Sara Blake |
To what extent may a tribunal exercise its provincial statutory authority to regulate persons or matters that occur outside the territorial boundaries of the province?
The Quebec securities regulator commenced tribunal proceedings to discipline individuals for a transnational “pump and dump” scheme. It alleged that they boosted the price of a penny mining stock by releasing false or misleading statements (the “pump”) and then profited by selling their shares to the public at inflated prices (the “dump”).
The scheme involved a shell company incorporated in Nevada whose shares traded over the counter in New York. At the outset of the scheme, a resident of Quebec acquired a majority shareholding. Then, offshore companies owned by residents of British Columbia were issued shares in exchange for, ostensibly, financing the mining exploration activities of a subsidiary. The Quebec resident “managed” the company, and its Quebec subsidiary, from a Quebec place of business, despite his lack of mining experience. The misleading press releases were issued from the Quebec place of business. The targeted victims were transnational — some were residents of Quebec.
The B.C. residents challenged the tribunal’s jurisdiction over them and their activities. The tribunal issued a preliminary ruling that it had territorial jurisdiction over the B.C. residents, applying a “real and substantial connection” test. The application for judicial review was dismissed by the Quebec courts.
The Supreme Court of Canada applied a correctness standard of review because the tribunal’s jurisdiction to take proceedings against out-of-province respondents raises a constitutional issue regarding the territorial reach of provincial legislation.
The court noted that the Securities Act grants the tribunal broad discretion to issue orders in the public interest, including orders to cease trading in a particular security, to prohibit a person from acting as a director or officer of a company whose securities are publicly traded and to impose and collect an administrative financial penalty for contravention of the Act.
The Securities Act is silent as to the tribunal’s territorial reach beyond provincial boundaries. The majority of the court ruled that this is a question of statutory interpretation as to the constitutional applicability (or reach) of the statute to out-of-province persons and activities. There must be a “sufficient connection” between the statute and the out-of-province persons and activities sought to be regulated. As a canon of construction, Quebec’s securities scheme may be applied only to those persons and matters with a “sufficient connection” or “real and substantial connection” to the province.
The sufficient connection test requires a contextual inquiry. In each case, the tribunal must examine the relationship among the province, the subject matter of the law and the person sought to be regulated under that law — to decide whether that relationship is sufficient to support the applicability of the legislation to the out-of-province person.
An important part of the context, in this case, is the transnational nature of the securities markets and securities regulation. As this pump and dump scheme was perpetrated from a base in Quebec, it would defeat the purpose of the cross-border nature of securities regulation to allow the B.C. residents to escape the reach of Quebec’s regulatory oversight. The court dismissed arguments of one B.C. resident that his individual participation took place entirely outside Quebec, ruling that he was implicated in a scheme that had important links to Quebec. An argument based on comity between provinces was dismissed. The B.C. residents chose to make Quebec the face of their securities manipulation operation. In addition, the court recognized that securities regulators co-ordinate their regulation of transnational securities markets.
Justice Suzanne Côte, in dissent, ruled that the focus should be on the tribunal’s adjudicative authority over the individuals rather than the statutory authority to regulate the Quebec securities market. She held that, though the Quebec tribunal had authority over the subject matter (the “pump and dump” scheme), it did not have adjudicative authority over the B.C. residents — that is, it could not make orders against the B.C. residents. She ruled that this determination must be based on the Civil Code of Quebec; that there is no other authority beyond that granted by this Code.
The majority of the court agreed that the Civil Code of Quebec does not give the tribunal jurisdiction over the B.C. residents. However, it found jurisdiction in its interpretation of the Securities Act and the international nature of regulated securities markets.
Justice Côte, in ruling that the tribunal had no authority to make orders against out-of-province residents, failed to note that the orders will apply only in Quebec — that is, the tribunal’s orders may exclude the B.C. residents only from participation in the Quebec securities markets. A provincial regulator may make orders against out-of-province individuals to protect the public interests of the regulatory subject in the regulator’s province.
As a practical matter, if orders are made against the B.C. residents by the Quebec tribunal, the B.C. Securities Commission will likely make orders to prevent the B.C. residents from participating in the securities markets in British Columbia. And any attempt by the B.C. residents to engage in the securities markets elsewhere in Canada or the United States will similarly be barred by orders made by local regulators of those markets. Given that the purpose of these orders is to protect the public interest in the regulator’s local market, the findings and orders of the Quebec regulator are sufficient evidence to warrant orders by regulators in other jurisdictions where the B.C. residents are active.
Transnational regulation of securities is done by provincial regulators because Canada does not have a national securities commission. The court made no mention of its decisions concerning two attempts by the federal government to establish a Canadian Securities Commission. The first was defeated by the constitutional division of powers: Reference re Securities Act 2011 SCC 66. The second weaker proposal, which would have required each province to opt in, was upheld as constitutional but it has not been enacted: Reference re Pan‑Canadian Securities Regulation 2018 SCC 48.
So, international securities markets are still regulated by provincial regulators. The facts of this case demonstrate how they do it. They co-ordinate, agreeing in each case, which provincial regulator should take the lead. Evidence gathering assistance is provided by the others. This is an efficient use of their resources.
I worked at the Ontario Securities Commission for 11 years. One thing I learned is that clever crooks take care not to “dirty their own nest.” In this case, the nest was the province of British Columbia. That explains the use by B.C. residents of a Nevada shell company whose shares traded in New York, and which was “managed” by a resident of Quebec and had a Quebec business address. And the targeted victims were located in many jurisdictions — only 15 victims resided in Quebec. I doubt there were any victims in British Columbia. These schemes are typically arranged in this manner to avoid attracting the interest of the securities regulator of the perpetrators’ home jurisdiction and to increase the difficulties of investigation by placing a lot of the evidence beyond the territorial reach of any regulator’s powers to compel the production of evidence.
The regulators address this investigative hurdle through co-operation and mutual assistance supported by statutory authority, which was upheld by the court in Global Securities Corp. v. British Columbia (Securities Commission) 2000 SCC 21. The majority cited this case in their discussion of the transnational nature of securities markets.
This challenge to the tribunal’s jurisdiction commenced as a “pleadings motion” before the tribunal. The issue was argued on the basis of allegations in the notice of hearing, assuming them to be true for the purposes of the motion. The B.C. residents sought judicial review of the tribunal’s preliminary ruling that it had jurisdiction over them. Typically, judicial reviews of preliminary rulings as to a tribunal’s constitutional authority to proceed have been dismissed as premature because courts prefer not to rule on constitutional issues without factual findings based on an evidentiary record. This is the second constitutional case this year in which the issue of prematurity is not discussed.
As I said about the last case, it raises a concern that a constitutional ground of judicial review is now viewed as an exceptional circumstance warranting a premature judicial review, regardless of the merits of the constitutional ground of review.
Sara Blake is the author of Administrative Law in Canada, 7th edition, LexisNexis Canada. Her practice is restricted to clients who exercise statutory and regulatory powers.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the author’s firm, its clients, Law360 Canada, LexisNexis Canada, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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