OSC Second Guesses IIROC on Marc McQuillen Settlement Agreement and Northern Securities Penalties

As we discussed in a previous post, the Ontario Securities Commission (OSC) rarely exercises its broad statutory discretion to interfere with and remake IIROC decisions. Last month, the OSC departed from this approach on two separate occasions.

First, in McQuillen, the OSC took the rare but not unprecedented step of setting aside as “manifestly unfair” a 2007 settlement agreement (the Agreement) between IIROC and Marc McQuillen (the Applicant). The OSC also ordered IIROC to expunge the Applicant’s related disciplinary record and to repay $25,000 in fines to the Applicant.

The Applicant entered into the Agreement with IIROC admitting to certain trading contraventions after IIROC Staff alleged in 2007 that both the Applicant and his immediate supervisor (Berry) had breached securities laws. The IIROC allegations were identical with respect to Berry and the Applicant.

In 2013, after a seven-day contested hearing, an IIROC hearing panel dismissed all of the allegations against Berry. In view of this decision, the OSC concluded that it would be manifestly unfair to require the settlement Agreement to stand.

In a rare acknowledgment of the burdens faced by respondents in actually defending multi-respondent proceedings, the OSC panel in McQuillen accepted that in 2007 the Applicant “realistically had little choice but to agree to a settlement rather than contest IIROC Staff’s position at a hearing on the merits with the time and expense that would have entailed.”

In one recent post, we noted that even complete success on the merits does not entitle successful parties to be made whole for defence costs. Respondents contesting allegations face serious reputational and financial costs even if they ultimately prevail after a contested hearing.

In another recent post, we noted that, for expediency and certainty, respondents may contemplate settling allegations that could be contested. For example, in AiT Advanced Information Technologies Corp., Re (2008) 31 O.S.C.B. 712, two respondents — the issuer and its CEO — agreed they contravened securities laws, and paid legal costs and fines. The third respondent, a director and outside counsel, successfully contested the allegations. In a decision that strongly influenced the McQuillen panel, the OSC revoked its order approving the settlement agreements for the company and its CEO, and acknowledged that the CEO “suffered personal and financial consequences” as a result of the settlement.

McQuillen also appears to be the OSC’s first decision addressing whether section 147 of the Securities Act (Ontario) — which gives the OSC a very broad exempting power with respect to “requirements” of Ontario securities law — permits the OSC to grant exemptions from both substantive and procedural requirements. The OSC decided that it does.

Second, also last month, in Northern Securities, the OSC reduced the length of suspensions and the quantum of fines previously imposed by IIROC on certain officers of Northern Securities Inc. For example, the OSC ordered the CEO of Northern Securities to pay a fine of $250,000 (instead of $625,000) noting that fines of the magnitude requested by IIROC have been imposed in the past in egregious cases tantamount to fraud. The OSC reduced the quantum of fines in this case because fraud was not alleged and there was no direct financial harm or loss to investors.

The OSC also ordered the CEO of Northern Securities to pay $62,500 in costs (instead of $125,000), because one of the three counts against him, which would have involved very significant investigation and hearing time, was dismissed.

Finally, the OSC suspended the CEO’s registration for one year (instead of two years) and imposed a two-year ban (instead of a permanent ban) from acting as an ultimate designated person (UDP). IIROC’s Dealer Member Disciplinary Sanctions Guidelines recognize that a permanent UDP ban should be imposed in cases where at least one of certain enumerated factors is present. Only two of these factors might have applied to Northern Securities’ CEO. IIROC Staff did not tender evidence or make specific submissions in respect of one of the factors, and there was no suggestion by witnesses providing character evidence that the second factor was present. Based on this analysis, the OSC reduced the permanent UDP ban previously imposed by IIROC to a two-year suspension.

McQuillen and Northern Securities present rather unusual outcomes. Parties seeking to have IIROC decisions overturned by the OSC still need to overcome heavy legal burdens.

AiT hearing and review IIROC McQuillen Northern Securities OSC penalty hearing sanctions settlement agreement



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