Court finds IIROC did not breach disclosure obligation regarding records in third party’s possession
A recent case before the Court of Appeal of New Brunswick has shed light on the disclosure obligations of regulatory bodies like the Investment Industry Regulatory Organization of Canada (IIROC), particularly when the document sought is with a third party.
In Investment Industry Regulatory Organization of Canada v. Crandall, 2020 NBCA 76, the appeal court allowed IIROC’s appeal and restored the decision of the IIROC panel, which said the respondent had engaged in excessive and often unauthorized trading that effectively stripped one of his elderly client’s accounts of the profits realized.
The respondent claimed that, for the proceedings, he needed various documents that were not in his possession, consisting of work records such as notebooks, trade tickets, telephone notepads and emails. He said that he left these work records with National Bank Financial Inc. when he resigned in 2012. Staff at the IIROC conveyed at least 19 requests to NBF for the production of these documents, and some of the records were found and disclosed to the respondent.
During the hearing before the IIROC, the respondent cross-examined the witnesses including the elderly complainant, but opted not to testify in his own defence on the basis that he could not do so without his personal notes. As a result, most of the complainant’s testimonial evidence was uncontested.
The IIROC panel found that the respondent had engaged in excessive trading and in unauthorized discretionary trading and had made unsuitable recommendations for the complainant’s personal investment account.
In the respondent’s application for review with the Financial and Consumer Services Tribunal, the respondent initially alleged that he was denied the right to a panel composed entirely of individuals whose mother tongue was English and was denied the privilege of access to documents critical to his defence.
During the pre-hearing conference, the applicant withdrew the language-related ground. The tribunal raised its own preliminary motion in connection with the disclosure provided to the respondent. The tribunal ultimately rescinded the IIROC’s decision and ordered a stay of proceedings, stating that the failure to provide certain records sought from NBF during the IIROC proceedings breached the IIROC’s duty of procedural fairness.
The Court of Appeal of New Brunswick allowed the IIROC’s appeal and restored the decision of the IIROC panel, ruling that the process before the tribunal was not procedurally fair to IIROC, that the tribunal incorrectly held that the duty of procedural fairness had imposed upon IIROC an obligation to disclose materials that were not in its possession and that NBF’s failure to produce the requested documents did not amount to a breach of procedural fairness.
The court found two procedural errors in the tribunal’s process which raised a reasonable apprehension of bias. First, the tribunal improperly made its own formal motion and adjudicated it. Second, the tribunal, on its own initiative, severed the grounds for review and chose to hear first only the issue relating to disclosure. In doing so, the tribunal provided no authority, no stated reasons and no opportunities for the parties to be heard on this matter.
The court then said that IIROC did not breach its duty of procedural fairness, whether during the investigative stage or during the adjudicative stage of the process. At the investigative stage, IIROC made numerous requests of NBF for documents, disclosed the relevant records that NBF produced and informed the respondent regarding the replies it received from NBF.
As regards the adjudicative stage, the court held that the tribunal improperly held that the duty of procedural fairness imposed upon IIROC the obligation to disclose materials that NBF had not provided. IIROC had repeatedly asked NBF for the documents that the respondent wanted and let the respondent know about the results of these inquiries.
The court said that the tribunal should not have characterized this as a disclosure case because IIROC could not disclose something which was not in its possession, and which was in the exclusive possession of a third party. Rather, this case involved the possible loss or destruction of documents by a third party, which was not done for the purpose of obstructing the IIROC proceedings.
Criminal law principles should apply, such that the respondent should show that the loss or destruction of the documents caused him actual prejudice. Because the respondent opted not to testify, he failed to show such actual prejudice, the court concluded.
Ted Brook, an associate at Norton Rose Fulbright Canada LLP, explained in a blog post that this case “reminds administrative tribunals of the importance (1) of staying in their own lane, and leaving it to the parties to determine which issues should be the subject of a motion, and (2) of the dangers of deciding issues without providing notice to the parties and an opportunity to be heard.”