R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
RT CAPITAL MANAGEMENT INC.
March 24, 2000
John A. Geller, QC - Vice-Chair
Morley P. Carscallen, FCA - Commissioner
R. Stephen Paddon, QC - Commissioner
Hugh Corbett - For the Staff of the Ontario Securities Commission
Jeremy Devereux - For RT Capital Management Inc.
This hearing was convened to consider two applications.
1. An application by RT Capital Management Inc. ("RT Capital"), made under section144 of the Securities Act ("the Act"), for an order varying an order (the "Section 19Order") made pursuant to subsection 19(3) of the Act on October 5, 1999 by theDirector of Enforcement of the Commission pursuant to an authority to make suchorders granted by the Commission under subsection 6(3) of the Act (in which theCommission ordered that RT Capital deliver to the Commission certain documentsmaintained by RT Capital pursuant to the requirements of subsection 19(1) of theAct) to include a provision that any documents provided to the Commission by RTCapital shall not be disclosed to any person or entity outside the Commissionexcept with the written consent of RT Capital or on further order of the Commissiongranted after the making of representations by RT Capital.
2. An application by the staff ("Staff") of the Commission for an order, pursuant toclause 17(1)(b) of the Act, authorizing Staff to make disclosure to The TorontoStock Exchange (the "TSE") of documents provided to the Commission pursuant toan order (the "Section 11 Order") made by the Commission on November 17, 1999pursuant to clause 11(1)(a) of the Act.
Parts VI and VII of the Act
Sections 11 through 18 of the Act are contained in Part VI of the Act (Investigations andExaminations).
Subsection 11(1) of the Act authorizes the Commission, by order, to appoint one or morepersons to make such investigations with respect to a matter as it considers expedient,inter alia, for the due administration of Ontario securities law or the regulation of the capitalmarkets in Ontario.
Section 13 of the Act provides a person making an investigation or examination undersection 11 or 12 with broad powers, including the power to summons and enforce theattendance of any person and to compel him or her to testify on oath or otherwise, and tosummon and compel any person or company to produce documents and other things.
Subsection 16(1) of the Act provides that, except in accordance with section 17, no personor company shall disclose at any time, except to his, her or its counsel: (a) the nature orcontent of an order under section 11 or 12; or (b) the name of any person examined orsought to be examined under section 13, any testimony given under section 13, anyinformation obtained under section 13, the nature or content of any question asked undersection 13, the nature or content of any demands for the production of any document orother thing under section 13, or the fact that any document or other thing was producedunder section 13.
Under subsection 17(1) of the Act, if the Commission considers that it would be in thepublic interest, it may make an order authorizing the disclosure to any person or companyof; inter alia,
a) the nature or content of an order under section 11 or 12; and
b) the name of any person examined or sought to be examined under section 13, anytestimony given under section 13, any information obtained under section 13, thenature or content of any questions asked under section 13, the nature or contentof demands for the production of any document or other thing under section 13, orthe fact that any document or thing was produced under section 13.
Subsection 17(2) of the Act provides that no order may be made under subsection 17(1)unless the Commission has, where practicable, given reasonable notice and anopportunity to be heard to;
a) persons and company's named by the Commission; and
b) in the case of disclosure of testimony given or information obtained under section13, the person or company that gave the testimony or from whom the informationwas obtained.
Sections 19 and 20 of the Act are contained in Part VII (Record-Keeping and ComplianceReviews).
Subsection 19(1) requires every market participant to keep such books, records and otherdocuments as are necessary for the proper recording of its business transactions andfinancial affairs and the transactions that it executes on behalf of others and to keep suchother books, records and documents as may otherwise be required under Ontariosecurities law.
"market participant" is defined in subsection 1(1) of the Act to mean, inter alia, a registrant.
Under subsection 19(3) of the Act, every market participant is required to deliver to theCommission at such time or times as the Commission may require: (a) any of the books,records and documents that are required to be kept by the market participant underOntario securities law; and (b) except where prohibited by law, any filings, reports or othercommunications made to any other regulatory agency whether within or outside of Ontario.(The Section 19 Order was made pursuant to subsection 19(3)).
Subsection 20(1) of the Act permits the Commission to designate in writing one or morepersons to review the books, records and documents that are required to be kept by amarket participant under section 19 for the purpose of determining whether Ontariosecurities law is being complied with.
Section 144 of the Act
Section 144 of the Act permits the Commission to make an order revoking or varying adecision of the Commission, on the application of the Executive Director of theCommission or a person or company affected by the decision, if in the Commission'sopinion the order would not be prejudicial to the public interest. "decision" is defined insubsection 1(1) of the Act to mean, in respect of a decision of the Commission or aDirector, a direction, decision, order, ruling or other requirement made under a power orright conferred by the Act or the regulations (which includes the rules) thereunder.
The Section 11 Order and the Section 19 Order
The Section 11 Order recited that RT Capital was registered as an Investment Counsellorand Portfolio Manager under the Act and that RT Capital may have engaged in tradingactivities in contravention of Ontario securities law, and appointed a number of personsto investigate and inquire into that matter. Pursuant to the Section 11 Order, PeterRodrigues of RT Capital was summoned, by a summons dated November 18, 1999, toattend before one of the persons named in the Section 11 Order at an examination and tobring with him and produce the audio tapes of all telephone conversations that took placeon nine specified days from and to the trading desks of RT Capital. Mr. Rodriguescomplied with the summons.
The Section 19 Order recited that RT Capital was a registrant and therefore a marketparticipant, that the documents described in the schedule to the Section 19 Order werenecessary for the proper recording of RT Capital's business transactions and financialaffairs and the transactions that RT Capital executed on behalf of others, that RT Capitalwas therefore required to deliver such documents to the Commission pursuant tosubsection 19(1) and paragraph 19(3)(a) of the Act, and that the Commission requireddelivery of such documents, and ordered that RT Capital deliver such documents to theCommission. The documents referred to in the Section 19 Order were delivered to theCommission by RT Capital.
1. RT Capital is registered with the Commission in the category of investment counseland portfolio manager.
2. On June 30, 1999, RT Capital received a letter from Kim Stewart, an investigatorwith the TSE. Ms. Stewart asked for a list of security positions and trades forDecember 31, 1998. The TSE subsequently requested the same information forMarch 31, 1999. RT Capital asked why the TSE needed the information but wasgiven virtually no information to explain the TSE's request.
3. Though under no obligation to do so, on July 12, 1999, RT Capital provided theinformation for December 31, 1998 on the understanding and condition that it wouldbe held in confidence. On July 15, 1999 it provided the information for March 31,1999 on the same basis.
4. On September 27, 1999, Mr. Atkinson of the TSE asked for further informationabout RT Capital trading. The TSE did not explain why this further information wasneeded.
5. Though under no obligation to do so, on October 5, 1999, RT Capital provided thefurther information requested on the condition that it too be held in confidence.
6. On October 5, 1999, the Commission delivered a letter from Mr. Vear of Stafftogether with the Section 19 Order requiring RT Capital to deliver the client recordsreferred to above to the Commission by October 19, 1999. Among other things, thesection 19 Order required RT Capital to deliver to the Commission a list of securitypositions and trades for December 31, 1998 and March 31, 1999 and to describehow portfolios are valued. This is the same documentation and information that theTSE had requested and received on a confidential basis.
7. Like the TSE, Staff did not explain why the information was needed and noindication was given that any investigation by the Commission was in progress.
8. The October 5, 1999 letter also asked RT Capital to provide the Commission withaudio tapes for the dates of October 30, 1998, November 30, 1998, December 30,1998, December 31, 1998, January 29, 1999, February 26, 1999 and March 31,1999. The tapes were not included among the records identified in the Section 19Order.
9. Given the volume of documentation contemplated by the Section 19 Order, anextension of time was sought through RT Capital's counsel. Staff agreed to extendthe date for delivery to October 29, 1999.
10. On October 27, 1999, counsel to RT Capital wrote to Staff and stated that thematerials consisted of confidential client records and asked that Staff treat theinformation as subject to sections 16 and 17 of the Act, as through delivered undersection 11, instead of section 19(3). Counsel asked Staff to confirm in writing thatRT Capital would have those protections.
11. In the October 27, 1999 letter, counsel for RT Capital noted that the request for thetapes went beyond the scope of section 19(3) of the Act because tapes are notrequired to be maintained under Ontario securities law. Counsel also pointed outthat the tapes recorded a number of telephone lines and thus there would be manydays of conversations covered by the tapes. Nevertheless, counsel confirmed RTCapital's willingness to assist the Commission and offered to explore the cost ofpreparing transcripts, if Staff could identify what it was they were looking for.
12. By October 29, 1999, Staff did not have an answer to the confidentiality concernsraised by counsel. Staff therefore agreed to extend the time for delivery of thedocuments into the next week until the confidentiality issue had been resolved.
13. On November 1, 1999, Mr. Vear of Staff wrote on behalf of Staff to counsel for RTCapital stating that Staff was not prepared to accede to RT Capital's request to treatthe documents as if they were subject to sections 16 and 17 of the Act. Mr. Vearacknowledged RT Capital's wish to co-operate with respect to the tapes. Mr. Vearoffered to make copies of the tapes and provide a copy to RT Capital. Mr. Vearindicated that, if appropriate, Staff would transcribe the tapes in whole or in part.Mr. Vear did not agree to limit the scope of the request for tapes. The letter did notidentify what Staff was looking for on the tapes. Mr. Vear set a deadline of 4:00p.m. on November 3, 1999 for the delivery of the documents.
14. On November 2 and 3, 1999, counsel had discussions with Mr. Vear and with HughCorbett of Staff regarding the confidentiality concerns of RT Capital. Mr. Vear andMr. Corbett refused to provide any assurance that the documents would not bedisclosed to a third party outside of the Commission. Staff gave no explanation ofwhy the information was needed.
15. On November 4, 1999, counsel to RT Capital wrote to Timothy Moseley of Staffbecause Mr. Corbett was out of the office. Counsel stated that documents wouldbe delivered to the Commission later that day pursuant to the Section 19 Order andonly pursuant to that order. Counsel for RT Capital pointed out that they interpretedsection 19(3) as only requiring documentation to be delivered to the Commissionand to no one else and stressed that the documentation could not be provided toany other person or entity.
16. Later that day, counsel contacted Staff which arranged to pick up the documents.The cover letter again stressed that the material was delivered on a confidentialbasis. At this point, Staff had still not explained why they had requested thedocuments.
17. On November 5, 1999, Mr. Moseley responded to the letter of November 4, 1999.Mr. Moseley stated that Staff did not accept counsel's interpretation of section 19and did not accept any of the conditions on which the documents were delivered.Mr. Moseley did not explain why the documents had been requested.
18. On November 5, 1999, counsel to RT Capital had further discussions with Mr. Vearabout the tapes. Mr. Vear agreed that the tapes were not required to be producedunder subsection 19(3). Counsel again offered to provide the tapes, even thoughnot required to do so, if the scope of the request could be made more manageable.
19. On November 16, 1999, counsel for RT Capital had further discussions with Mr.Corbett about the confidentiality issue. Counsel described RT Capital's position indetail to Mr. Corbett. The position of Staff remained unchanged. Counsel told Mr.Corbett that it would like an opportunity to discuss the issue at a meeting with Staffbefore a single Commissioner, using the procedure described in the CommissionNotice found at (1994), 17 O.S.C.B. 3529.
20. On November 17, 1999, the Commission issued the Section 11 Order whichappointed each of Michael Vear, Hugh Corbett, Thomas Atkinson, AlexisMeanchoff, Ronald Pelletier and Kim Stewart to investigate and inquire into tradingactivities of RT Capital.
21. Thomas Atkinson, Alexis Meanchoff, Ronald Pelletier and Kim Stewart are notemployees of the Commission. They are employees of the TSE.
22. On November 18, 1999, the Commission issued a summons requiring PeterRodrigues of RT Capital to attend on November 25, 1999 for an examination andto bring with him audio tapes of all conversations that took place on June 30,October 30, November 30, December 30 and December 31, 1998, and January 29,February 26, March 30 and March 31, 1999.
23. The Section 11 Order and the summons were served on counsel that same day.
24. Counsel for RT Capital immediately called Mr. Vear to discuss concerns about theSection 11 Order and the summons. First, counsel objected to the fact that theSection 11 Order named at least two people, namely Thomas Atkinson and KimStewart, who were not Commission employees but work for the TSE, and hadpreviously made enquiries concerning the same matters as those covered by theSection 11 Order. Second, counsel stated that it would be unreasonable to providethe tapes without listening to them first and that listening to the tapes would takemany hundreds of hours. Third, counsel asked for assurance that Mr. Rodrigueswas only being asked technical questions about the making of the tapes. Fourth,counsel stated that RT Capital would need an order under section 17 allowing it todisclose the Section 11 Order and Summons to those people at RT Capital whonormally deal with issues of this type as well as to the people at RT Capital whosevoices are on the tapes. Counsel confirmed the discussion in a letter datedNovember 22, 1999.
25. On November 23, 1999, Mr. Vear wrote to counsel. Mr. Vear wrote that section 11does not place "any restrictions" on who may be appointed as an investigator andthat staff expected Mr. Rodrigues to deliver the summoned material on November25, 1999.
26. On November 24, 1999, counsel spoke again with Mr. Vear. Counsel stated thatRT Capital had raised serious issues with respect to the summons and Section 11Order that had not been deal with. Counsel wrote that it wished to arrange for ameeting before a single Commissioner to discuss these concerns. Failing that,counsel advised that it would make an application to the Commission.
27. On November 24 and on the morning of November 25, 1999, Mr. Vear and othermembers of Staff insisted that Mr. Rodrigues attend with the tapes, failing whichfurther action would be taken.
28. Given the position of Staff, counsel attended on November 25, 1999 with Mr.Rodrigues. Staff undertook not to disclose any information to those persons, notmembers of Staff, named in the Section 11 Order until RT Capital had the chanceto move before the Commission for an order varying the Section 11 Order, providedthat RT Capital moved expeditiously.
29. Subsequent to receiving the Section 11 Order, counsel for RT Capital asked Stafffor particulars of the matter to be investigated. Staff provided no additionalparticulars.
30. RT Capital's application to the Commission which is before us at this hearing,requesting a section 144 order amending the Section 19 Order, originally requestedother relief as well. The other matters were settled between counsel for RT Capitaland Staff.
31. Prior to the hearing, counsel for RT Capital were informed by Staff of the mattersunder investigation by Staff, as well as those under investigation by the staff ("TSEStaff") of the TSE.
32. Staff is conducting an investigation which it has been authorized to conduct by theCommission pursuant to the Section 11 Order. The basis for the investigation, asset out in the Section 11 Order and in the particulars which have now beenprovided to RT Capital, is as follow: it appears to Staff that RT Capital has engagedin a scheme of high closings or "upticking" certain share prices from time to time.The high closings appear to Staff to have been carried out at the close of month-end, quarterly and year-end periods, presumably, in the view of Staff, for thepurpose of inflating the valuation of RT Capital portfolio's holding those shares. Inthe view of Staff, it appears that RT Capital employees carrying out the highclosings acted on the instructions of RT Capital portfolio managers and/or seniormanagement.
33. TSE Staff originally brought this matter to the attention of the Commission. TSEStaff had already commenced its own investigation into the conduct of certain ofTSE member brokerages and their respective traders concerning the alleged highclosings. Staff is now conducting its own investigation into the affairs of RT Capitaland its employees, over whom the Commission has exclusive jurisdiction.
34. After being advised of TSE Staff's concerns, Staff obtained the Section 19 Orderto compel production of certain books, records and documents from RT Capitalrelating to the trading activity in issue. The specific documents sought from RTCapital are identified in Appendix "A" attached to the Section 19 Order.
35. The audio tapes supplied pursuant to the summons are tape recordings made andretained by RT Capital and include: (i) internal telephone conversations betweenthe RT Capital traders and RT Capital portfolio managers and (ii) externaltelephone conversations between RT Capital traders and the traders at thebrokerages used by RT Capital to carry out its trades. The tapes are not among thetypes of documents required to be kept by RT Capital pursuant to section 19.
36. In response to the summons, RT Capital produced the tapes to Staff for the daysspecified in the summons. Staff then arranged for transcripts of the tapes to beprepared, copies of which were provided to counsel for RT Capital. The tapes, inthe view of Staff, contain virtually conclusive evidence of numerous instances ofhigh closings carried out by RT Capital.
37. Staff seeks to provide copies of the books, records and documents obtained fromRT Capital pursuant to the Section 19 Order to TSE Staff for the purpose ofassisting TSE Staff in its investigation of its member brokerages and traders. Stafftherefore opposes the relief sought by RT Capital.
38. The TSE has no jurisdiction to compel production of the tapes from RT Capital andRT Capital does not consent to Staff disclosing the tapes and transcripts thereof toTSE Staff. As a result, Staff is seeking an order under section 17(1)(b) of the Actauthorizing Staff to disclose the tapes and the transcripts thereof to TSE Staff.
Submissions of Counsel for RT Capital
The following submissions with respect to RT Capital's request for a section 144 orderwere made by counsel for RT Capital.
a) Subsection 19(3) is found in Part VII (Record-Keeping and Compliance Reviews)of the Act. Subsection 19(1) requires every market participant to keep books andrecords. Subsection 19(3) requires each market participant to deliver those booksand records to the Commission when ordered to do so. Section 20(1) provides thatthe Commission may designate one or more persons to review the books andrecords "for the purpose of determining whether Ontario securities law is beingcomplied with".
b) Part VII must be interpreted in the context of the Act as a whole and withconsideration of related provisions. Subsection 19(3) which gives the Commissionpower to compel the production of documents must be strictly construed and notextended beyond the wording of the provision.
c) Generally, only documents required to be "filed" with the Commission are public.Public access to filings is itself limited by subsection 140(2), which allows theCommission to hold filings in confidence. Virtually all information concerningregistrants is confidential. There is nothing in Part VII that takes the informationobtained under subsection 19(3) outside of the ordinary scheme of confidentiality.
d) The purpose of Part VII, as the title suggests, is simply (i) to ensure that marketparticipants keep books and records, and (ii) to provide the Commission with themeans to obtain those books and records so that the Commission can carry outcompliance reviews as part of its duty to administer the Act. A compliance reviewis not an investigation. Investigations are addressed in Part VI (Investigations andExaminations). A compliance review is merely a type of audit or "check-up" by theCommission for its own purposes.
e) Part VII does not allow the Commission to obtain information for a purpose otherthan its own compliance review. There is no reason why a compliance review bythe Commission would properly include or allow disclosure of the information to athird party with no regulatory responsibility for a registrant.
f) A comparison of Part VII with Part VI makes it even clearer that informationgathered under subsection 19(3) cannot be disclosed. Section 11 of Part VI, likesubsection 19(3) of Part VII gives the Commission power to obtain documents.Paragraph 11(1)(b), unlike subsection 19(3), allows the Commission to obtaindocuments for other regulators and to share the information with them, subject tothe express confidentiality protections of section 16 and 17.
g) It is paragraph 11(1)(b) that makes it possible for the Commission to shareinformation pursuant to agreements such as the Memorandum of Understandingsigned by the Commission, the United States Securities and ExchangeCommission, the Commission des valeurs mobilières de Québec and the BritishColumbia Securities Commission dated January 7, 1988.
h) It is significant that in that Memorandum of Understanding the signatories recognizethat legal authority is required before they can share information. A provision likeparagraph 11(1)(b) provides that legal authority. Part VII provides no suchauthority.
i) The fact that the express confidentiality provisions of Part VI are not included inPart VII does not mean that information gathered under subsection 19(3) can bedisclosed. On the contrary, confidentiality provisions are simply not needed for PartVII because Part VII, unlike Part VI, does not envisage the information ever beingused by or disclosed to a party other than the Commission itself.
j) It is also contrary to the public interest for the Commission to use subsection 19(3)in order to obtain information for a third party.
k) Subsection 19(3) is to be used by the Commission to obtain documents for theCommission's own compliance reviews. In this case there is evidence that the TSEhas been pursuing an investigation that overlays with the investigation by Staff.The position of Staff in response to counsel's requests and the inclusion of theemployees of the TSE in the Section 11 Order demonstrates that the purpose forwhich the information in this case was gathered is not simply for a compliancereview by the Commission, but to obtain documents for a third party, namely theTSE. Thus subsection 19(3) is being used for a purpose for which it was notintended.
l) If the purpose of the Section 19 Order is to undertake an investigation or to obtaindocuments for or to disclose documents to a third party, the Commission shouldhave proceeded entirely under section 11, which is designed for that purpose andwhich contains corresponding confidentiality protections. By proceeding undersubsection 19(3), Staff is depriving RT Capital of the confidentiality protections itwould have had if the Staff had proceeded under section 11.
m) The actions of Staff also put RT Capital in the conflict with its other duties under theAct. Section 221 of the regulations made under the Act specifies that: "Everyregistrant shall deal fairly, honestly and in good faith with its customers and clients".One of the most important and most basic obligations of fair dealing that aregistrant has is to preserve the confidentiality of its clients affairs.
n) The materials that RT Capital provided pursuant to the section 19 Order consist ofconfidential client information. Staff has insisted that RT Capital provide thatinformation but has been unwilling to agree that the material will be kept inconfidence and will not go beyond the Commission.
o) Staff's position has placed RT Capital in a position where its obligation to complywith the Section 19 Order is in conflict with its obligations to its clients under section221 of the regulation made under the Act.
p) This conflict presents a public interest issue. Compliance with one legal dutyshould not entail non-compliance with another. This conflict would not exist if thecorrect interpretation of subsection 19(3) were adopted that recognizes theconfidentiality of documents delivered under subsection 19(3) and ensures thatsuch documents would not be disclosed to a third party.
q) Subsection 19(3) gives the Commission power to obtain documents from individualor corporate citizens. Staff, when it obtains the documents, is subject to an impliedundertaking that it will not use the documents for any purpose other than theparticular proceeding conducted by the Staff and will not disclose those documentsto a third party.
r) The documents provided by RT Capital to Staff pursuant to the Section 19 Orderare subject to an implied undertaking that they not be used for any purpose otherthan a Compliance Review by the Commission and not be disclosed to any partyoutside the Commission.
s) On the facts of this case, the Commission should decline to relieve Staff of theimplied undertaking.
t) The facts of this case also lead to the inference that Staff obtained the Section 19Order and the documents in question at least in part with the object of obtainingthem for the TSE. The TSE was conducting an investigation of RT Capital by June30, 1999. On October 5, 1999, the Commission issued the subsection 19(3) Order.
u) The inescapable conclusion from these facts is that the TSE began its investigationand then sought the assistance of Staff because of the fact that the TSE had noauthority or jurisdiction over RT Capital. Staff then began its investigation with theaim of being able to obtain documents and information from RT Capital which itwould then provide to the TSE.
v) It is not proper for Staff to use powers granted by the Commission for compliancereviews to obtain information and documentation for the TSE that the TSE has nopower of its own to obtain.
w) Subsection 19(3) gives the Commission power to obtain documents from individualor corporate citizens. Staff, when it obtains the documents, is subject to an impliedundertaking that it will not use the documents for any purpose other than theparticular proceeding conducted by the Staff and will not disclose those documentsto a third party.
Counsel for RT Capital made the following arguments with respect to Staff's applicationfor a section 17 order.
aa) Section 11 of the Act, like section 19, must be interpreted in the context of the Actas a whole and with consideration of related provisions.
bb) The interpretation of section 11 must also recognize that the Commission, unlikea superior court, has no inherent power to compel the attendance of a witness orthe production of documents. It may only do so as a result of an express statutorygrant of power.
cc) When the Section 11 Order was made, Staff was aware that the TSE hadcommenced an investigation into certain trading irregularities pertaining to RTCapital prior to Staff commencing its investigation.
dd) In order to be able to disclose the tapes and transcripts to the TSE, section 17requires that Staff satisfy the Commission that it would be in the public interest tomake an order authorizing the disclosure.
ee) The situation is analogous to the question of whether Staff should be relieved fromits implied undertaking with respect to documents obtained pursuant to the Section19 Order. The TSE has no jurisdiction or authority to obtain the tapes andtranscripts from RT Capital. If Staff is permitted to disclose the tapes andtranscripts, then the TSE will obtain material that it could not directly obtain throughits carefully designed statutory scheme. Further, the TSE would be obtainingconfidential information from a corporate citizen over which it has no jurisdiction orauthority at all. Thus, for the same reasons that Staff should not be relieved if itsimplied undertaking, it should not be allowed to disclose the tapes and transcriptsto the TSE. It is not in the public interest.
ff) The facts of this case also lead to the inescapable conclusion that Staff obtainedthe Section 11 Order and summonsed the tapes at least in part with the object ofobtaining them for the TSE because the TSE had no power to obtain them.
gg) It is not proper and not in the public interest for Staff to use investigatory powersgranted the Commission to obtain information and documents for the TSE that theTSE has no power of its own to obtain.
hh) It would not be in the public interest to grant Staff's request for a section 17 order.
Submissions of Staff
Staff made the following arguments:
1) Staff is investigating a high closing scheme involving RT Capital. Staff seeks todisclose the tapes and transcripts to TSE Staff to assist TSE Staff in conducting itsinvestigation of the brokerages and traders under its jurisdiction involved in the highclosing scheme.
2) The tapes contain evidence of numerous instances of high closings carried out atRT Capital's request by traders at certain brokerages. The TSE has no jurisdictionto compel RT Capital to produce the tapes and transcripts. The tapes andtranscripts are significant insofar as they either reveal or confirm trades to be highclosings when those trades may not otherwise appear to be such based on themarket surveillance data and other information available to the TSE.
3) Section 16 and 17 of the Act set out a regime which balances the need to preservethe confidentiality of investigations carried out under the Act against the publicinterest in the Commission being able to fulfil its regulatory mandate. Section 16protects the privacy of individuals or companies which are compelled to providetestimony and documents to the Commission under summons. This protects thereputation of those parties while an investigation is underway and, in particular, inthose cases where no subsequent proceedings are commenced. Section 16 alsorecognizes the Commission's interest in preserving the integrity of its investigationby minimizing the opportunity for collusion and the tailoring of evidence amongstwitnesses. Notwithstanding the protections afforded by section 16, section 17 setsout a mechanism for permitting the disclosure of testimony or documents obtainedpursuant to a section 13 summons if, in the Commission's view, it is in the publicinterest to do so.
4) There is a compelling interest to be served in permitting disclosure of the tapes andtranscripts to TSE Staff. The tapes contain material evidence of serious tradingimproprieties which would be of great relevance to TSE Staff's investigation of thesame subject matter. Disclosure of the tapes and transcripts would therefore be infurtherance of the Commission's regulatory mandate. In contrast, there is no publicinterest, let alone a compelling interest, which would be served by refusingdisclosure of the tapes and transcripts to TSE Staff. The Commission's "publicinterest discretion" as set out in section 17 of the Act should be interpreted in apurposive manner which permits the Commission to fulfil its regulatory mandate.In determining the scope of the public interest discretion, the Commission shouldbe guided by the bona fides of the request for disclosure and should not haveregard to technical interpretations which seek to frustrate the Commission'sregulatory mandate. Public confidence in the capital markets of Ontario would beseriously eroded if the Commission was not allowed to disclose evidence of thisnature to TSE Staff.
5) Section 21 of the Act empowers the Commission to recognize stock exchanges,subject to such terms and conditions as the Commission may impose. The TSE isthe only recognized stock exchange in Ontario. The role of the TSE is to facilitate,administer and regulate trading in securities in the secondary market in Ontario.
6) Pursuant to subsection 21(4) of the Act, the TSE is vested with the authority toregulate the operations and the standards of practice and business conduct of itsmembers and their representatives. Section 21.6 of the Act provides that no by-law,rule, regulation, policy, procedure, interpretation or practice of the TSE shallcontravene Ontario securities law, but permits the TSE to impose additionalrequirements within its jurisdiction.
7) Pursuant to subsection 21(5) of the Act and the rulemaking powers set out insubsection 143(1) of the Act, the Commission retains oversight jurisdiction toregulate virtually all aspects of the operations of the TSE, including specifically, themanner in which the TSE carries on business, the trading of securities on orthrough the facilities of the TSE, any security listed or posted for trading on theTSE, and issuers whose securities are listed or posted for trading on the TSE, toensure that they comply with Ontario securities law and any by-law, rule, regulation,policy, procedure interpretation or practice of the TSE.
8) The authority vested in the Commission to recognize the TSE as a stock exchange,subject to the Commission's oversight jurisdiction represents, in effect, a partialdelegation or assignment of the Commission's mandate under the Act to administerand regulate the trading of securities in the secondary market. The Commissionretains the authority to govern the operation of the TSE but as a matter of practicethe Commission relies upon the TSE, at least in the first instance, to regulate acomponent of the capital markets. The deference shown by the Commission to theTSE is a recognition of the added efficiency and effectiveness brought about by thecreation of a specialized body whose resources and expertise are dedicated solelyto the regulation of trading in the secondary market.
9) Section 19 of the Act requires every market participant to keep and deliver to theCommission upon request any of the books, records and documents required to bekept by the market participant under Ontario securities law. The types of situationsin which, or the purposes for which, the Commission may require a marketparticipant to deliver section 19 books, records and documents is a matter solelywith the discretion of the Commission. Subsection 19(3) provides only that amarket participant shall deliver the books, records and documents "at such time ortimes as the Commission may require". Section 19 may therefore be used by theCommission in a variety of situations, including to conduct "spot audits", as RTCapital concedes, or, as in this case, where Staff has been alerted by the TSE ofserious trading irregularities on the part of RT Capital, to gather information in theinitial phase of an inquiry or investigation.
10) Section 20 of the Act authorizes the Commission to designate in writing one or morepersons to review the books, records and documents produced by a marketparticipant pursuant to section 19 for the purpose of determining "whether Ontariosecurities law is being complied with".
11) The purpose of the review conducted pursuant to subsection 20(1) is not limited todetermining whether the record-keeping requirements of section 19 is itself beingsatisfied. Rather, subsection 20(1) expressly states that the purpose of the reviewis to determine "whether Ontario securities law is being complied with". Section 20therefore contemplates that a "compliance review" may be the first step in a processwhich gives rise to an investigation of and, if necessary, enforcement proceedingrelating to, a violation of Ontario securities law.
12) To the extent that a section 20 compliance review uncovers any matters whichwould ordinarily fall within the jurisdiction of the TSE, Staff is, and ought to be, atliberty to provide the relevant books, records and documents to the TSE. Toproceed otherwise would effectively result in Staff being required to assumeresponsibility for all the violations of Ontario securities law revealed by a section20 review which would ordinarily be investigated and prosecuted by theenforcement branch of the TSE.
13) It is an unreasonably narrow interpretation of section 20 to describe a compliancereview as "merely a type of audit or check-up by the Commission for its ownpurposes", as RT Capital has done. Similarly, it is an unreasonably narrowinterpretation of Part VII of the Act to assert that "Part VII does not allow theCommission to obtain information for a purpose other than its own compliancereview".
14) The Act does not place any terms, conditions or restrictions on Staff with respectto the disclosure of books, records and documents delivered to it by a marketparticipant pursuant to section 19.
15) The absence of confidentiality provisions in relation to section 19 books, recordsand documents is consistent with the notion that the books, records and documentsare, and must logically be, documents in respect of which there is no reasonableexpectation of privacy. If the Legislature had intended that the books, records anddocuments delivered pursuant to section 19 were not to be disclosed to any partyother than the Commission, it could have easily and expressly provided for wordingto that effect in Part VII.
Purpose of Subsection 19(3) of the Act
Subsection 19(3) of the Act requires every market participant to deliver to the Commissionat such time or times as the Commission may require: (a) any of the books, records anddocuments that are required to be kept by the market participant under Ontario securitieslaw; and (b) except where prohibited by law, any filings, reports or other communicationsmade to any other regulatory agency whether within or outside of Ontario. The subsectiondoes not describe the purposes for which the Commission may require such delivery. Inour view, such delivery may be required by the Commission for any purpose related to theexercise by the Commission of its powers, or the performance of its duties, provided forin the Act.
A separate provision, subsection 20(1) of the Act, authorizes the Commission to designatein writing one or more persons to review the books, records and documents that arerequired to be kept by a market participant under section 19 for the purpose of determiningwhether Ontario securities law is being complied with. Subsection 20(2) gives a personso designated the right to: (a) enter the business premises of any market participant duringbusiness hours; and (b) inquire into and examine the books, records and documents of themarket participant that are required to be kept under section 19, and make copies of thebooks, records and documents.
Subsection 20(1) does prescribe a purpose which would permit such a designation to bemade, namely "for the purpose of determining whether Ontario securities law is beingcomplied with". As we have stated, in our view, subsection 19(3), which merely requiresthe delivery of materials, may be exercised by the Commission for a broader purpose. Inany event, even if we are in error on this, it appears to us that it would clearly beappropriate for the Commission to make a subsection 19(3) requirement of a marketparticipant for the purpose of determining whether Ontario securities law is being compliedwith.
We note that in neither case is the requirement limited, as suggested by counsel for RTCapital, to the obtaining of information only for the purpose of the Commission's owncompliance review.
We also note that there is no requirement that Staff disclose to the market participant thatit is conducting an investigation or explain to the market participant the reasons for whichthe Commission requires the material.
Compliance reviews are conducted by the Commission in various circumstances. Anumber of registrants are selected for review each year, such reviews being generalreviews to determine whether Ontario securities law is being complied with and to ensurethat, if it is not, the registrant takes the necessary action to cure the defects. In egregiouscases, the matter, following the compliance review, may be referred to the EnforcementBranch of the Commission for further action. Such action may involve the making of anorder under section 11 of the Act.
As well, however, a compliance review may be conducted by the Commission of aregistrant or other market participant if the Commission receives information that themarket participant may have violated one or more provisions of Ontario securities law. Insuch circumstances, the review is the first step in a potential enforcement proceeding.
A compliance review may also be conducted if Staff has reason to believe that a marketparticipant's records may contain information as to possible violation of Ontario securitieslaw by third parties. For instance, a broker's records may contain evidence of improperinsider trading by insiders of an issuer.
It is just not correct to say that compliance reviews are, or are intended by Part VII of theAct to be, merely routine reviews.
Although Mr. Steep argued that, because the purpose of Part VII of the Act is record-keeping and compliance, there is no need for any procedural or substantive protection, asfound in Part VI, because it is not contemplated by the Act that such records will be usedin a coercive way in an investigation, in answer to a question from Vice-Chair Geller heacknowledged that the Commission could use subsection 19(3) for the purpose of its ownregulatory authority related to compliance, that it might be the starting point of aninvestigation, and that it would be an appropriate use of statutory authority for theCommission to use documents obtained pursuant to subsection 19(3) for some purposewithin the ambit of the Act including an investigation under section 11.
Does Part VII Envisage Non-Disclosure to Third Parties?
Counsel for RT Capital argued that Part VII of the Act, unlike Part VI, does not contain aconfidentiality requirement since such a requirement is not necessary because Part VIIdoes not envisage the information ever being used by or disclosed to a third party.
We do not agree. In our view, there is nothing in Part VII which would lead to such aconclusion. The books, records and documents referred to in subsection 19(1) are, in themain, ordinary business documents. We cannot understand why, if the Legislature hadintended that they be held in confidence and used only by the Commission itself, it wouldnot have so stated, as it did in Part VI. Nor can we understand why the Legislature wouldnot have included a provision, such as subsection 17(1) of the Act, permitting theirdisclosure to third parties if such disclosure was in the public interest. It seems peculiarto us that the Legislature would have permitted disclosure of compelled testimony on apublic interest basis, but not of ordinary business records.
Counsel for RT Capital also argued that the actions of Staff put RT Capital in a conflict withits other duties under the Act since section 221 of the regulations under the Act requiredthat "Every registrant shall deal fairly, honestly and in good faith with its customers andclients", and one of the most basic obligations of fair dealing that a registrant has is topreserve the confidentiality of its clients' affairs.
While we agree that a registrant is obliged to preserve the confidentiality of its clients'affairs, we question whether this obligation flows out of section 221. In any event, anysuch obligation is, and must be, subject to other requirements of Ontario securities law,such as subsection 19(1), requiring disclosure.
Counsel for RT Capital also argued that, generally, only documents required to be "filed"with the Commission are public (referring to subsection 140(1) of the Act), that virtually allinformation concerning registrants is confidential, and that "There is nothing in Part VII thattakes information obtained under section 19(3) outside of the ordinary scheme ofconfidentiality". Subsection 140(1) of the Act prescribes what must be made available bythe Commission for public inspection. It sets a minimum, not a maximum, standard. Infact, a good deal of other material, including material with respect to registrants - otherthan material protected from disclosure by the Freedom of Information and Protection ofPrivacy Act, is made available by the Commission on its public files, and there is no"scheme of confidentiality" that would apply to prevent the disclosure by the Commissionof the documents required to be delivered under subsection 19(3).
Nor, as argued by counsel for RT Capital, does the fact that Part VI permits the gatheringof information to assist in the due administration of the securities law or the regulation ofthe capital markets of another jurisdiction mean, in our view, that information may not beobtained by other means for a self-regulator in this jurisdiction.
For these reasons, we do not accept the argument that Part VII of the Act does notenvision the information obtained under subsection 19(3) ever being used by or disclosedto a party other than the Commission itself.
Relationship Between the Commission and a Recognized Self RegulatoryOrganization or a Recognized Stock Exchange
Section 2.1 of the Act requires the Commission, in pursuing the purposes of the Act, tohave regard to a number of fundamental principles, including the principle that theCommission should, subject to an appropriate system of supervision, use the enforcementcapability and regulatory expertise of recognized self-regulatory organizations. Althoughthe TSE is not a recognized SRO, it is a recognized stock exchange. In our view, thepolicy reason behind this fundamental principle applies equally to recognized stockexchanges. Under the scheme of the Act a recognized SRO and a recognized stockexchange are each the front line regulator of its members, who nevertheless remain, asdoes the SRO or stock exchange itself, subject to the overriding jurisdiction of theCommission.
Part VIII of the Act (Self-Regulation) deals with the recognition by the Commission of stockexchanges, SROs and certain other types of organizations. Subsection 21(2) providesthat the Commission may, on the application of a person or company proposing to carryon business as a stock exchange in Ontario, recognize the person or company if theCommission is satisfied that to do so would be in the public interest. Subsection 21(4)provides that a recognized stock exchange shall regulate the operations and the standardsof practice and business conduct of its members and their representatives in accordancewith its by-laws, rules, regulations, policies, procedures, interpretations and practices.Subsection 21(5) provides that the Commission may, if it appears to be in the publicinterest, make any decision with respect to:
a) the manner in which a recognized stock exchange carries on business;
b) the trading of securities on or through the facilities of a recognized stock exchange;
c) any security listed or posted for trading on a recognized stock exchange;
d) issuers, whose securities are listed or posted for trading on a recognized stockexchange, to ensure that they comply with Ontario securities law; and
e) any by-law, rule, regulation, policy, procedure, interpretation or practice of arecognized stock exchange.
Section 21.1 of the Act contains similar provisions with respect to SROs.
Subsection 21.7(1) of the Act permits the Executive Director or a person or companydirectly affected by, or by the administration of, a direction, decision, order or ruling madeunder a by-law, rule, regulation, policy, procedure, interpretation or practice of arecognized stock exchange, a recognized SRO or certain other organizations to apply tothe Commission for a hearing and review of the direction, decision, order or ruling.
Clause 143(1) 12 of the Act permits the Commission to make rules (with the effect of law)regulating recognized stock exchanges, recognized SROs and certain other organizations,including prescribing requirements in respect of the approval by the Commission of anyby-law, rule, regulation, policy, procedure, interpretation or practice.
In the ordinary course, a recognized stock exchange or a recognized SRO will perform theinitial investigation into any alleged or suspected breach, by a member of the organization,of Ontario securities law. It is not unusual for an investigation to involve both members ofa recognized stock exchange or a recognized SRO and registrants or other persons whoare not such members, in which case Staff and staff of the stock exchange or SRO willcooperate in the investigation into breaches of Ontario securities law alleged to have takenplace. In the matters involved in these proceedings, it would be difficult and impracticablefor such an investigation to take place without the cooperation of the staff's of the twoorganizations. The allegations, as we understand them, are that RT Capital engaged ina high closing scheme with the cooperation and assistance of certain members of the TSE.To separate the two investigations would, in our view, be both impracticable and contraryto the scheme contemplated by the Act.
The reason for permitting and enabling recognized stock exchanges and recognized SROsto operate as the front line regulators of their members, and to initially investigatebreaches of Ontario securities law alleged to have been committed by their members, isa recognition by the Commission that these organizations have the specialized expertise,and the facilities, which enable them to carry on such investigations efficiently andeffectively. It is always open to the Commission itself to take over any such investigation,and a combined investigation could lead to a quasi-criminal prosecution by theCommission against, or an administrative proceeding before the Commission with respectto, both members of such an organization and others directly regulated by theCommission.
Accordingly, in our view counsel for RT Capital's assertion that, for purposes of section 19and 20 of the Act, the TSE is a "third party" to which disclosure may not be made is simplyincorrect.
Mr. Steep acknowledged that the TSE could carry out its functions as a front-line regulator,and was in fact doing so. His position was that the TSE could not use the Commission,a separate statutory body, as a surrogate to conduct investigations for it in circumstanceswhere the Legislature had expressly not given a jurisdiction to conduct and seize thosetypes of documents. In our view, this argument is based on an incorrect analysis of whatin fact took place.
The correct analysis is that Staff has been engaged in a compliance review, followed byan investigation pursuant to the Section 11 Order, in part directly, as regards RT Capitalitself, and in part with TSE Staff, as regards TSE members.
The compliance portion of these activities, was clearly for the purpose of determiningwhether Ontario securities law was being complied with by RT Capital and the TSEmembers alleged to be involved in the scheme. It is not correct to imply that either theSection 19 Order or the Section 11 Order was issued at the instance of TSE Staff in orderto obtain material and information for TSE Staff. It is clear, in our view that material andinformation with respect to all participants in the alleged scheme, including RT Capital,was being sought.
Counsel for RT Capital argued that the Section 19 Order was made for an improperpurpose, namely to assist the TSE in its investigation. In our view, this argument just doesnot take into account either the Commission's concern with breaches of Ontario securitieslaw by RT Capital, which it directly regulates, or the relationship between the twoorganizations which we have outlined.
The Section 19 Order was clearly made for the purpose of determining whether Ontariosecurities law was being complied with by RT Capital and the TSE members in question.And, in our view, there is nothing whatsoever wrong with this. We do not, in theseproceedings, have to determine whether the position would be the same if an order wasmade under subsection 19(3) solely for the purpose of obtaining information for the TSEin connection with a breach of the TSE by-law's or rules which did not also involve abreach of Ontario securities law.
Nor do we accept counsel for RT Capital's implied undertaking argument. Even if theimplied undertaking argument applies in the case of a subsection 19(3) order (which wedoubt but do not have to decide), it is our view that the undertaking would be no more thanto use the material obtained only for the purposes permitted by subsection 19(3) of the Act,and we are satisfied, for the reasons stated above, that disclosure to TSE Staff wouldcome within such purposes.
Subsection 17(1) Order
Given the relationship between the Commission and the TSE which we have discussedabove, and particularly their relationship with respect to investigations, an orderauthorizing disclosure to TSE Staff under subsection 17(1) of the Act was clearly, in ourview, in the public interest and, indeed it would be against the public interest for us torefuse to make such an order. Accordingly, at the conclusion of the hearing we made thesubsection 17(1) order a copy of which appears as the Schedule to these Reasons.
Section 144 Order
In the result, RT Capital's application for a section 144 order varying the Section 19 Orderis refused. The documents provided to the Commission by RT Capital pursuant to theSection 19 Order maybe disclosed to TSE staff.
May 5th, 2000.
"J. A. Geller"
"Morley P. Carscallen"
"R. Stephen Paddon"
R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
RT CAPITAL MANAGEMENT INC.
WHEREAS on November 17, 1999, the Ontario Securities Commission (the"Commission") issued an order pursuant to section 11(1)(a) of the Securities Act, R.S.O.1990, c. S.5, as amended (the "Act") in relation to this matter (the "Investigation Order");
AND WHEREAS in response to a summons delivered to Peter Rodrigues datedNovember 18, 1999, as a representative of RT Capital Management Inc. ("RT Capital"),RT Capital produced to Staff of the Commission taped recordings of all telephoneconversations that took place on June 30, 1998, October 30, 1998, November 30, 1998,December 30, 1998, December 31, 1998, January 29, 1999, February 26, 1999, March 30,1999 and March 31, 1999 from and to Turrets #1and #4 of the RT Capital trading desk(hereinafter referred to collectively as the "Tapes");
AND WHEREAS Staff of the Commission thereafter arranged for transcripts of theTapes to be prepared (hereinafter referred to collectively as the "Transcripts");
AND WHEREAS the Toronto Stock Exchange (the "TSE") is conducting aninvestigation of certain brokerages and the traders employed by those brokerages inrespect of the same subject matter which is under investigation by Staff of the Commission;
AND WHEREAS the TSE may want to make use of the Tapes and Transcripts inthe course of its investigation and in any subsequent proceedings;
AND WHEREAS it appears to the Commission that it is in the public interest tomake this Order;
IT IS HEREBY ORDERED pursuant to subsection 17(1)(b) of the Act that upon theundertaking of the TSE that it will only use the Tapes and Transcripts for its regulatorypurpose, the Tapes and the Transcripts may be disclosed to the TSE for use by the TSEin conducting its investigation and in any subsequent proceedings commenced by theTSE.
March 24th, 2000.
"J. A. Geller"
"Morley P. Carscallen"
"R. Stephen Paddon"