In Sutton (Re), the Investment Industry Regulatory Organization of Canada’s (IIROC) found that individuals with regulatory functions in securities industry may not enjoy immunity for errors where they acted in good faith and with reasonable diligence.
Sutton was a specialist in the field of securities industry regulation. From March 2003 until July 2012, he acted as the CFO for First Leaside Securities Inc., which was a part of the First Leaside Group of Companies. As part of his role, Sutton was required to monitor First Leaside Securities Inc.’s policies and procedures to ensure that it complied with the financial rules about the pricing of its unlisted securities.
For financing, the First Leaside Group issued fund units at $1.00. The issue before IIROC was whether Sutton, as CFO of First Leaside Securities, breached IIROC Dealer Member Rule 38.6(c) by failing to ensure that these fund units were properly priced on client account statements.
Sutton’s position was that there was an active market for the fund units and that the securities’ $1.00 price was the result of that active market. He opined that he did not need to take any further steps to determine a price. The Hearing Panel was unpersuaded :
61 […] Infrequent transactions at a fixed price, offered by the issuer of the Fund Units, for the ultimate purpose of maintaining the price and utilizing funds which were obtained from other investors for such purchases has none of the hallmarks of an active market.
In responding to the argument that individuals with regulatory functions in the securities industry should enjoy a degree of immunity from errors, the Hearing Panel acknowledged SEC statements and sentiments that compliance officers should not have to fear enforcement actions if they perform their responsibilities diligently, in good faith, and in compliance with the law.
Nevertheless, the Hearing Panel found that Sutton breached the IIROC Dealer Member Rule 38.6(c) because the fund units were not properly priced. The Hearing Panel opined that if immunity were afforded, it would be contrary to the purpose of having a CFO supervise pricing. As such, the absence of intentional wrongdoing or mens rea, or the fact that Sutton may have acted with reasonable diligence were not considered a defence by the Hearing Panel.
The Hearing Panel ruled that, if required, a Sanction Hearing will take place at a date and place to be determined.
The author would like to thank Saam Pousht-Mashhad, Articling Student, for his contribution to this article.