Your Guide to the Supreme Court’s Recent Securities Ruling and Protecting your Investments

Broad Strokes (The Macro-Economic Context)

Canada presents a somewhat embarrassing spectacle at the International Organization of Securities Commissions.  Of the 107 countries represented by the organization, Canada is the only one without a delegate in attendance armed with the mandate or power to agree to anything on our behalf.   Instead, two provincial regulators from Ontario and Quebec have a seat at the table.

The provinces have been regulating securities for as long as there have been securities, and as a result we currently have 13 different sets of securities regulators and regulations—that’s one for every province, every territory and, somewhat inexplicably, a Canadian regulator that does not have dominion over Canada.  Despite the recommendations of numerous commissions and experts over the past 40 years, previous attempts by the federal government to implement a single regulator have broken up on the rocky shoals of constitutional clarity.

Although not quite everyone agrees, many say that the policy case for a single regulator is overwhelming.   Firstly, it is extremely hard for our mid-sized firms to expand nationally and internationally when they have to cover the costs of ensuring they are in compliance with so many sets of regulation. We lose out on the benefit of mutual recognition agreements of our securities regimes with other countries, given the complexities of cutting a deal with 13 querulous securities commissions.   Public companies nearly always raise capital in several provinces, and large institutional investors tend to have diversified holdings that include investments in a variety of industries, from a variety of regions and countries.

As York University and former dean of Osgoode Hall Law School Patrick J. Monahan points out: “This long-simmering issue has acquired particular urgency in recent years as a result of the increasing integration of global financial markets. As we saw in the global financial crisis that emerged in the aftermath of the collapse of Lehman Brothers in 2008, this integration means that a default by a single market participant can set off a chain reaction that undermines confidence and can bring down the entire global financial system.”

Protection for individual/retail investors: a bird’s eye view of the regulatory landscrape

As far as CARP is concerned, the best reason of them all was that having a single, Canadian securities regulator would also address the issue of inadequate enforcement and inconsistent investor protection across Canada. Currently, fraudsters banned in one province simply move to a new province and continue operating. Canada has a securities enforcement mosaic, where each provincial securities commission has its own priorities, resources and varying levels of expertise. In 2006, the Crawford Panel on a Single Canadian Securities Regulator expressed “profound concern about ineffective enforcement,” which it called a “domestic and international embarrassment for Canada”.

The current regulatory landscape is as follows: the provincial regulatory commissions like the Ontario Securities Commission (OSC) are involved in regulatory policy development and monitor market participants for compliance with securities law. Where appropriate, they may enforce rules by issuing cease trade orders, imposing terms and conditions on registration or impose sanctions and penalties.  They cannot prosecute and they do not really recover money or offer mediation for individual investors.   Many believe that in actual fact, we rely on the American regulator, the SEC (Securities and Exchange Commission to prosecute white-collar crime more than we do our own.

The National Securities Regulator had been expected to include an enforcement and investigation function to provide a strengthened, more coordinated regulatory and criminal enforcement regime to improve investor protection from misconduct in Canada’s capital markets.

There are also several industry Self-Regulatory Organizations (SROs), the largest of which is the Investment Industry Regulatory Organization of Canada (IIROC) created in 2008 through the consolidation of the Investment Dealers Association of Canada (IDA) and the Market Regulation Services Inc.  Its mandate is to set and enforce quality regulatory and investment industry standards, protect investors and strengthen market integrity while maintaining efficient and competitive capital markets.

The Ombudsman for Banking Services and Investments (OBSI) currently offers retail investors the most helpful recourse for Canadian investors looking to obtain some sort of restitution—but we need to do better.  OBSI’s recommendations are non-binding and organizations/firm only belong on a volunteer basis.  To be fair though, most industry players will submit to OBSI’s recommendations.  Find out more about OBSI here:

Case Study: SROs, Working Hard or Hardly Working?  Potential Conflicts of Interest  in the Industry

In April 2008 a W-FIVE investigation revealed some shocking cases that suggested the (then) IDA existed for industry public relations purposes more than investor protection.   Most of us would be inclined to believe that we would be protected if we opted to invest with a reputable giant like RBC Dominion Securities, yet that is not necessarily true. It certainly wasn’t for (then) 58-year-old Nova Scotia farmer Donald Kennedy, who had inherited $155, 000 and placed it all in what he believed to be secure investments.  The unfortunate reality is that questionable, even predatory investment professionals can lurk in the most reputable places.  Mr. Kennedy’s original broker at RBCDS was fantastic. Under her stewardship, his investment was at one point worth $217, 000. When she went on maternity leave, Kennedy’s account was taken over by another RBCDS broker named Hugh Bagnell, and things started to go downhill.

Just under two years later, his account had dwindled to $1, 800.  Mr. Kennedy was concerned that his money kept disappearing but “being naive and him being a fairly high-paid professional, what do I hire him for if I don’t take his advice?” he said.  During this time, Mr. Bagnell was churning Donald Kennedy’s account (buying and selling stocks constantly while raking in the commissions and bleeding the account dry).  This spells out one of the conflicts of interest that exists in the investment industry: many (but not all) advisors are paid on commission and make money by selling their clients investment products. This can lead them to make trades that are not in the investor’s interest.  While most brokers do not abuse their clients’ principal the way Hugh Bagnell did, there is obviously a possibility that some retail investors are not earning as much as they could if their brokers were solely acting in the client’s interest.

It turns out that Donald Kennedy was not the first of Mr. Bagnells’ investment fraud victims. With the help of Toronto-based investor advocate Robert Kyle, W-FIVE uncovered a private IDA database that listed brokers who had multiple complaints, investigations, court actions and criminal charges leveled against them. It turned out that Hugh Bagnell was on this list and that he had been accused in no less than 27 incidents, including complaints and civil claims. In an interview with W-FIVE, IDA Senior Vice-President Paul Bourque said that individuals such as Bagnell are identified and dealt with on a “priority basis.”

Can it be understood that Hugh Bagnell was not a priority despite having been named in 27 incidents and complaints?  You decide.

After looking into the case, the IDA fined Bagnell $50,000 and imposed a permanent ban on him. It also imposed a fine of $70,000 on Bagnell’s former boss, Halifax RBCDS branch manager Frank Youden, for failing to supervise his employee.  The branch manager paid the fine and remained in his position but Bagnell walked away from the financial services industry, and his fine.

According to Robert Kyle, “The IDA cannot collect fines outside of the confines of a contract.  They can push you out of the industry, but once they do, they’ve lost their ability to collect it from you.”

The nail in the casket?  Paul Bourque openly acknowledged that the IDA did not get investors their money back and that it had only ever ordered restitution once.

CARP Recommendations for enhanced Investor Protection

CARP has called for a comprehensive investor protection function within the National Securities Regulator–and now will be calling for it within the provincial regulators. This would include:

  • A dedicated agency with specialist knowledge
    • to receive complaints
    • to investigate
    • to support prosecutions
  • A tribunal with authority
    • to order restitution
    • to undo [rescind] transactions
    • to order compliance
  • A compensation fund to pay the restitution
  • New criminal charges
    • presumably with new investigation capacity
  • Access for retail investors
    • to local offices
    • to mediation services
    • to an investor advisory panel


CARP members have strongly endorsed the initiative. Our polling shows that 86% of them agreed that Canada should have a National securities regular and a whopping 92% agreed that it should have the power to charge dishonest brokers and collect compensation for the victims from the perpetrators. They see value in having a single regulator and indicated even greater support for the agency to have enforcement and restitution powers.

Supreme Court Ruling on National Securities Regulator and the Main Arguments Being Heard

The heady days of 2010, when we had high hopes for the future of the National Securities Regulator, have come and gone. A Canadian Securities Transition Office was established last year after Mr. Flaherty introduced the Proposed Canada Securities Act and it seemed as though things were speeding along. Minister Flaherty was a huge proponent of legislation and the government had started laying the groundwork for the Act’s implementation.

Unfortunately, several of the provinces have taken issue with the proposed legislation, citing concerns that the court’s approval of the federal government’s proposed Securities Act would create a dangerous precedent, giving Ottawa de facto jurisdiction over areas that are currently regulated by the provinces. This is partially good news, because not all of the provinces are opposed to the concept of a National Securities Regulator. However, they are concerned that the Act may lead to further encroachments on provincial sovereignty in areas that are deemed to be of national importance: “Once it is dragged through the gates, this Trojan horse cannot be expelled and its forces become paramount to the provinces’ local forces which are under the banner of property and civil rights,” said B.C. lawyer, George Copley.

On December 22nd 2011, the National Securities Regulator Act died a fiery death when the Supreme Court declared it unconstitutional.   CARP Responded with the following press release: //

Kelley McKinnon, lawyer for the Ontario Teachers’ Pension Plan, said a critical element of securities regulation is managing the risks to the national economy that could arise from abuse:  “From a financial investor’s perspective, that is absolutely critical and it can only be done efficiently at the federal level,” Ms. McKinnon said.

There is a consensus among supporters of the NSR: the provincial regulator cannot effectively tackle investor or institutional abuse.  Very few provinces take up enforcement orders from other jurisdictions barring scam artists from participating in capital market activities. The priority of the provincial regulators—indeed their principle mandate—is to protect investors within their jurisdiction.

The Court heard from Ontario lawyers and investors who said the regulation of Canada’s capital markets is an essential element of the country’s economic well-being, and should be undertaken by a national government.

Judge LeBel reportedly grilled Ontario Lawyer Janet Minor while towing a hard line:

“What you are essentially saying is federalism doesn’t work and should move towards a unitary system,” he said. “If it’s important, it’s federal.”

The unanimous decision of the court establishes that oversight for the investment industry fits squarely within the “property and civil rights” powers that were assigned to the provinces by the British North America (BNA) Act of 1867.

The ruling does suggest that it would be possible for both levels of government to seek “common ground” and share oversight of securities, with the provinces able to look after the day-to-day aspects of the industry and the federal government able to keep an eye on systemic risk.

Lorne Sossin, Dean of Toronto’s Osgoode Hall Law School, said that the ruling was narrowminded and presented a backwards-looking view of federalism: “I think the Constitution, for the last 80 years or so, we’ve been saying is a living tree. This looks more like a view of the Constitution that’s likely to wither on the vine,” Mr. Sossin said.

Federal Finance Minister Jim Flaherty said he would respect the court’s ruling  “It is clear we cannot proceed with this legislation. We will review the decision carefully and act in accordance with it,” he said.

“CARP members had wanted to see the National Securities Regulator established because of the promised improvement in investor protection, including better investigation, mediation and restitution. Now the provinces, especially those that opposed the national body must step up and demonstrate how they would replace that vital investor protection and coordinate their efforts to ensure national uniformity. For too long, individual investors have been left largely to their own devices and even successful prosecutions do not make them whole. For seniors, especially, the losses can be life changing since they do not have enough time to recover their financial stability”, said Susan Eng, VP Advocacy for CARP.

CARP will not give up on the idea of real meaningful investor protection and will continue to maintain a watchful eye on this file.