The Law and the Fair Dealing Model: Part Two
| Author | Julia Dublin |
| Pages | 348-383 |
The
Law and the
Fair
Dealing
Model
Part
Two
Julia
Dublin
A.
INTRODUCTION
The
general
standards
of
conduct
imposed
on the
regulated
industry
under
the
Ontario
Securities
Act,1
the
Ontario
Commodity
Futures
Act,2
and
the
bylaws
of the
Investment Dealers Association
of
Canada (IDA)
and
the
Mutual Fund Dealers Association
(MFDA),
such
as the
"know
your
client"
and
"suitability" requirements
and the
general duty
to act in
good
faith,
are
largely directed
at
registrant conduct around particular trans-
actions. These operate parallel with
the
civil
remedies that allow individ-
ual
clients
to
seek compensation
from
financial
services providers
when
they have
suffered
a
loss. This paper examines
and
catalogues
the
com-
mon law
expectations
of
financial
service provider/client relationships
and
draws parallels
to the
Fair
Dealing Model proposals.
*
Senior
Legal
Counsel, Ontario Securities Commission.
The
author thanks
Brigitte
Geisler
for
stimulating discussions
on
broker liability
and for
provid-
ing
access
to her
collection
of
case reports.
1
R.S.O.
1990,
c. S.5
[OSA].
2
R.S.O. 1990,
c.
C.20
[CFA].
348
The
Law and the
Fair
Dealing
Model:
Part
Two 349
B.
ONTARIO
SECURITIES
ACT
APPROACH
TO
SETTING BUSINESS CONDUCT
STANDARDS
In
E.A.
M
anning
Limited31
Ontario Securities Commission (OSC) Com-
missioner
Geller,
quoting
from
a
1966 decision
of
former
Chairman J.R.
Kimber,
stated that
the
rules under
the
Ontario
Securities
Act
represent
general business conduct principles that
are
subject
to
individual inter-
pretation:
In
Ontario
the
practice
has not
been
to set
down detailed
and
specific
rules
to
regulate
the
conduct
and
affairs
of
registrants.
The
principle
adopted
has
been that there
is an
implied standard
of
ethics which
applies
to all
registrants,
and it is the
responsibility
of
each registrant
to
know
and
observe this
standard....
It may at
times,
in
particular
sit-
uations, place
a
registrant
in the
position where
he has to
determine
personally what
is
right
or
wrong without
any
specific
guidelines.
In
such
a
situation
he
must apply
the
general,
ethical
philosophy
for the
conduct
of the
securities
business.
The
fact
that
no
specific rule
pro-
hibits
an act
cannot
be the
test.4
Commissioner
Geller
also addressed
the
special vulnerabilities
of
investors
that
underlie
the way
securities regulators
should
understand
and
administer their rules, again quoting Chairman Kimber
in
Goldmack:5
It
must
be
borne
in
mind
by all
registrants that
in
dealing with
the
pub-
lic
they cannot assume that
the
public
is
knowledgeable
and
sophisti-
cated.
The
Securities
and
Exchange Commission
has
given
a
helpful
guide
on
this point.
We
must give
due
recognition
as
have
the
courts that
the
"investing
and
usually naive public need special protection
in
this specialised
field,"
and
must take into account
the
effect
which
the
[representation]
may
have
not
only
on the
sophis-
ticated
and
informed
investor,
but
also
on the
unwary
and
ignorant.
Nor are we in
these cases concerned only with criminal
or
civil
fraud.
By
seeking
and
holding registration
a
registrant
in
fact
represents that
3
(1995),
18
O.S.C.B.
5317.
4
Ibid,
at
5342,
quoting
Goldmack
Securties
Corporation
Limited
(1966), O.S.C.B.
14.
5
Ibid,
at
5340.
350
JULIA
DUBLIN
he
will
deal
fairly
with
the
public.
The
securities
business
has
long
been
considered
as
requiring
special
regulation.
Within
the
financial
services
industry,
there
are
different
views
as to
what compliance with
the
current conduct rules
for
firms
and
their rep-
resentatives actually requires
in
practice.
For
example,
the
resolution
of
a
particular
conflict
between
the
commercial interests
of a
firm
or its
representatives
and the
client
may be
seen
as
good
business
by
some
and may be
condemned
by
others
as
abusive
of the
client.
Nor
does
there seem
to be
consensus
as to
what constitutes
the
minimum accept-
able level
of
client service
where
advice
is
offered.
Simple, universally
accepted
industry norms
for the
fair
treatment
of
clients
are not
easy
to
discern,
and
there does
not
always appear
to be
consensus
as to
either
minimum standards
or
best
practices.
C.
THE
COURTS' APPROACH
Where
firm
and
representative misconduct
is
alleged,
the
same
set of
facts
can
give rise
to
regulatory proceedings
and
criminal
and
civil
law
proceed-
ings
— in
criminal cases concerned with secret commissions,
and in
civil
actions
for
fraudulent
and
negligent misrepresentation, negligence,
and
breach
of
fiduciary duty
as an
agent
or as a
relationship-based
fiduciary.
Courts
rely
on
principles
of
more general application when they
assess civil liability
or
criminal guilt under section
426(1)
of the
Criminal
Code.
In
both cases,
the
court's
first
step
is to
articulate
the
precise nature
of
the
relationship
formed
between
the
client
and
financial
adviser. This
will
establish responsibility
for
financial
loss,
or
whether
the
conduct
constitutes
a
criminal
offence.
This exercise
may be as
simple
as
finding
a
contract
of
agency
or as
complex
as
assessing
the
nature
of a
fluid
advisory
relationship evidenced
by
documents
and
conversations
extending
over years
of
dealings.
In
some
cases,
certain standards
are
effectively
presumed
from
cer-
tain relationships
— for
example,
the
fiduciary
duty that arises
from
agency contracts. Based
on
evidence
(often
contradictory) adduced
by
the
parties
as to
their intentions
and
expectations
in
their business deal-
ings,
courts will draw conclusions
as to
what duties were owed.
As a
result,
courts define
relationship-based
rights
and set
conduct stan-
dards
for
both service provider
and
client.
Because
both courts
and the
Fair Dealing Model
focus
on
relation-
ships,
the
Fair Dealing Model regime
can be
seen
as a
codification
and
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