B.C. Court of Appeal Considers Extraterritorial Reach of Securities Act
In an interesting new judgment - Torudag - the British Columbia Court of Appeal has held that the B.C. Securities Commission may assert regulatory jurisdiction over residents of other provinces, who engage in insider trading through a stock exchange in Ontario. The Torudag Court arrived at this conclusion despite extraterritoriality arguments about the constitutional applicability of the B.C. Securities Act.
The Torudag case arose on appeal from a preliminary decision of the B.C. Securities Commission. In that decision, the Commission found that it possessed jurisdiction to consider whether the appellant violated the insider trading provisions then in force under s. 86 of the Securities Act. In a subsequent liability decision, the Securities Commission held the appellant did in fact violate s. 86. This occurred because the appellant acquired shares of a resource issuer, known then as Icon Industries Ltd., while being in a special relationship with it and having knowledge of material facts that had not been generally disclosed. The Commission ultimately proceeded to issue sanctions against the appellant.
On appeal, the appellant argued that the Commission was incorrect to find that the Securities Act gave it jurisdiction over the offence. There were several factors which suggested that the connection between British Columbia and the trades was minimal:
- 1) At the time of the judgment, the appellant was in the process of moving from Alberta to Quebec, and had never been a B.C. resident;
2) The appellant acquired his Icon shares over the TSX Venture Exchange, which processes all trades using a server located in Toronto; and
3) The appellant acquired his shares through an online trading account with a dealer based in Connecticut, whose only Canadian office was in Montreal.
However, there were also some factors which supported a connection to British Columbia:
1) The majority of the sellers of the shares acquired by the appellant were B.C. residents;
2) Icon was a reporting B.C. company; and
3) The "special relationship" between the appellant and Icon arose from an agreement for the sale of mineral claims that was governed by B.C. law and subject to B.C. arbitral legislation.
The Court dismissed the appeal. Hall J.A., who delivered the unanimous reasons, placed particular emphasis on the regulatory functions of the Securities Commission, and the fact that Icon was a reporting issuer in B.C. In his view, these factors, together with the B.C. residency of some of the share vendors, created a "real and substantial connection" between British Columbia and the trades. Hall J.A. also suggested that, given the modern prevalence of electronic trading, the fact that the TSX Venture Exchange's server was located in Ontario was not sufficient to deprive British Columbia of a legitimate connection to the trades.
The most interesting aspect of Hall J.A.'s analysis was his rejection of the appellant's suggestion that only a "meaningful connection", and not simply a "real and substantial connection", would allow for the constitutional application of the Securities Act to extraterritorial trades. This argument arises from the territorial restrictions on provincial legislative power under s. 92 of the Constitution Act, 1867. In dismissing this argument, Hall J.A. suggested that the distinction between a "meaningful" connection, and a "real and substantial" one, was based solely on the concurring judgment of Bastarache J. in Castillo, and was not a real issue:
"In making the submission that he did, about it being necessary for there to be a “meaningful connection” between the conduct and British Columbia, counsel for the appellant made reference to some comments of Bastarache J. speaking for himself in a concurring judgment in the Castillo case cited above. In that judgment, Bastarache J. indicated that “meaningful connection” as a test would set the bar higher than “a real and substantial connection”. I confess to some difficulty in appreciating that there would be any difference of substance between the two phraseologies. In my respectful view, the two phraseologies capture the same concept, namely a state of facts demonstrating circumstances in which it would be appropriate for a tribunal to take jurisdiction over a legal issue or controversy." (para. 19)
The ruling in Torudag will serve as an important precedent in future litigation involving the extraterritorial reach of securities legislation. While certain aspects of Hall J.A.'s reasoning are fact-specific, the case suggests that Securities Commissions possess jurisdiction over foreign persons engaging in transactions on foreign exchanges, provided there are other facts which establish a "real and sufficient connection" to the province concerned. It is also possible that Torudag will be cited in other contexts, such as where plaintiffs seek to plead statutory causes of action for securities misrepresentations in multijurisdictional class actions (though the two situations are distinguishable).
However, whatever the correct result on the facts of Torudag, certain aspects of the Court's legal analysis are open to question. In particular, the Court's finding that a "real and substantial connection" with the province engaged the Commission's jurisdiction under the Securities Act seems to neglect the difference between superior courts (which derive their jurisdiction in part from s. 96 of the Constitution Act, 1867), and regulatory tribunals (which derive their jurisdiction from their enabling legislation). In the context of tribunals, their extraterritorial jurisdiction cannot be any greater than the legislative jurisdiction of the province by which they were enacted. This issue of provincial legislative jurisdiction is distinct from the issue of judicial jurisdiction, and it was in relation to the latter that the "real and substantial connection" test applied by the Court originated.
The Supreme Court of Canada recognized this distinction in the Unifund case, which was also cited by the Court in Torudag. In Unifund, the Supreme Court held that an arbitrator under the Ontario Insurance Act was without jurisdiction to resolve a dispute that was not sufficiently connected to the province. Contrary to the Court's suggestion in Torudag, the majority of the Supreme Court in Unifund - and not merely Bastarache J. in his concurring Castillo judgment - recognized that a "real and substantial" connection would not necessarily permit the arbitrator to take jurisdiction over the dispute under the Ontario legislation. The Court in Unifund stated:
"... If the Ontario insurance scheme is wholly inapplicable to the appellant on the facts here, an arbitrator appointed under the Ontario Act is without any statutory or other authority to decide anything in this case. ...
...The territorial limits on the scope of provincial legislative authority prevent the application of the law of a province to matters not sufficiently connected to it: J.-G. Castel and J. Walker, Canadian Conflict of Laws (5th ed. (loose-leaf)), at p. 2.1. As will be seen, a “real and substantial connection” sufficient to permit the court of a province to take jurisdiction over a dispute may not be sufficient for the law of that province to regulate the outcome....The required strength of the relationship varies with the type of jurisdiction being asserted. A relationship that is inadequate to support the application of regulatory legislation may nevertheless provide a sufficient “real and substantial connection” to permit the courts of the forum to take jurisdiction over a dispute. This happens regularly. The courts, having taken jurisdiction, then apply the law of the other province applying rules of conflict resolution governing choice of law issues. ..." (paras. 17, 58 and 80)
These passages were not referred to by the Court in Torudag.
Torudag v. British Columbia (Securities Commission), 2011 BCCA 458
B.C. Court of Appeal Docket Number: CA037286
Date of Judgment: November 16, 2011
B.C. Court of Appeal B.C. Securities Act B.C. Securities Commission extraterritorial reach insider trading regulatory jurisdiction securities litigation special relationship TSX