BCSC

Decisions

GLOBAL SECURITIES CORPORATION [Decision]

BCSECCOM #:	Document Type: Decision
Published Date: 1997-07-18	Effective Date: 1997-07-16
Details:

IN THE MATTER OF THE SECURITIES ACT
R.S.B.C. 1996, c. 418

AND

IN THE MATTER OF GLOBAL SECURITIES CORPORATION

HEARING

PANEL: DOUGLAS M. HYNDMAN CHAIR
JOYCE C. MAYKUT, Q.C. VICE CHAIR

DATE: JULY 2, 1997

APPEARING: MARK SKWAROK FOR COMMISSION STAFF

STEPHEN ZOLNAY

MURRAY A. CLEMENS, Q.C. FOR GLOBAL SECURITIES CORPORATION

DECISION OF THE COMMISSION

1. INTRODUCTION

This decision relates to a hearing under section 161 of the Securities Act, R.S.B.C. 1996, c. 418. In a notice of hearing dated March 3, 1997, Commission staff ask the Commission to order Global Securities Corporation and its directors and senior officers to comply with two orders previously issued by staff demanding that Global produce certain documents.

2. BACKGROUND

Global Securities Corporation is a registered dealer based in Vancouver. In June 1996, Commission staff received a request from the United States Securities and Exchange Commission to obtain information related to accounts of Global for clients with United States mailing addresses. The request was made under the terms of a Memorandum of Understanding (“MOU”), dated January 7, 1988, between the Commission and the SEC. The SEC is the body empowered to regulate trading in securities under the U.S. federal securities laws. The MOU is a non-binding statement of intent between the two commissions regarding the exchange of information related to securities market oversight and enforcement. The purpose of the SEC’s request was to gather facts to determine whether anyone had violated U.S. federal registration requirements. The information requested was related to possible trades in securities by Global or its salespersons on behalf of individuals resident in the United States and would be contained in records kept by Global. Commission staff reviewed the request and determined that it would be appropriate to cooperate and compel production of the requested information.

On July 3, 1996, Commission staff issued an order that Global deliver to staff basic information related to all trading accounts with U.S. addresses (account numbers; names, addresses and telephone numbers of account holders; and names addresses and telephone numbers of registered representatives responsible for each of the accounts); more detailed information and records related to trading accounts for which Tracy-Anne Godoy was the registered representative; and documents relating to any client complaints or internal disciplinary actions involving Godoy. The order, issued under what is now section 141 of the Act, stated that the information and records were “required to be provided or produced for the administration of the Act, and to assist in the administration of the securities laws of another jurisdiction”, and directed that the information be provided by August 2, 1996.

Global responded through counsel with a series of questions about the order, the identity of the other jurisdiction and whether the scope of the demand could be narrowed. Staff responded to the questions and advised that the scope could not be narrowed. On August 1, 1996, Global responded by providing the information related to Godoy and her accounts but refused to provide any of the information related to U.S. accounts other than Godoy’s. Global later advised that it would reconsider its refusal to provide the information if Commission staff provided a copy of the SEC request and information about the SEC’s authority to obtain the information and its purpose in seeking it. Commission staff responded on October 16, 1996, with a further order under section 141, demanding production of the remaining information by November 1, 1996. Global refused to comply with the order of October 16, 1996. In response to further questions from Global, staff advised that they were not prepared to provide a copy of the SEC request.

Global continued to refuse to produce the information relating to U.S. accounts demanded under the orders. As a consequence, on March 3, 1997, the Executive Director issued the notice of hearing setting down these proceedings.

On April 17, 1997, Global filed a petition in the Supreme Court of British Columbia, seeking two forms of relief. First, Global sought a declaration that section 141(1)(b) of the Act is ultra vires the province and of no force and effect. Second, Global sought an order of prohibition, restraining the Commission from holding this hearing, on grounds that the Commission is subject to a reasonable apprehension of bias. On May 26, 1997, the Commission filed a notice of motion in the Court, seeking an order that the Court decline to hear the petition with respect to the validity of section 141, on the basis that the question ought properly to be heard by the Commission. On June 13, 1997, the Court dismissed both Global’s petition and the application of the Commission. Global has filed in the Court of Appeal a notice of appeal of the judgment of the Supreme Court. The Commission has filed a notice of cross-appeal.

On June 27, Mr. Justice Hollinrake of the Court of Appeal refused Global’s application to stay the Commission hearing until the appeal is heard.

3. BIAS APPLICATION

Before we heard argument on the merits of Commission staff’s application for a compliance order, Global asked us to hear argument and rule on its application that we decline to make the order requested by staff on grounds that the Commission is subject to institutional bias in this matter.

Global raised the same issue in its petition to the Supreme Court for an order of prohibition. Global argued that, although the Court dismissed its petition, an analysis of the reasons for judgment reveal that the Court did not actually address the issue raised in its application for an order of prohibition. Global therefore said that the Court did not really decide the issue so the Commission should hear it.

Commission staff argued that because the relief sought by Global was refused, the bias issue was res judicata and was a matter that should be left to the Court of Appeal.

We declined to hear the bias argument because the petition under which Global’s bias argument was made had been dismissed by the Supreme Court and that judgment was under appeal to the Court of Appeal. In those circumstances, we considered it inappropriate for the Commission to venture into the same territory.

4. ISSUES AND ANALYSIS

Section 141 of the Act reads as follows:

(1) The executive director may make an order under subsection (2)

(a) for the administration of this Act,

(b) to assist in the administration of the securities laws of another jurisdiction,

(d) in respect of matters in British Columbia relating to trading in securities in another jurisdiction.

(2) By an order applicable generally or to one or more persons or entities named or otherwise described in the order, the executive director may require any of the following persons to provide information or to produce records or classes of records specified or otherwise described in the order within the time or at the intervals specified in the order:

(a) a clearing agency;

(b) a registrant;

(d) a reporting issuer;

(e) a manager or custodian of assets, shares or units of a mutual fund;

(f) a general partner of a person referred to in paragraph (b), (c), (d), (g), (j) or (k);

(g) a person purporting to distribute securities in reliance on an exemption

(i) described in section 74 (2), or

(ii) in an order issued under section 76;

(h) a transfer agent or registrar for securities of a reporting issuer;

(i) a director or officer of a reporting issuer;

(j) a promoter or control person of a reporting issuer;

(k) a person engaged in investor relations activities on behalf of a reporting issuer or security holder of a reporting issuer;

(l) the Canadian Investor Protection Fund.

This section provides authority for Commission staff to obtain from registrants information related to trading in securities. Staff issued orders to Global compelling production of information related to securities trading accounts for U.S. residents, primarily in order to assist the SEC in an informal investigation, but the orders stated that the requested information was required to be provided or produced both for the administration of the Act and to assist in the administration of the securities laws of another jurisdiction.

Commission staff submit that Global has been in breach of the order to produce information for a year and has advanced no reasonable basis not to comply.

Global says that it has provided two of the three sets of information demanded by the original order and has raised a serious issue on the third set.

Global raised in the Supreme Court the argument that section 141(1)(b) of the Act, which authorizes the Executive Director to demand from a registrant production of information and records to assist in the administration of the securities laws of another jurisdiction, is ultra vires. That argument was rejected by the Court.

Global raised before us three arguments for declining to issue a compliance order:

1. Global has been denied the opportunity to ensure the SEC’s request for assistance was made in compliance with the MOU.

2. The SEC’s request is beyond its legal authority to require production of documents.

3. The scope of the order for production is broader than the scope of orders the Commission would make for its own investigations.

The first argument misconstrues the nature and purpose of the MOU, which is merely an administrative arrangement to facilitate cooperation between two agencies. Commission staff received a request from the SEC and, after determining that it would be appropriate to do so, decided to cooperate. Whether the request was made in the manner set out in the MOU is irrelevant to this proceeding.

The second argument is based on the proposition that the SEC must issue a formal investigation order, which it has not done in this case, in order to use its subpoena powers to compel production of documents. However, it is not the SEC that is compelling production in this case, it is the staff of this Commission. The authority is clear - section 141 of the Act.

The third argument has no merit. Section 141 says nothing about the scope of an order for production. Global has been ordered to produce some very basic information about the securities accounts it holds for U.S. residents. As a dealer with a head office in British Columbia, Global is required by section 27 of the Securities Rules, R.B.C. Reg. 194/97, to “keep at its head office … a complete and accurate record of its business transactions and financial affairs that are conducted … in or out of British Columbia …”. This includes, under section 39 of the Rules, a record for each account showing the name and address of the client.

Commission staff is entitled to obtain and review these records, as a matter of routine regulation, either in the course of a compliance review of a dealer under section 39 of the Act or, as in this case, through a demand for production under section 141. These powers are in addition to the broader subpoena powers given under section 144 of the Act to a person appointed pursuant to an investigation order and to the subpoena powers given to a Commission hearing panel under section 173 of the Act.

The record keeping obligations are designed to ensure that the Commission has prompt and unimpaired access to a dealer’s books and records. Ease of access to the information reflected in these records is necessary to enable the Commission to discharge its mandate to protect the public interest.

Accordingly, the Commission staff has a legitimate regulatory interest in the information demanded, both to further the objective of cooperating with the SEC in the regulation of international securities activity and to protect the integrity of our markets by determining whether a dealer based in British Columbia is conducting its securities related business illegally in a foreign jurisdiction. As a registered dealer subject to regulation by the Commission, Global has no choice but to produce the information.

We find that the orders were properly issued under section 141 of the Act. It concerns us that a registrant has refused to comply with an order of this nature for almost a year.

The situation of Global here is best described in the words of Wood, J. (as he then was) in British Columbia Securities Commission v. Branch (1990), 43 B.C.L.R. (2nd) 286 at 312 (S.C.), aff’d (1992), 63 B.C.L.R. (2d) 331 (C.A.) aff’d 1995 2 S.C.R. 3, where he said:

…the individual who is the subject of such an investigation [by the staff of the Commission] has from the outset known that he or she is participating in a highly regulated and controlled activity, namely, trading in securities. To apply to be licensed, which is a prerequisite to such participation, is to accept the expectation of constant and vigilant supervision, exercised by a regulatory authority whose powers are well known and widely accepted. There is nothing secret about the nature of the Commission’s powers, nor about its determination to pursue its mandate to protect the public. Those who do not wish to accept the supervision and regulation of the Commission ought to find another occupation.

5. DECISION

We consider it to be in the public interest that Global comply with the order for production of information. Accordingly, we order

1. under section 161(1)(a) of the Act that Global comply with, and that the directors and senior officers of Global cause Global to comply with, the orders issued under (what is now) section 141 of the Act on July 3 and October 16, 1996, by delivering the information demanded to Commission staff by August 1, 1997;

2. under section 174 of the Act that Global pay fees and charges for the costs of or related to this hearing in an amount to be determined following submissions from the parties.

DATED at Vancouver, British Columbia, on July 16, 1997.

FOR THE COMMISSION

Douglas M. Hyndman Joyce C. Maykut, Q.C.
Chair Vice Chair