privilege. Under that agreement, IIROC staff would not access the records on the hard drives directly but instead would provide the consultant with search terms (not to be disclosed to Golden Capital and the employees) that the consultant would use to identify the

¶ 11 Once a record was subject to a claim of privilege under that process, the party claiming privilege would give IIROC staff information sufficient to allow it to assess the claim. If IIROC wished to contest the claim of privilege, the party claiming privilege would provide a copy to the IIROC panel for a determination of whether privilege applied.

¶ 12 Between March 7 and April 3, 2007 the consultant provided Golden Capital with copies of the records identified by IIROC staff’s search terms. Golden Capital was given until April 18 to identify the records, if any, over which it wished to claim privilege.

¶ 13 On April 18, 2007 Golden Capital told IIROC staff that it would not comply with the January 2007 agreement. It said the search terms used by IIROC staff “must have been too broad” because they generated too many records, which included records clearly not relevant to the investigation and private records of the three employees. Golden Capital took the position that this showed IIROC was not acting reasonably in conducting its investigation.

¶ 14 On May 28, 2007 IIROC staff issued a notice of hearing alleging Golden Capital’s contravention of paragraph 19.6 of By-law 19.

¶ 15 On November 26, 2007 the IIROC panel found that Golden Capital contravened paragraph 19.6.

¶ 16 In that decision on liability, the IIROC panel contemplated the holding of a second hearing to deal with two issues: how to handle documents subject to a claim of solicitor-client privilege, and the penalties and costs to be imposed as a consequence of its finding on liability.

¶ 17 That hearing convened on December 20, 2007, but Golden Capital was prepared to make submissions only on the issue of privileged documents. On January 7, 2008, the IIROC panel issued a ruling directing the parties to deal with documents subject to claims of solicitor-client privilege in a manner substantially the same as the terms of the parties’ January 2007 agreement. Paragraph 8 of the ruling provides that in any application by IIROC staff to contest a privilege claim,

¶ 18 After the privilege ruling, Golden Capital reviewed the documents on the list generated by the search terms, identified those over which it wished to claim solicitor-client privilege, and provided that information to the consultant. The consultant then provided IIROC staff with access to the balance of the documents. To date, IIROC has not contested any of the privilege claims.

¶ 19 On March 12, 2008 the IIROC panel heard submissions on penalty and on April 19 ordered Golden Capital to pay a fine of $75,000 and costs of $76,760.
¶ 20 Golden Capital says the IIROC panel’s decisions should be set aside, because:
¶ 21 IIROC says that the panel’s decisions do not involve any of the factors listed in Policy 15-601 Hearings that would lead the Commission to interfere in an IIROC decision, and that we should confirm the panel’s decisions.
¶ 22 On a hearing and review under section 28 of the Act, the Commission may confirm or vary the decision under review, or make another decision it considers proper: section 165(4).

¶ 23 The Commission’s standard for reviewing decisions of a self regulatory body like IIROC is set out in section 5.9(a) of BC Policy 15-601 as follows:
¶ 24 In our opinion, there is no reason for us to review the IIROC panel’s decision relating to privileged documents. To begin with, the decision makes no final determination about whether the panel has the jurisdiction to determine privilege. To the contrary, it gives Golden Capital the right to challenge the panel’s jurisdiction to do that.

¶ 25 Moreover, the effect of the decision is hypothetical. In the year or so that IIROC has known which documents are subject to privilege claims, it has not sought to contest any of those claims. The issue is moot until IIROC makes an application contesting a claim of privilege, the panel considers submissions on its jurisdiction, and makes a decision at least about that.

¶ 26 Finally, the decision about privilege has nothing to do with the IIROC panel’s decision on liability, which it made about two months before the privilege decision, nor with the penalty decision. The liability decision is not based on any issues involving the treatment of privileged documents, and the penalty decision is based solely on the panel’s findings in the liability decision.

¶ 27 There is therefore no substantive decision on the privilege issue for us to review.
¶ 28 IIROC By-law 19 deals with the investigation of members. These are the relevant excerpts:
¶ 29 As noted by the panel in the case before us, this matter “goes to the very nature” of how IIROC conducts investigations.

¶ 30 The panel followed earlier IIROC decisions purporting to establish the principle that IIROC has a duty to act reasonably in initiating and conducting an investigation under By-law 19, citing Derivative Services Inc. (1999) IDACD No. 29.


¶ 31 That case was about whether Derivative Services Inc. had contravened By-law 19.6 by failing to provide information to IIROC staff. In a preliminary ruling (see Derivative Services Inc. (1999) 22 OSCB 5543), the panel said (at page 403):

¶ 32 We agree that IIROC has a duty to act in good faith. It is fundamental to the rule of law that those with legislative powers to investigate must exercise those powers in good faith. IIROC’s investigative powers are contractual, not statutory, but it is a recognized self-regulatory organization under the Act. Under section 26(1) of the Act, IIROC has the duty to regulate its members in accordance with its By-laws and rules. Implicit in that obligation is the duty to exercise its regulatory powers, including its powers of investigation, in good faith.

¶ 33 In the decision on the merits, the Derivative Services panel considered whether IIROC had properly initiated and conducted its investigation under By-law 19, and expanded further the scope of the obligation to act reasonably:

¶ 34 In Union Securities [2005] IDACD No. 51 IIROC alleged that Union Securities Ltd. contravened paragraph 19.6 by refusing to provide IIROC with records from a computer hard drive used by a Union employee. The Union Securities panel accepted the concept of reasonableness, saying (at paragraph 6) that “investigations must be instituted in good faith and reasonably”, citing Derivative Services, and “must be conducted reasonably”.

¶ 35 The panel in the case before us followed Derivative Services and Union Securities. It said (at p. 9):


¶ 36 There are no words in By-law 19 to provide a basis for concluding that IIROC’s authority to conduct an investigation must be exercised reasonably, or that a reasonableness standard applies to the initiation and conduct of IIROC investigations generally. Neither do any of the IIROC cases cited to us identify any authority for those propositions.

¶ 37 How IIROC panels came to their conclusions about a reasonableness standard is not clear, although it appears that the Derivative Services panel simply accepted counsel’s submissions to that effect. This circumstance was then compounded by an apparent misreading of paragraph 19.6, evident from the statements in IIROC decisions that the information requested of members by IIROC staff must be “reasonably required”.

¶ 38 Paragraph 19.6 contains two related but separate thoughts. The first deals with IIROC access to relevant information. This is reflected in the clause “For the purposes of any . . . investigation, [IIROC staff] shall be entitled to free access to . . . all books of account, securities, cash, documents, bank accounts, vouchers, correspondence and record of every description of the person concerned.”

¶ 39 According to the Union Securities decision, paragraph 19.6 entitles the Association to free access to information “reasonably required” for the purpose of the investigation. This is a misreading of the paragraph – the words “reasonably required” do not appear in the clause entitling IIROC staff free access.

¶ 40 This brings us to the second thought in paragraph 19.6, which deals with the obligation of members not to obstruct IIROC investigations. This is reflected in the words “and no such person shall withhold, destroy or conceal any information, documents or thing reasonably required for the purpose of such . . . investigation.” Here the words “reasonably required” do appear, and they modify only the items that the person must not withhold, destroy or conceal. They do not modify the earlier clause entitling IIROC staff to free access.

¶ 41 A similar misreading has arisen in the interpretation by IIROC panels of paragraph 19.5. The Union Securities panel, referring to earlier IIROC decisions, noted that because investigations under By-law 19 “must be conducted reasonably”, the IIROC had to act reasonably in determining whether the information it sought under paragraph 19.5 was relevant.

¶ 42 Paragraph 19.5(b) says that a member must provide IIROC with information “that the Association determines may be relevant to a matter under . . . investigation.” There is nothing in paragraph 19.5(b) that imposes any reasonableness standard on the determination of relevance.

¶ 43 As a practical matter, IIROC panels have applied the reasonableness standard so that it requires the IIROC to do no more than what it is already required to do as a result of its duty to act in good faith (or, when it comes to dealing appropriately with claims of solicitor-client privilege, to act in accordance with the rules of natural justice).

¶ 44 Union Securities held (at paragraph 31) that, in applying the reasonableness standard in paragraph 19.5(b), the threshold for establishing relevance “is not high”, and that the determination of relevance will be reasonable “if the items demanded might possibly be relevant to the matters under investigation.” This interpretation effectively removes reasonableness as a factor in determining relevance.

¶ 45 IIROC panels have also correctly held that the discretion of determining relevance under paragraph 19.5(b) rests solely with IIROC – there is no role in this determination for the person under investigation.

¶ 46 Consider, for example, this excerpt from Union Securities:

¶ 47 Turning to the criteria identified by the panel in the case before us for testing reasonableness in IIROC investigations, the first is the reasonableness of the decision to start an investigation. Derivative Services held (at page 10) that IIROC can meet the reasonableness standard in initiating an investigation if it has received information that “indicates the possibility of a violation of its By-laws or other rules.” This is, appropriately, a very low threshold and is nothing more than is required under a duty to act in good faith.

¶ 48 The second criterion – whether IIROC staff gave notice of the investigation is surprising on its face. It is in the nature of investigations that their effectiveness is

¶ 49 The third criterion deals with disruption of the business activities of the person from whom the information is sought. This is another aspect of the duty to act in good faith. The language used by the panel in this criterion is unfortunately broad, appearing to require the IIROC to proceed in a manner that “will have a minimal impact”. There is nothing in By-law 19 to support that interpretation. Although IIROC, to meet its duty to act in good faith, must minimize disruption of business activities, some disruption may be unavoidable if the aims of the investigation are to be met. In some circumstances, the disruption could be considerable, but so long as IIROC is otherwise acting in good faith, disruption alone is not sufficient to impugn an investigation. Whether IIROC acted reasonably could be relevant in determining whether it acted in good faith, but the point is that the fundamental obligation is to act in good faith, not to act reasonably.

¶ 50 The fourth criterion is whether the information IROC seeks is reasonably required. Union Securities interpreted the scope of person’s right to withhold information under paragraph 19.6 as follows:

29 . . . We interpret the words ‘reasonably required’, for the purposes of the investigation, to be that information which the IDA has determined may be relevant to the investigation. The clear meaning of the language of the two paragraphs of By-law 19 is that once the IDA has determined possible relevance, it is entitled to free access to it.

¶ 51 We find that IIROC has no obligation to act reasonably in making any decisions in connection with the initiation or conduct of an investigation under By-law 19. Its only duty is to act in good faith.

¶ 52 Accordingly, there is no need to “read together” paragraphs 19.5 and 19.6 for them to work properly. Paragraph 19.5(b) gives IIROC power to order an IIROC member to produce information relevant to an investigation. IIROC has sole discretion to determine what is relevant.

¶ 53 Paragraph 19.6 entitles IIROC to free access to information, including “records of every description” in the possession of a member that IIROC considers may be

¶ 54 The notion that IIROC has an obligation to act reasonably in addition to its duty to act in good faith is also contrary to the public interest. The duty to act in good faith is long-established, well-understood, and adequately protects the interests of persons under investigation. It is the only duty that applies to Commission investigations – investigations that can lead to far more severe sanctions than those IIROC can impose.

¶ 55 It is in the public interest that IIROC be able to pursue investigations in good faith without having to consider whether every decision it makes in the course of initiating and conducting an investigation will be considered “reasonable” when viewed after the fact.

¶ 56 This case is itself a demonstration of the problems associated with introducing a reasonableness standard to the conduct of investigations. When the IIROC search terms produced what Golden Capital considered to be too many documents to review, and inevitably contained irrelevant and private documents, Golden Capital felt itself entitled to deny IIROC access to the mirror-imaged records. It took the position that IIROC had the onus of proving that it was conducting the investigation reasonably, and that it acted reasonably in determining which records were relevant. IIROC having failed to do so to Golden Capital’s satisfaction, Golden Capital decided it was justified in refusing access to the mirror-imaged records.

¶ 57 The ultimate outcome of this line of reasoning is that IIROC cannot gain the free access to records to which it is entitled until agreement is reached with the person who has possession of the records (and who quite possibly is the subject of the investigation) about whether IIROC has made reasonable decisions about what was relevant, and has otherwise conducted its investigation reasonably. What is this, if it is not, in the words of the Union Securities panel, setting a fox, even if only an alleged one, on guard of a henhouse? It is hard to imagine an interpretation more crippling to IIROC’s power to investigate effectively and efficiently in the public interest.
¶ 58 Most of the authorities cited by Golden Capital are not relevant. Many relate to the rules of production and access in the context of private litigation, which has nothing to do with investigations under securities laws or by IIROC.

¶ 59 The law is clear that firms and individuals in the business of trading in securities have an extremely low expectation of privacy over records and things connected to their business.

¶ 60 In British Columbia Securities Commission v Branch [1995] 2 SCR 3, Justice L’Heureux-Dube, in concurring reasons, said:
¶ 61 These principles apply equally to investigations conducted under IIROC By-laws.

¶ 62 The appropriate expectation of privacy was well-articulated in Union:
¶ 63 Golden Capital objects to being required to produce the hard drives, on the basis that hard drives are not among the list of items a Member is required to produce under paragraph 19.5(b). We disagree. In our opinion, the requirement in that paragraph that the member provide “information, books, records and documents . . . in such manner and form, including electronically, as may be required by the Association” are broad enough to include computer hard drives. In addition, paragraph 19.6 entitles IIROC to records “of every description.” Accordingly, Golden Capital was prohibited, under paragraph 19.6, from withholding from the IIROC “any information, document or thing” reasonably required for the investigation. A hard drive is a thing included in the list of items required to be produced under paragraph 19.5(b) and to which IIROC has free access under paragraph 19.6.
¶ 64 We find that in its decision on liability the panel erred in law in finding that IIROC has a duty to act reasonably in the course of an investigation, other than to the extent necessary to meet its duty to act in good faith. However, we do not fault the panel for that error – it was simply following the precedents of earlier IIROC decisions.

¶ 65 In light of our finding that IIROC has no duty to act reasonably, Golden Capital’s submissions that IIROC failed to prove it acted reasonably are not relevant. However, the panel considered those submissions in applying the reasonableness standard, and we find that, had that been the standard, the panel correctly concluded, for the reasons it stated, that IIROC acted reasonably.

¶ 66 There was no suggestion in the submissions, nor did we find any evidence, that IIROC failed to act in good faith.

¶ 67 Golden Capital says that the panel’s decision on penalties and costs is “grossly in excess of any sum that might reasonably be awarded in the circumstances.”

¶ 68 Golden Capital says that it acted reasonably and in good faith. It says it was merely seeking to protect from disclosure documents that were subject to claims of solicitor-client privilege, were irrelevant, or were private in nature.

¶ 69 Golden Capital made no specific submissions about what penalties would be appropriate. We assume its position, as it was in the penalty hearing before the IIROC panel, is that a reprimand would be sufficient, or, alternatively, any fine should be “modest”.

¶ 70 Derivative Services held that the failure by an IIROC member to cooperate with an investigation is a serious contravention of IIROC By-laws (see [2000] IDACD No. 26 at page 12):

¶ 71 In considering the matter of penalty in the case before us, the IIROC panel considered and applied IIROC’s Disciplinary Sanction Guidelines to the facts of the case and its findings. It noted that Golden Capital had a disciplinary history, intended to act in the manner that the panel found to be a contravention of By-law 19, failed completely to produce the mirror-imaged records when requested by IIROC staff, and delayed the investigation and increased its costs. It also noted that the information withheld was of central importance to the investigation. In our opinion, its conclusions on all these matters were reasonable.

¶ 72 The panel also rejected Golden Capital’s submissions that it acted in good faith and on legal advice in challenging IIROC’s authority under By-law 19. Referring to Derivative Services, the panel said:

¶ 73 We agree. There was no new legal ground to be tilled on the issues around IIROC’s entitlement to the information it was seeking from Golden Capital. All of the issues that were relevant in this case were addressed and settled in Union Securities, a case IIROC provided to Golden Capital at the outset of the dispute over access.

¶ 74 The only issue that Union Securities did not deal with was the application of the Personal Information Protection and Electronic Documents Act, SC 2000, c. 5 and the Personal Information Protection Act, SBC 2003, c. 63. However, there are no real issues to be argued here. The federal legislation permits the disclosure of information when required to comply with “an order made by a court, person or body with jurisdiction to compel the production of information.” IIROC has that jurisdiction under paragraph 19.6.

¶ 75 The British Columbia legislation specifically permits the disclosure of information for investigations related to trading in securities by organizations recognized by the Commission, of which IIROC is one.

¶ 76 In determining the amount of the penalty, the panel noted that the minimum suggested fine in IIROC’s Disciplinary Sanction Guidelines is $50,000 for a contravention of paragraph 19.6. The panel then weighed the aggravating and mitigating factors, considered appropriate precedents, and set the fine at $75,000. In our opinion, the penalty it imposed and the process it followed in setting it were reasonable. Indeed, we would have considered a higher penalty reasonable and appropriate in the circumstances of this case.

¶ 77 In determining costs, the panel considered the costs submitted by IIROC staff, and reduced them for the reasons described in the decision. In our opinion, the costs it imposed and the process it followed in determining them were reasonable.

¶ 78 As stated in BC Policy 15-601 the Commission generally confirms IIROC decisions unless one or more of the criteria in section 5.9(a) of the Policy apply. The two criteria relevant in this case are whether IIROC erred in law and whether the Commission’s view of the public interest differs from IIROC’s.

¶ 79 Although the IIROC panel erred in law in applying the reasonableness standard in its liability decision, we find its decision was otherwise made in accordance with the law, the evidence and the public interest.

¶ 80 None of the section 5.9(a) criteria apply to the panel’s penalty decision. We find its decision was made in accordance with the law, the evidence and the public interest.

¶ 81 We confirm the IIROC panel’s liability and penalty decisions. As noted above, it is not necessary to review the panel’s privilege decision.

¶ 82 April 9, 2009

¶ 83 For the Commission