IN THE MATTER OF THE INVESTMENT DEALERS ASSOCIATION OF CANADA (ENFORCEMENT DIVISION) AND GOLDEN CAPITAL SECURITIES LTD.

Transcription

1 IN THE MATTER OF THE INVESTMENT DEALERS ASSOCIATION OF CANADA (ENFORCEMENT DIVISION) AND GOLDEN CAPITAL SECURITIES LTD. DISCIPLINARY HEARING OF THE PACIFIC DISTRICT COUNCIL OF THE INVESTMENT DEALERS ASSOCIATION OF CANADA Hearing Dates: Panel Members: Counsel: October 24 th, 25 th, 26 th, 29 th and November 1 st and 2 nd, 2007 John Rogers, Chair, Brian Field and James Harkness Robert W. Cooper and Joelle Walker, McCarthy Tétrault LLP, Barristers & Solicitors, Counsel for the Investment Dealers Association of Canada; and Roger D. McConchie and R. Alan McConchie, McConchie Law Corporation, Barristers & Solicitors, Counsel for the Respondent, Golden Capital Securities Ltd. Pursuant to Part 10 of By-law 20 of the by-laws of the Investment Dealers Association of Canada ( Association ) a Hearing Panel was convened to determine whether Golden Capital Securities Ltd. (the Respondent ) contravened by-laws of the Association as alleged by the enforcement division of the Association in an Amended Notice of Hearing dated May 28, 2007 (the Amended Notice of Hearing ). Amended Notice of Hearing The Amended Notice of Hearing was issued and served upon the Respondent in accordance with the provisions of Rule 6 of the Association s Rules of Practice and Procedure, October 1, 2004 (the Rules ). The Amended Notice of Hearing alleges that since November 2006, the Respondent as a Member of the Association refused/and or failed to provide the Association staff with free access to records that are reasonably required by Association staff for the purpose of ongoing investigations, contrary to Association By-laws 19.6 and/or 29.1.

2 2 Summary of Facts By letters dated September 15, 2006 Association staff informed the Respondent that Association staff had commenced an investigation into the Respondent s supervision of the opening and handling of certain investment accounts by three of its employees, all Approved Persons of the Association (the Employees ). In a subsequent telephone conversation with the Chief Compliance Officer of the Respondent, Association staff advised the Respondent that Association staff on November 3, 2006 planned to mirror image the computer hard drives that the Respondent had provided to the Employees to use in their employment activities (the Computer Hard Drives ). The Respondent was instructed not to give these employees advance notice that such an activity would occur. The investigation leading to this action by the Association (the Investigation ) was commenced by the Association following review of materials supplied to the Association by the British Columbia Securities Commission (the BCSC ). These materials suggested that the Employees had acted in contravention of the know your client rule as contained in Regulation of the Association s Regulations (the Know Your Client Rule ). The materials included summaries of interviews by BCSC staff with some of the Employees. These interview summaries showed that when queried by BCSC staff as to the identity of the beneficial owners of securities traded through accounts for which they were responsible, the Employees responded that they did not know the identities of these beneficial owners and that they were not required to know such identities. In the course of the Investigation, Association staff requested and received documentation from the Respondent. However, it became evident that it was necessary to access information on the Computer Hard Drives and in order to access that information, a mirror imaging of the Computer Hard Drives should be undertaken. Following notification by the Association of the intention to mirror the Computer Hard Drives, the Respondent expressed concern that some of the records stored on the Computer Hard Drives were subject to solicitor client privilege, were not relevant to the Investigation, and were private in nature. However, the Respondent agreed to cooperate with the request of the staff of the Association on the condition that the Association agree that the information retrieved from the Computer Hard Drives would be secured and not accessed or dealt with by anyone until the Employees had been informed that the mirror imaging had been performed and the Employees had had an opportunity to address issues of privilege, privacy and relevancy with respect to the information stored on the Computer Hard Drives. The Association agreed that the Employees would be given an opportunity to advise the Association of any claims of solicitor-client privilege with respect to records on the Computer Hard Drives. This was to be done by providing staff of the Association with a list of all documents for which such privilege was claimed together with an explanation to support such claim. However the Association refused to entertain claims of privacy or relevancy with respect to these records.

3 3 The Computer Hard Drives were mirror imaged as scheduled on November 3, 2006 by Totally Connected Security Inc. (TCSL), an independent third party retained by the Association to perform this task. Following the mirroring of the Computer Hard Drives, TCSL retained the mirrored data (the Mirrored Records ) and to date continues to retain the Mirrored Records. Although the Respondent fully cooperated in carrying out the securing of the Mirrored Records, the Respondent did not agree with the Association s position with respect to the Association s right to access the Mirrored Records and advised the Association that it would be applying to the BCSC for a review. On January 8, 2007, Association staff issued and served on the Respondent a notice of hearing, with hearing dates scheduled for February 15 th and 16 th, 2007, as a result of the Respondent s refusal to provide Association staff with free access to the Mirrored Records. To save the delay and expense of a hearing, Association staff and the Respondent entered into an agreement (the January Agreement ) that: 1. The Association staff would not access the Mirrored Records directly, but they would provide TCSL with search terms (the Search Terms )for the purpose of identifying those records from among the Mirrored Records that Association staff intended to review; 2. Neither the Respondent, nor the Employees would be advised of the Search Terms; 3. Using the Search Terms, TCSL would conduct a search of the Mirrored Records and locate relevant records ( Relevant Records ); 4. Copies of the Relevant Records would be supplied to counsel for the Respondent and to counsel for the Employees, but not to Association staff; 5. From the Relevant Records so supplied, the Respondent and the Employees would identify those over which solicitor-client privilege was claimed; 6. Association staff would be entitled to access the balance of the records; 7. A party could advise Association staff of a record which a party believed not relevant to the Investigation, and Association staff would take such advice under advisement; 8. Where solicitor-client privilege was being claimed: a. the claiming party would so advise Association staff in writing of the particular record over which privilege was claimed, such advice to be in a manner which would enable Association staff to assess the claim of privilege without revealing privileged information; b. Where Association staff agreed with the claim of solicitor-client privilege, the party claiming privilege would supply TCSL with a copy of the record and TCSL would remove this record from the Mirrored Records; c. Where Association staff elected to contest the claim for solicitor-client privilege, the party claiming privilege would provide a hearing panel of the Association with a copy of the record over which privilege was

4 4 claimed so that the hearing panel could determine whether or not the record in dispute should be produced to Association staff; d. Where the hearing panel upheld the claim of privilege, TCSL would be so advised and the record over which privilege was claimed would be deleted from the Mirrored Records; and e. Where the hearing panel did not uphold the claim of privilege, TCSL would be advised to release this record to Association staff; and 9. The hearing scheduled for February 15 th and 16 th was adjourned generally. Pursuant to the January Agreement, over a period of time extending from March 7, 2007 to April 3, 2007, the Respondent was provided with computer discs by TCSL containing the Relevant Records. The Respondent was given until April 18, 2007 to identify the records on these discs over which it claimed solicitor-client privilege. In accordance with the January Agreement, counsel for two of the Employees provided TCSL with a list of records over which his clients claimed privilege. However, by letter dated April 18, 2007 the Respondent advised that it was unable to comply with the January Agreement. The reason given by the Respondent for its inability to comply was that the Search Terms were so broad that a huge volume of records, including personal photographs and videos, were included in the Relevant Records. On May 28, 2007 the Amended Notice of Hearing was issued and served on the Respondents with a hearing scheduled for June 21 and June 22, With a view to resolving this matter, further negotiations ensued between staff of the Association and the Respondent. These negotiations led to a letter from counsel for the Respondent to counsel for the Association dated June 14, 2007 (the June 14 th Letter ). In the June 14 th Letter, counsel for the Respondent purports to confirm the terms of an agreement between the Association and the Respondent with respect to access to the Mirrored Records by Association staff. This purported agreement may be summarized as follows: 1. The Association would appoint an independent investigator (the Independent Investigator ) who would be instructed on the scope of the Investigation; 2. The Independent Investigator would be employed by the Association, but an employee who did not work in the Pacific District Office of the Association and was not involved in any investigation connected to the Respondent or Gateway Securities or any person whose registration is or has been sponsored by these members; 3. The Independent Investigator would be limited to receiving from staff of the Association a description of the matters included in the Investigation, although the Independent Investigator would be entitled to seek clarification of the subject matter of the investigation if so required;

5 5 4. The role of the Independent Investigator would be limited to reviewing each of the Relevant Records to determine its relevancy to the Investigation in accordance with the provisions of By-law 19; 5. The Independent Investigator would not have the ability to expand the Investigation or to commence new investigations following a review of the Relevant Records; 6. If as a result of this review by the Independent Investigator, the Association determined to expand the scope of the Investigation, the Association would be required to advise the Respondent of this expansion and provide further particulars; 7. Those of the Relevant Records the Independent Investigator considered to meet the above test of relevancy would be produced to Association staff and to the Respondent; 8. Those of the Relevant Records which the Independent Investigator considered not to be relevant would be sealed and not revealed in any manner; 9. Following receipt of those of the Relevant Records the Independent Investigator considered to meet the relevancy test, Association staff would be entitled to request TCSL to conduct further searches of the Mirrored Records and any records produced would follow a process similar to the process for the Relevant Records; 10. The Respondent would not contest any determination made by the Independent Investigator; 11. The process above described would not affect any further activities of Association staff with other than the Mirrored Records, nor restrict the Respondent from being entitled to challenge such future activities; and 12. The hearing scheduled under the Amended Notice of Hearing would be adjourned generally and following the completion of the review by the Independent Investigator, the Association would publish a statement advising that the Amended Notice of Hearing was withdrawn. Association staff takes the position that the June 14 th Letter reflects nothing more than a proposal to resolve matters between Association staff and the Respondent and that Association staff were not able to accept the terms of the June 14 th Letter as it unduly restricted Association staff s ability to conduct investigations. As Association staff and the Respondent were unable to agree upon access by Association staff to the Mirrored Records held by TCSL, the hearing originally scheduled for June 21 & June 22, 2007 was rescheduled to the dates above set out. Respondent s Position In its response to the Amended Notice of Motion, the Respondent affirms that it has complied fully with the requirements of By-laws 19.6 and 29.1 in connection with the Investigation. The Respondent points to the fact that it has produced on numerous occasions and in a timely manner during the course of the Investigation all records and information in hard

6 6 copy form as and when requested by the Association. It has retained the Computer Hard Drives and is in a position to respond to any requests for specific electronic records relevant to the Investigation contained on the Computer Hard Drives. To date Association staff have not made such a request. Although not being required to do so, the Respondent permitted Association staff and TCSL access to the Computer Hard Drives for the purpose of securing the Mirrored Records and has continued in good faith to attempt to resolve in a practical manner access to the Mirrored Records. The June 14 th Letter contains such a resolution in the form of an agreement between the Respondent and Association staff with respect to accessing the Mirrored Records. But Association staff has repudiated the terms of this agreement and thereby rejected the possibility of any further discussions towards resolving this matter. In any event, the Respondent argues, By-law 19.6 must be read in conjunction with Bylaw 19.5 when Association staff seeks access to information during the course of an investigation. By-law 19.5 requires the production of only relevant documents. Bylaw 19.6 grants access only to documents reasonably required for conducting an investigation. The Respondent maintains that the onus is on the Association to demonstrate that the documents it seeks to access are relevant and reasonably required for an investigation. In that the Mirrored Records contain documents upon which solicitor-client privilege is claimed, documents which are private to the Employees, and documents which are irrelevant to the Investigation, Association staff have not satisfied the onus placed upon them to demonstrate that the Mirrored Records are reasonably required for the Investigation. Association staff are, therefore, not entitled to access the Mirrored Records. Further, the Respondent maintains, the Respondent is prohibited by federal legislation in the form of the Personal Information Protection and Electronic Documents Act S.C c.5 and British Columbian legislation in the form of the Personal Information Protection Act, SBC 2003, c.63 from permitting Association staff access to the Mirrored Records. Decision The Hearing Panel determines that the Respondent has breached Association By-laws 19.6 and/or 29.1 by refusing Association staff access to the Mirrored Records. The Hearing Panel will determine an appropriate penalty for this breach at a separate hearing following submissions from the parties. At this separate hearing, the Hearing Panel will entertain an application from the parties to make an order as to the method by which Association staff might access the Mirrored Records while maintaining solicitorclient confidentiality of information contained within the Mirrored Records.

7 7 It is anticipated that the parties will prior to the hearing come to agreement as to the method by which this access by Association staff to the Mirrored Records is to be carried out. Failing such agreement, at the hearing the Hearing Panel will entertain submissions from the parties as to what this method should be, determine the appropriate method, and order accordingly. At this hearing, as well, the Hearing Panel will receive submissions on and make an order concerning costs. Reasons The matter before us goes to the very nature of how the investigatory powers granted to Association staff by the Constitution, By-laws and Regulations of the Association are to be exercised by Association staff in this digital age. The evidence before us is that the BCSC was concerned that unknown parties were trading large volumes of shares of certain companies listed on the over-the-counter bulletin board market in the United States. The investigation by the BCSC found that some of the accounts at the Respondent for which the Employees were responsible were actively trading in these shares. When the staff of the BCSC queried some of the Employees as to the identity of the beneficial owners of the securities traded through these accounts, they were advised that the owners of the accounts in question were institutions in foreign jurisdictions and that the secrecy laws of these foreign jurisdictions prohibited the disclosure of the beneficial owners of the securities being traded by these institutions. The position taken by some of these Employees was that the Know Your Client Rule did not require them to ascertain the identity of the beneficial owners of these securities as such identity was protected by the secrecy laws to which the institutional owners of the accounts were subject. Staff of the BCSC sought the assistance of staff of the Association to proceed with the investigation. Staff of the Association determined that such assistance was warranted and requested certain documentation from the Respondent. The Respondent complied fully with this request. However, following a review of the documentation provided by the Respondent, staff of the Association came to the conclusion that additional information was required. This additional information was focused on who was giving the Employees instructions with respect to trading in the accounts in question. The determination of Association staff was that this information was most likely contained on the Computer Hard Drives and in the form of, among other things, communications. The difficulty facing Association staff was that as they did not know the identity of the parties they suspected to be giving the trading instructions, they were not able to identify those documents, files or other forms of electronic data that might be relevant to their investigation to be in a position to ask the Respondent specifically for these data. Association staff, therefore, requested that the Respondent permit the mirror imaging of the Computer Hard Drives so that Association staff would be able to review the data on them for the purpose of the ongoing investigation.

8 8 The Respondent cooperated fully in completing the mirroring of the Computer Hard Drives and in generating the Mirrored Records, all without advance warning to the Employees. However, following the creation of the Mirrored Records by TCSL, the Respondent has not permitted Association staff access to the Mirrored Records. The reason given by the Respondent for its refusal to grant such access is that while acknowledging that the Mirrored Records contain data relevant to the Investigation, the Mirrored Records also contain data over which solicitor client privilege is claimed, data which is private to the Employees, and data which is irrelevant to the Investigation. When Association staff had TCSL parse the Mirrored Records using the Search Terms to produce the Relevant Records, an enormous amount of data was delivered to the Respondent in a manner which made it very difficult for the Respondent to review it. This difficulty together with the fact that the Relevant Records contained material clearly irrelevant to the Investigation made it unreasonable, the Respondent claims, to require it to review the Relevant Records. Therefore, the Respondent s refusal to review the Relevant Records and its refusal to permit Association Staff access to the Mirrored Records does not constitute a breach of Association by-laws as alleged by the Amended Notice of Hearing as Association staff was not acting reasonably as required by By-law 19. The Respondent maintains that a reasonable procedure for Association staff to pursue in seeking information from the Respondent is for Association staff to identify the information sought by them, notify the Respondent of the information sought, and the Respondent would then search the Computer Hard Drives to secure the requested information. The Issue Although the subject of the Investigation centers around an interpretation of the Know Your Client Rule, that is not the issue before us. The issue before us is whether or not under By-law 19 the Respondent is required to provide Association staff access to the Mirrored Records. And if such access is required, what, if any, restrictions are placed upon Association staff in gaining this access. This issue may be broken down into five components: the procedure for accessing information; information definition; claims for solicitor-client privilege; claims for privacy; and the determination of relevancy. 1. The Procedure for Accessing Information Association By-law No. 19 is entitled EXAMINATIONS AND INVESTIGATIONS. By-laws 19.5 and 19.6 are as follows: 19.5 For the purpose of any examination or investigation pursuant to this By-law 19, a Member, registered representative, investment representative, sales manager, branch manager, assistant or co-branch manager, partner, director officer, investor or employee of a Member or any other person approved or

9 9 seeking approval or under the jurisdiction of the Association pursuant to the Bylaws and Regulations, may be required by the Senior Vice-President, Member Regulation, his or her staff, or any other person designated by the Board of Directors: a) To submit a report in writing with regard to any matter involved in any such investigation; b) To produce for inspection and provide copies of any books, records accounts and documents, that are in the possession or control of the Member or the person, that the Association determines may be relevant to a matter under examination or investigation and such information, books, records and documents shall be provided in such manner and form, including electronically, as may be required by the Association; and c) To attend and give information respecting any such matters; And the person shall be obliged to submit such report, to permit such inspection, provide such copies and to attend, accordingly. Any person subject to an investigation conducted pursuant to this By-law 19 shall be advised in writing of the matters under investigation and may be invited to make submission by statement in writing, by producing for inspection books, records and accounts and by attending before the persons conducting the investigation. The person conducting the investigation may, in his or her discretion, require that any statement given by any person in the course of an investigation be recorded by means of an electronic recording device or otherwise and may require that any statement be given under oath For the purpose of any examination or investigation pursuant to this By-law 19, the Senior Vice-President, Member Regulation, his or her staff or any person designated by the Board of Directors shall be entitled to free access to, and to make and retain copies of, all books of account, securities, cash, documents, bank accounts, vouchers, correspondence and records of every description of the person concerned, and no such person shall withhold, destroy or conceal any information, documents or thing reasonably required for the purpose of such examination or investigation. Read together, By-laws 19.5 and 19.6 require that Association staff proceed in a reasonable manner when during the course of an investigation they wish to access information in the possession of a member or a registrant. The indices demonstrating that Association staff has proceeded in a reasonable manner include the following: 1. A determination is made that it is reasonable to begin an investigation into a particular matter; 2. The party from whom the information is sought is given notice in writing that this investigation has begun, such notice to contain sufficient detail that the party to whom it is directed has a reasonable understanding of the matter under investigation;

10 10 3. In accessing the sought after information, the Association staff must proceed in a reasonable manner and one which will have a minimal impact upon the activities and operations of the party from whom the information is sought; 4. The information sought is reasonably required given the purpose and scope of the investigation being undertaken; and 5. A reasonable procedure is established to deal with claims of solicitor-client privilege. In the matter at hand, the evidence clearly shows that it was reasonable for Association staff to commence the Investigation. Not only did the BCSC seek the assistance of the Association staff, but the subject of the Investigation is one which deals with the interpretation of the Know Your Client Rule as it applies to members dealing with institutional clients subject to secrecy laws of foreign jurisdictions. An issue clearly important to the Association given its regulatory responsibilities. The evidence before us demonstrates that the proper written notice was given to the Employees and the Respondent. In accessing the Computer Hard Drives, Association staff acted reasonably. Proper advance notice was given to the Respondent; TCSL, an independent third party with technical expertise to perform the mirroring of the Computer Hard Drives was retained at the Association s expense; and the mirroring of the Hard Drives was performed by TCSL outside of trading hours with representatives of both the Respondent and the Association present. Indeed, from the evidence before us, Association staff were at pains to ensure that the operations of the Respondent faced a minimum of disruption and that the mirroring of the Hard Drives had no impact upon the Respondent s computer network and other computer systems. The information sought by Association staff from the Mirrored Records is information leading to the identity of one or more parties who might be the undisclosed beneficial owner of the shares traded through the accounts for which the Employees were responsible. It is reasonable to seek this information as it may be relevant to the Investigation given the focus of the Investigation into the possible violation of the Know Your Client Rule with respect to the trading in these accounts. Indeed, it was conceded by the parties during the proceeding before us that the Mirrored Records contain information both relevant and irrelevant to the Investigation. In securing the Mirrored Records, a reasonable procedure was not established in advance for dealing with claims of solicitor-client privilege. However, following the mirroring of the Computer Hard Drives, TCSL took possession of the Mirrored Records and Association staff has not had access to them. Therefore, the process has not been tainted and solicitor client confidentiality has been maintained. We therefore find that in securing the Mirrored Records the Association staff proceeded in a reasonable manner.

11 11 2. Information Definition In the matter at hand, Association staff delivered Search Terms to TCSL to apply to the Mirrored Records to produce the Relevant Records. The Respondent makes much of the fact that Association staff has refused to advise the Respondent of the Search Terms. The Respondent takes the position that there is an obligation on Association staff to clearly define the data to which it seeks access. We disagree with the Respondent. Association staff has no obligation to disclose the Search Terms to the Respondent. Indeed, Association staff had no obligation to produce the Relevant Records from the Mirrored Records. To find that Association staff must during the course of an investigation disclose to the party from whom it is seeking information a clear definition of the information being sought before access is granted to the information is not only contrary to the provisions of By-laws 19.5 and 19.6, but, from a practical perspective, it imposes too great a restriction upon the access to information by Association staff conducting the investigation. Provided that Association staff is proceeding in a reasonable manner, By-law 19.6 makes it clear that Association staff has free access to such information. Free access does not mean, as suggested by the Respondent, that Association staff is required to specifically identify data to which access is sought and then to request that data from the Respondent. We find that Association staff, subject to any claims for solicitor-client privilege, has free access to the Mirrored Records without any obligation to define the Relevant Records or to provide the Respondent with a list of the Search Terms. Nor does the term free access mean that Association staff has what the Respondent claims is an unfettered right of search and seizure and the right to conduct a fishing expedition. Association staff s right to free access is only granted within the context of the investigation being conducted in the reasonable manner as above delineated. Nor is such right of free access itself an unreasonable right in the context of the securities industry. The Supreme Court of Canada in British Columbia Securities Commission v. Branch, [1995] S.C.J. No. 32 ( Branch ) confirmed that as the securities industry is a heavily regulated environment, that participants in the industry must have different expectations from those in other industries. As was observed by L Heureux-Dubé J. at pp when commenting upon powers granted to parties conducting an investigation in the securities industry: Although such powers of investigation may not always be necessary in regulatory contexts, I conclude that they are indeed necessary in the present instance, given the profound asymmetry of information facing securities regulators, the close relationship between such investigatory powers and the obligations voluntarily undertaken by those participating in this regulated activity, and the lack of less intrusive alternative means to investigate and deter market irregularities and improper conduct by market players.

12 12 In the above excerpt from her judgment, L Heureux-Dubé J. was referring to the British Columbia Securities Act and to the investigatory regime envisioned by that Act. However, the principles articulated by L Heureux-Dubé J. apply equally to the By-laws of the Association, to the investigatory regime encompassed by those by-laws, and to the matter at hand. Indeed, the matter before us is an excellent example of why this principle of free access must be maintained. If we were to find that the Respondent s interpretation of By-law 19.6 is correct, Association staff would be required to identify specific data on the Computer Hard Drives to which they wished access. However, as the evidence before us clearly demonstrates, Association staff does not know the identity of the parties they believe to be giving trading instructions to the Employees. Therefore, without free access to the Mirrored Records, the Investigation is severely curtailed. We do not interpret the provisions of By-law 19.6 to intend such a curtailment. The Respondent argues that without affixing this limitation to the provision of By-law 19.6, that Association staff would be entitled to embark on an over-breadth of access to the Mirrored Records. Again, we must disagree with the Respondent. As is above set out, there is a procedure for Association staff to follow in seeking access to information, and such a procedure provides reasonable limitations on Association staff to ensure that there is not such an over-breadth of access. 3. Claims for Solicitor-Client Privilege As was referred to above, initially the process of mirror imaging the Computer Hard Drives did not take into account claims for solicitor-client privilege. The Respondent has taken the position that Association staff should identify specific data to which they wish access and then the Respondent would then advise those parts of this data over which it wished to claim solicitor-client privilege. We disagree with the procedure put forward by the Respondent for the purpose of identifying solicitor-client privilege. As is above set out, once Association staff has followed a reasonable process for securing access to information, it has free access to that information, subject only to claims for solicitor-client privilege made by the party providing the information. It is not incumbent upon Association staff to identify specific parts of the information in which they have interest and then to invite the party providing the information to make a claim for solicitor-client privilege on that information. Rather, it is incumbent upon the party providing the requested information to make a claim for solicitor-client privilege for any part of the information supplied. The information over which a claim is made will then be sealed and Association staff will only be granted access to it if a hearing panel of the Association subsequently determines that Association staff is entitled to access this information. 4. Claims For Privacy The Respondent argues that its clients have an expectation of privacy in their dealings with the Respondent. This expectation, the Respondent maintains, is codified under

13 13 federal and provincial privacy legislation. If Association staff is permitted access to the Mirrored Records, the Respondent maintains, such right to privacy is breached. As well, the Mirrored Records contain data entered on the Computer Hard Drives by the Employees, which data are purely private. By granting Association staff access to the Mirrored Records, the Respondent submits, the Employees similar expectation of privacy is violated. We disagree with the Respondent that granting Association staff access to the Mirrored Records, once any claims for solicitor-client privilege have been dealt with, breaches any right to privacy that might be enjoyed either by a client of the Respondent or by one of the Employees. To deal first with expectations of privacy, other than under privacy legislation. In Canada, the securities industry is heavily regulated. When a client, either Canadian or foreign, chooses to participate in the Canadian securities industry, the client by that fact chooses to become subject to the rules and regulations of the industry, including disclosure requirements and the resulting disclosure of private information. The Privacy Policy of the Respondent, a copy of which is provided to every new client of the Respondent, anticipates the possibility of such disclosure. This Privacy Policy includes the following provisions: [the Respondent] does not disclose your personal information to third parties other than in the following circumstances or for the following purposes: 6. where we are required or permitted to do so by law including to any law enforcement agency, securities regulatory authority or self-regulatory organization: By opening or maintaining a brokerage account at [the Respondent] or using the [Respondent] website or participating in offers made to [Respondent] customers or prospective customers, or other promotional activities or service offerings engaged in by [Respondent], you have consented to the disclosure of your personal information to a third party in the circumstances or for the purposes described above. The Association is a self-regulatory organization which requires its members to disclose the personal information of its clients during the course of an investigation. The clients of the Respondent by opening an account with the Respondent have clearly agreed to disclose their personal information to the Association for the purpose of the Investigation.

14 14 Similarly with a person working in the securities industry in Canada. Accepting employment in the Canadian securities industry involves an exercise of free choice to accept the accompanying regulatory structure and low expectation of privacy. (Branch, Derivative Securities,[1991] I.D.A.C.D. No. 29; Robb, [2002] I.D.A.C.D No. 1) We agree with the observation of the Ontario District Council in Union Securities Ltd. [2005] I.D.A.C. No. 51 ( Union Securities ) at paragraph 35 that when an employee of an Association member uses for private purposes a computer supplied to him or her by an employer, the employee s reasonable expectation of privacy must be considered to be reduced to almost nil. Neither clients of the Respondent nor the Employees have expectations of privacy contained in data in the Mirrored Records which prevent Association staff free access to the Mirrored Records. Nor does privacy legislation applicable in British Columbia assist the Respondent. In British Columbia, personal information is protected by federal legislation in the form of the Personal Information Protection and Electronic Documents Act S.C c.5 ( PIPEDA ) and British Columbian legislation in the form of the Personal Information Protection Act, SBC 2003, c.63 ( PIPA ). Section 7 (3) of PIPEDA provides: an organization may disclose personal information without the knowledge or consent of the individual only if the disclosure is (c) required to comply with an order made by a court, person or body with jurisdiction to compel the production of information.. In PIPEDA Case Summary #347, [2006] C.P.C.S.F. No. 24, August 15, 2006, the Assistant Privacy Commissioner in holding that the collection of personal information by a member of the Association was not in contravention of the principles set out in PIPEDA, observed at paragraph 6 that The IDA is the national self-regulatory organization of the Canadian securities industry. It regulates the solvency, educational proficiency, and sales and business practices of Canadian investment dealers. Noncompliance with its regulations can result in disciplinary action, including registration suspension and fines. We find that by granting Association staff access to the Mirrored Records the Respondent does not contravene PIPEDA. Similarly with PIPA. Section 18 (1) of PIPA states:

15 15 18(1) An organization may only disclose personal information about an individual without the consent of the individual, if (c) it is reasonable to expect that the disclosure with the consent of the individual would compromise an investigation or proceeding and the disclosure is reasonable for purposes related to an investigation or a proceeding, And Section 1 of PIPA defines investigation as: investigation means an investigation related to (e) trading in a security as defined in section 1 of the Securities Act if the investigation is conducted by or on behalf of an organization recognized by the British Columbia Securities Commission to be appropriate for carrying out investigations of trading in securities, If it is reasonable to believe that the breach, contravention, circumstance, conduct, fraud or improper trading practice in question may occur or may have occurred; The Association is recognized by the BCSC to be appropriate for carrying out investigations of trading in securities in British Columbia. In not advising the Employees of their desire to mirror the Computer Hard Drives Association staff acted reasonably to ensure that the Investigation was not compromised. And we find that access by Association staff to the Mirrored Records is reasonable for the purposes of the Investigation. We therefore find that the Respondent is in compliance with the provisions of PIPA in granting Association staff access to the Mirrored Records. The Respondent in its submissions expressed concern that if clients, especially clients who are subject to the laws of secrecy jurisdictions, can not be assured of having their right to privacy protected, that they will take their business elsewhere. We acknowledge that the securities industry is a global industry and that participants in this industry have the opportunity to trade in securities in many locations throughout the world. In Canada the securities industry encompasses what the Supreme Court of Canada in Branch (at pp ) called a scheme of economic regulation which is designated to discourage detrimental forms of commercial behavior. Participants in this industry benefit from this regulatory environment. However, in return for accessing the benefit of this regulatory environment, such participants must be willing to accept some

16 16 compromise in their right to privacy. Clients of the Respondent, including those subject to the laws of secrecy jurisdictions, when they voluntarily open an account with the Respondent and participate in the benefits of the Canadian securities industry agree to be bound by the Respondent s Privacy Policy as above referred to and thereby acknowledge their acceptance of such compromise to their right to privacy. 5. Determination of Relevancy The question of who determines whether or not the information sought by staff of the Association is relevant to the investigation for which the information is sought is similar to that dealt with above under Information Definition. Behind the Respondent s refusal to grant Association staff access to the Mirrored Records is the belief that Association staff should only have access to data contained in the Mirrored Records which are relevant to the Investigation. When faced with the question of who should determine this question of relevancy, the Respondent takes the position that, at worst, the Respondent should have some say in what of the requested information is relevant to the Investigation and what is not. And at the best that this question should be determined by a party independent from a member of Association staff involved in the Investigation. Such a position is embodied in the Respondent s demand to receive from Association staff a list of the Search Terms. If the Respondent is to have some say in the determination of relevancy, it must have access to the criteria being used to judge relevancy and therefore must have access to the Search Terms. Similarly, the concept of an independent arbiter of relevancy is contained in the provisions of the June 14 th Letter which require an independent investigator to rule upon whether or not data contained in the Mirrored Records are relevant to the Investigation. The best party to determine whether or not certain information is relevant to an investigation is the party conducting the investigation. This party is Association staff. It is the role of Association staff to conduct an investigation into an alleged breach of the Association s Constitution, By-laws, Regulations and Rules, collect the evidence they believe may be relevant to the investigation, and, if as a result of such investigation they believe a breach has occurred, to bring allegations as to such breach before a hearing panel at a disciplinary hearing. At the disciplinary hearing, the respondent remains fully entitled to dispute the relevancy of the material put before the hearing panel by Association enforcement staff. However, it is at that point in the process that the respondent has the right and the opportunity to object to the relevancy of the information collected and presented by Association staff, not at the investigatory stage. That Association staff is the party to determine relevancy is obvious from the plain meaning of the words in By-law 19.5 (b) which imposes on a Member the obligation To produce for inspection and provide copies of any books, records, accounts and documents, that are in the possession or control of the Member., that the Association determines may be relevant to a matter under. investigation (emphasis added). Indeed, the use of the term may be relevant rather than the more restrictive term is relevant grants Association staff a great deal of latitude in their determination of

17 17 relevancy. This is as it should be as during the course of an investigation it is extremely difficult to determine with any precision the relevancy of information presented. It is not until the investigation has run its course that a more precise determination of the relevancy of a particular piece of information to the investigation might be ascertained. We therefore disagree with the position taken by the Respondent in the matter at hand. It is Association staff involved in the Investigation who determine whether or not the information contained in the Mirrored Records is relevant or may be relevant. It is not the purview of the Respondent as the party from whom the information is sought or a party independent to the Investigation to make this determination. For this reason, we find that there is no obligation on the Association staff to disclose the Search Terms to the Respondent. Nor is the independent investigator envisaged by the June 14 th Letter required to determine relevancy. The Ontario District Council in Union Securities considered the provisions of By-law 19 when dealing with facts similar to the matter at hand. In Union Securities, Association staff advised the Association member, Union Securities Ltd. ( Union ), in writing that an investigation had been commenced with respect to Union s supervision of an employee s handling of the accounts of a certain client. The client traded in securities of U.S. overthe-counter bulletin board companies. Association staff requested that Union provide copies on compact disk of all user data, including electronic file folders and incoming and outgoing s contained on hard drives previously and currently assigned to the employee of Union and his assistant over a specified period of time (the Electronic Data ). The Electronic Data requested by Association staff were preserved and held by Union s counsel. However, Union refused to provide Association staff with free access to the Electronic Data on the grounds that Association staff had not provided Union with sufficient detail for it to determine what portion of the Electronic Data was relevant to the investigation being conducted by Association staff. The Ontario District Council found that by refusing to provide the Electronic Data, other than materials over which solicitor-client privilege was claimed, Union had breached Bylaw On the question of who determines the relevancy to the investigation of the material sought, the Ontario District Council was quite clear in observing that it is the right of Association staff to determine relevance and that once this determination has been made, that Association staff has free access to the material sought. Conclusion Provided that Association staff continue to proceed in a reasonable manner, By-law 19 of the Association s by-laws grants Association staff free access to the Mirrored Records and the data included therein, subject only to claims of solicitor-client privilege. Neither clients of the Respondent nor the Employees whose personal information might be included in the data on the Mirrored Records have any expectation of or right to privacy

18 18 to prevent such access, and there is no requirement on Association staff to determine the relevancy of the data accessed prior to accessing the Mirrored Records. There was no obligation on Association staff to deliver Search Terms to TCSL and have TCSL parse the Mirrored Records to produce the Relevant Records. Therefore, the Respondent s claim that it is unreasonable to require it to review the Relevant Records does not vitiate its obligation to grant Association staff free access to the Mirrored Records as above provided. In other words, the Respondent s difficulty in being able to work with the Relevant Records is not a valid defence to the allegations contained in the Amended Notice of Hearing. Nor is it unreasonable for Association staff to seek to conduct their own direct review of the Computer Hard Drives, rather than having to do so indirectly through directions to the Respondent. As was readily apparent from the evidence before us, Association staff did not know the identity of the parties about whom they were seeking information and they could not, therefore, identify the information sought. By the very nature of the Investigation, it was reasonable for Association staff once accommodation was made for solicitor-client privilege to have direct access to the Computer Hard Drives, rather than accessing the data thereon through the Respondent. Finally, when it comes to the question of who determines the relevancy to an investigation of information sought by Association staff, By-law 19 makes it clear that it is Association staff which makes this determination. The June 14 th Letter The terms of the June 14 th Letter have been above set out in reasonable detail as the Respondent argues that the June 14 th Letter represents a binding agreement between the Respondent and the Association as to how Association staff have agreed to access the Mirrored Records. It is the position of the Respondent that if the June 14 th Letter is not binding upon Association staff, that it at least represents a reasonable method by which Association staff should secure access to the Mirrored Records. To deal first with the question as to whether or not the June 14 th Letter constitutes an agreement binding upon Association staff. The evidence before us clearly shows that there were extensive negotiations between the Respondent and Association staff leading to the forwarding of the June 14 th Letter from Respondent s counsel to Association counsel. The Respondent asserts that the June 14 th Letter reflects the agreement that had been reached between the parties as a result of these extensive negotiations. We are not able to find such an agreement. From a review of the communications between the parties leading up to the sending of the June 14 th Letter and from the terms of the June 14 th Letter itself, which ends with the phrase Please confirm the IDA s acceptance to the terms set out above by signing and returning the duplicate copy of this letter, we find that the June 14 th Letter does not confirm an agreement reached by the Respondent and Association staff. Rather it is an attempt by Respondent s counsel to consolidate the communications between the parties into a