Gill was successful in having the Court of Appeal set aside the decision of the B.C. Securities Commission that the newly formed CDNX stock exchange had jurisdiction to discipline Gill for alleged breaches of the rules of the Vancouver Stock Exchange, a predecessor to the CDNX

23. September 2003 0

Administrative law – Decisions of administrative tribunals – Securities Commission – Compliance with rules and by-laws – Jurisdiction – Stock brokers – Disciplinary proceedings – Governance – Restructuring of stock exchanges – Survival of contracts – Judicial review – Standard of review – Correctness

Gill v. Canadian Venture Exchange Inc., [2003] B.C.J. No. 1767, British Columbia Court of Appeal, July 28, 2003, Donald, Newbury and Smith JJ.A.

In late 1999, following a series of carefully planned transactions, the Canadian Venture Exchange Inc. (“CDNX Inc.”) began business as a stock exchange (“CDNX”), replacing the exchanges formerly operated as the Vancouver Stock Exchange (“VSE”) and the Alberta Stock Exchange. At that time, there was pending against Gill, a “registered representative”, an investigation by the VSE into alleged misconduct on his part contrary to the VSE Rules. The question on appeal is whether CDNX Inc. now has the authority, arising as a matter of contract rather than legislation, to undertake a hearing into the alleged infractions and, presumably, to impose penalties. By a decision dated April 26, 2002, the British Columbia Securities Commission ruled that CDNX Inc. did have that authority, having acquired it by virtue of the 1999 transactions. Gill appealed the Commission’s ruling.

In January 1993, Gill filled out and signed a “Uniform Application for Registration/Approval” seeking to become a registered representative in order to sell securities in British Columbia. At Question 4 of the application, Gill was asked to “check all appropriate boxes to indicate the Canadian Securities Commissions or similar authority and/or self-regulatory organizations with which [he was] seeking registration or approval”. Gill checked the British Columbia Securities Commission and, under self-regulatory organizations, checked the Investment Dealers Association of Canada (“IDA”) and eight stock exchanges. At the end of the document, Gill and his then employer, Nesbitt Thomson Inc., signed a “Certificate and Agreement” which indicated that they were aware of the by-laws, rules and regulations of the self-regulatory organizations listed in Question 4 and agreed to be bound by those rules and regulations.

In 1997, the VSE commenced an investigation into Gill’s trading activities.

Prior to restructuring, the members of the VSE agreed with VSE Inc. and CDNX to be bound by various agreements between the organizations including a “Members’ Agreement” amongst CDNX Inc. and its members which contained an acknowledgement in Section 3.3 that: “the Exchange has jurisdiction to conduct investigations, hold hearings and make determinations for conduct which occurred prior to the effective date of this Agreement.”

The court did not find any evidence that similar acknowledgements were sought or obtained from registered employees of the Members.

Some months after the 1999 restructuring, Gill’s employment was terminated by his then employer, Merrill Lynch. Some months after that, CDNX Inc. delivered to Gill’s counsel a proposed “Settlement Agreement”. The Agreement contemplated that Gill would pay a fine of $75,000, disgorge commissions of $22,477.99, and undertake not to be involved “in the industry” for a period of 10 years. Gill denied the allegations and declined to accept these terms. CDNX decided to institute disciplinary proceedings for the alleged violations of the VSE Rules. A hearing was held by the Commission on February 15, 2002. The hearing proceeded on the basis of the assertion by CDNX Inc. that the “source and origin” of its jurisdiction over Gill was a contract formed between him and the VSE when he applied for registration in 1993. At the hearing, the Commission concluded that the IDA’s acceptance of Gill’s application had given rise to a contract by which he had attorned to the VSE’s jurisdiction and undertaken to be bound by and comply with its by-laws and rules. The Commission further found that the VSE’s contractual rights and obligations had survived the 1999 “merger” such that the CDNX Inc. could take disciplinary action against Gill. Gill appealed the decision of the Commission that it had jurisdiction to impose disciplinary proceedings against him.

The Court of Appeal held that the standard of review to be applied in the review of the Commission’s decision was one of correctness. The court used the “pragmatic and functional approach” focusing on the four key factors: the presence or absence of a privative clause or statutory right of appeal; the expertise of the tribunal in question relative to that of the reviewing court on the issue in question; the purposes of the legislation; and the nature of the question. The court held that all four factors in this case militated in favour of the application of a standard of correctness. Specifically, the court noted that the Securities Act provided an express right of appeal, and the issues involved in the case were those of general contract law and the authority of organizations such as the VSE and, consequently, the Commission did not have greater expertise than the court determining such issues.

The court reviewed the nature of relationship between the VSE and Gill. The court was satisfied that Gill and his employer, Nesbitt Thomson, did enter into a contract with the VSE in 1993. The court noted that the final page of the application form signed by Gill was headed “Certificate and Agreement” and contained a covenant on his part and on the part of his employer to do the things stated therein. The court then went on to review the agreements whereby VSE Inc. transferred and assigned to CDNX Inc. all of its assets and undertakings. At issue was whether or not the contract between the VSE, Gill, and his employer in 1993 was assignable without the consent of Gill and his employer. In the “application form”, the court noted that Gill had agreed that his application could be transferred to other self-regulatory organizations listed in Question 4 of the form at some future date. CDNX Inc. was not among those organizations listed. The court held that a party to a contract may not amend the contract unilaterally and, therefore, Gill’s consent to VSE Inc. transfer of the contract to CDNX Inc. would have been necessary. No evidence was before the court that such consent had been obtained.

The absence of consent and notice was found by the court to be fatal to the argument of CDNX Inc. that the 1993 contract “survived” the restructuring such that CDNX Inc. had contractual jurisdiction over Gill. The court noted that the fact that this agreement was not an ordinary chose in action underlined the importance of notice and consent in this case. CDNX Inc. was not asserting an ordinary contractual “right”. Rather, it was asserting an authority to discipline a registered representative and, if necessary, to deprive him of his livelihood and impose a substantial penalty on him. Arguably, this is a judicial or quasi-judicial jurisdiction which cannot be delegated (a term which the court presumed included a “transfer” or “assignment”) without statutory authority. The court cited Vine v. National Dock Labour Board, [1956] 3 All E.R. 938 (H.L.) and Barnard v. National Dock Labour Board, [1953] 1 All E.R. 1113 (C.A.) on this point.

In the result, the court held that the argument of CDNX Inc., which was based solely on the assignment of a contractual right, failed and the decision of the Commission was set aside. The court issued a declaration that CDNX Inc. had no jurisdiction arising as a matter of contract to proceed with a hearing of allegations that Gill infringed the by-laws or Rules of the VSE.

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