Submissions to the Securities Commission
Re: New Concepts for Securities Regulations

June 2002

 

I. Introduction

The Law Society of British Columbia is the governing body of lawyers in the province of British Columbia. The Law Society's responsibilities are set out in the Legal Profession Act, a provincial statute which delegates to the Law Society the power to admit new members, make rules and monitor the conduct and competence of lawyers. The primary responsibility of the Law Society under the Act is to uphold and protect the public interest in the administration of justice.

The statutory mandate is fulfilled through a sophisticated organization. The Law Society of British Columbia is governed by a Board of Directors, called by the traditional name, the Benchers. Twenty-five Benchers are elected by members of the Law Society and up to six are appointed by the provincial Cabinet as full voting Lay Benchers to represent the non-lawyer point of view. The Chief Elected Officer is called the President.

II. Concept paper: new concepts for securities regulation

The Law Society has reviewed the British Columbia Securities Commission "Concept Paper" entitled "New Concepts for Securities Regulations". Concept 5 of that paper is "New Enforcement and Public Interest Powers". It states, in part:

Securities legislation contains various provisions that prohibit fraud and authorize regulators to make orders in the public interest. For example, Securities Commissions can bar those involved in securities markets in various ways, prohibit them from holding office in any issuer, assess administrative penalties against them, and order them to pay hearing costs. Commissions can also order that certain securities not be traded and can apply to court for an order compelling participants to comply with the legislation.

Effective enforcement is essential to a credible regime of securities regulation. We should ensure that Commissions have effective tools to deal with those who fail to meet the required standards of conduct in the market.

The existing enforcement powers in the BC legislation are reasonably comprehensive, but we have identified a few enhancements that are worth considering.

The summary of Concept 5 presented in the Concept Paper suggests that:

A commission could prohibit professionals from engaging in practice involving that commission if the professionals' conduct related to trading in securities is so egregious or grossly incompetent as to be contrary to the public interest.

Development of that concept suggests that:

Professionals such as lawyers, accountants and geologists sometimes engage in behaviour that negatively affects the integrity and efficiency of the capital markets.

[Commissions] currently have no enforcement options for dealing directly with professionals who do this. For instance, [commissions] cannot prevent these professionals from continuing to appear before a commission or from preparing documents that are filed with it.

Further development of the issue discloses that the concept to be considered is that:

A commission would be able to order that a professional cannot appear before it or prepare documents that are filed with it. This power would be similar to existing powers of the U.S. Securities and Exchange Commission.

In further discussion, the Concept Paper indicates that such an order would be available to the Commission only where it found the professional's conduct to violate the public interest objectives of the legislation (or advising clients how to do so) to be egregious or found the professional to be grossly incompetent in Commission filings. "Effective regulation requires sanctions to address this behaviour and a power to limit a professional's ability to practise would achieve that purpose."

The Law Society understands that the Concept Paper is the Commission's first release with respect to considering new concepts for securities regulations. We have been informed by the Commission that the Concept Paper contains ideas rather than proposals or recommendations. We understand that it has been brought about partially by a requirement placed upon the Commission by the Provincial government to examine deregulation. Deregulation would loosen up control over companies regulated by the Commission. Accompanied with the deregulation would be a requirement to balance such regulation by having better (or more) enforcement mechanisms and better (or more) civil remedies.

The Law Society further understands that this Concept Paper is the first step in a series of consultations and will not be the last.

The Law Society has noted, however, that interested parties have been invited to comment with respect to the Concept Paper, and the Law Society has therefore availed itself of the opportunity to do so at this time. We expect that we will continue to monitor the examination of these concepts by the Commission and may, of course, have more to say on topics of interest to the Law Society in the performance of its statutory mandate at a later date.

 

III. The net effect of the concept proposed by the Commission

 

If developed, the concept proposed would give the Commission the power to regulate the conduct of legal professionals who appear before it, or who make filings with it.

The Law Society does not dispute the jurisdiction of the Commission to make orders against lawyers. The Commission has an important public interest function of protecting investors and ensuring the proper functioning of capital markets in the province. The Law Society would not consider that the Commission would be usurping the role of the Law Society in situations where the Commission was investigating and/or sanctioning a lawyer for conduct which constituted a breach of the Securities Act or the Securities Regulations. Nor would the Law Society take issue with the Commission applying against a lawyer the penalties prescribed under the Securities Act for any breach of the said Act or Regulations which had been proven. The Commission must be allowed to remedy or sanction a breach of its own Act which violates the public interest in fair and efficient capital markets, and to control its own processes (see, for instance, Wilder v. Ontario Securities Commission (2001) 53 O.R. (3d) 519 (C.A.)).

The Law Society views such powers of the Commission no differently than it does those of the police and Crown in the investigation of crime. No-one could seriously argue that a lawyer should be immune from prosecution for an alleged offence under the Criminal Code simply because the Law Society may also investigate such conduct and sanction the lawyer if it is proven to be unprofessional conduct or conduct unbecoming a lawyer.

An important distinction must be drawn, however. Neither the police nor the Crown (nor, for that matter, the Courts) purport to sanction a lawyer professionally for conduct which gives rise to criminal charges against a lawyer. The police cannot issue an order prohibiting a lawyer from representing a client whom the police are investigating. Nor does the Crown suggest it could issue a directive prohibiting a lawyer representing a client against whom the Crown is proceeding.

The Law Society understands that the Commission is interested in the provisions of Rule 102(e) of the Securities and Exchange Commission ("SEC") Rules in the United States. Rule 102 deals generally with the appearance and practice before the SEC. Rule 102(e) states:

(e) Suspension and Disbarment

(1) Generally. The Commission may censure a person or deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission after notice and opportunity for hearing into the matter:

(i) not to possess the requisite qualifications to represent others; or

(ii) to be lacking in character or integrity or to have engaged in unethical or improper professional conduct; or

(iii) to have willfully violated, or willfully aided and abetted in the violation of any provision of the Federal securities laws of the rules and regulations thereunder.

(our emphasis)

The nature of censure afforded to the SEC is clearly beyond that presently allowed to the Commission in British Columbia. The powers provided in Rule 102 extend to sanction against a lawyer in his or her professional capacity, either on the basis of improper conduct or sheer incompetence.

The regulatory regime of professionals is different in the United States than it is in Canada. In the United States, the sanction of lawyers in their professional capacities is, in many States, undertaken by the Courts. That is not the case in Canada. With the exception of the power to cite for contempt or to award costs personally against counsel, Courts in Canada do not regulate the conduct of counsel appearing before them. That jurisdiction, in all provinces and territories, is given by statute to the provincial law societies or their equivalents.

Given the fact that Courts in many States regulate the conduct of those who appear before them, it is not too surprising that a body such as the SEC would be given the power to regulate and sanction those who appear before it.

However, because Courts do not regulate or sanction counsel in Canada, it would be anomalous indeed if an administrative tribunal were to be afforded the power to do so. Such jurisdiction is not needed, though, because the Law Society has the statutory power and mandate to perform this function.

IV. Independence of the legal profession

The Law Society is concerned that by affording the Commission the power to regulate and sanction the professional conduct of lawyers appearing before or making filings with it, the independence of the legal profession from the government of the province would be adversely affected. It is one thing for the Commission to investigate lawyers for alleged breaches of the Securities Act and the Securities Rules, or for the Commission to penalize, within the powers available to it under the Securities Act, lawyers who have conducted themselves contrary to the provisions therein. It is quite another matter, however, for the Commission to temporarily or permanently prohibit a professional from practising before the Commission.

The discipline of lawyers has long been removed from Government and the Courts. This has been done in order that clients could be confident that their interests were fully represented without any personal fear of reprisal (or indeed gain) on the part of lawyers. Courts in Canada do not have the right to control which members of the Bar are entitled to appear before them. If Judges are concerned about the professional conduct or the competence of lawyers, the practice is to refer the matter to the appropriate regulatory body, which in British Columbia is the Law Society. There is a long history of the Courts being independent of the State.

The Commission, however, is in a very different situation than are the Courts. Section 5 of the Securities Act states that the Securities Commission is an agent of the government. The Law Society recognizes that, by virtue of Bennett v. British Columbia (Securities Commission) (1991), 82 D.L.R. (4th) 129 (affirmed (1992) 94 D.L.R. (4th) 339), the Securities Commission may not be a delegate of the Crown. It is an independent and knowledgeable body responsible for the administration of the Securities Act, and neither it nor its Executive Director is a "government official" in the same sense as a prosecutor, employed by the Ministry of Attorney General, is an agent to the Crown. However, it is clear that the Commission could never be construed to be as independent of the government as a Court. Appointments to the Commission, for example, are by way of Orders-in-Council, which may in theory be revoked at any time. It would therefore be very dangerous, in the view of the Law Society, to afford to the Securities Commission any power to regulate the professional conduct or competence of lawyers, because the independence of the profession from the government would be compromised.

The Supreme Court of Canada has affirmed the fundamental importance of the independence of the legal profession from the government. In Attorney General of Canada v. Law Society of British Columbia et al. (1982) 137 D.L.R. (3d) 1 at 23, the unanimous Court stated:

The independence of the Bar from the State in all its pervasive manifestations is one of the hallmarks of a free society. Consequently, regulation of these members of the law profession by the State must, so far as by human ingenuity it can be so designed, be free from State interference, in a political sense, with the delivery of services to the individual citizens in the State, particularly in the fields of public and criminal law. The public interest in a free society knows no area more sensitive than the independence, impartiality and availability to the general public of the members of the Bar and through those members, legal advice and services generally.

The separation of the legal profession from government preserves and guarantees the independence of both the profession and of individual lawyers. It ensures that individuals in conflict with the State will always be able to obtain independent legal advice and representation to pursue and protect their rights. The Law Society considers there may well be an encroachment on the rights of clients to select their own legal representation in the event the Securities Commission were permitted to bring sanctions against lawyers by preventing them from acting for clients in dealings with the Commission.

The Law Society is concerned that the public interest would be threatened, rather than served, by the possibility of sanction by the Commission inhibiting lawyers from appearing before or otherwise making submissions to the Commission from making the fullest possible case for their client, or from representing client s who may be in disfavour with the Commission, for fear of reprisal from the Commission.

 

V. Regulation of the legal profession

 

1. Object and duty of the Law Society

Giving the Commission the power to regulate professionals as posited in Concept 5 may arguably be necessary if there were no other body with a mandate to perform such regulation. With respect to the legal profession in British Columbia, however, that is clearly not the case.

The Law Society of British Columbia was created by statute in 1884. Through voluntary associations, however, it can trace its origins back to at least 1869, prior to when British Columbia was admitted to Confederation. In the intervening 133 years, its statutory responsibilities have included regulating the admission of individuals to the profession as well as the regulation of the professional conduct of those who have been admitted.

The object and duty of the Law Society by virtue of its legislation is set out presently in s. 3 of the Legal Profession Act which states:

It is the object and duty of the society

(a) to uphold and protect the public interest in the administration of justice by

(i) preserving and protecting the rights and freedoms of all persons,

(ii) ensuring the independence, integrity and honour of its members, and

(iii) establishing standards for the education, professional responsibility and competence of its members and applicants for membership, and

(b) subject to paragraph (a),

(i) to regulate the practice of law; and

(ii) to uphold and protect the interests of its members.

Together, the Benchers and Law Society staff work to protect the public interest in the administration of justice by striving to ensure that lawyers of British Columbia are:

1. properly trained before they are admitted to the Bar of the Province;

2. competent as they continue to practise their profession in the Province;

3. able to discharge their ethical and professional responsibilities with respect to their practice of law; and

4. capable of conducting their affairs in a manner that is not unbecoming that of a member of the Law Society.

2. Protection of the public interest

The independence of the Bar does not mean that the legal profession is free to run its own house in any way it sees fit or for its own benefit. The primary responsibility of the Law Society is to protect the public interest in the administration of justice. Any suggestion of advancing the interest of the profession itself is strictly subordinate to the public interest. This fact is given the force of law in Section 3 of the Legal Profession Act as stated above.

The Law Society also maintains a mandatory insurance program which seeks to ensure that clients are compensated should they suffer financial loss due to the negligence of a lawyer.

Any profession is of course distinguished from a trade by the development, usually over many years, of a comprehensive code of ethical standards of conduct to which all members of the profession must subscribe and adhere. Professional standards for lawyers in British Columbia are contained in the Legal Profession Act, the Law Society Rules, and the Professional Conduct Handbook. There are also court decisions and Law Society discipline decisions by which members may be guided in their ethical and professional responsibilities. Members of the profession are also guided by the Canadian Bar Association's Code of Professional Conduct.

The investigation and enforcement by way of powers granted to the Law Society by the Legal Profession Act ensure that the public interest in the administration of justice is protected by a body independent of the government.

3. Handling complaints about lawyers

Three of the principal functions of the Law Society are receiving, investigating, and responding to complaints about lawyers.

The Law Society Rules require that all complaints received and all information indicating that a lawyer may be guilty of professional misconduct must be investigated by the Law Society. If, after all the known facts have been gathered, the complaint appears to be valid, the staff must refer the complaint to the Discipline Committee. That Committee always includes at least one member who is not a lawyer.

On the other hand, if all the available facts point to the possibility that a lawyer is practising law in an incompetent fashion, the complaint may be referred to the Practice Standards Committee. That Committee also includes non-lawyer participation.

In many cases, the available facts point to the conclusion that there is no sufficient evidentiary basis for pursuing the complaint. The complainant and the lawyer are then notified of the decision, and a complainant who disagrees with such a dismissal of a complaint by staff may appeal the decision to the Complainants' Review Committee, which is Chaired by a non-lawyer.

The Discipline Committee meets approximately once every month to review complaints. It may, in serious cases, authorize the issuance of a Citation leading to formal disciplinary charges, it may order an informal conduct review before two senior lawyers, usually Benchers, or it may decide to take no further action.

Discipline Citations are heard by discipline panels, usually consisting of three Benchers. The Law Society, and in most cases, the lawyers, are represented by counsel. Testimony is given under oath and the hearings are open to the public unless there is some good reason to exclude the public. A lawyer who is dissatisfied with the decision of a discipline panel may appeal to the full Benchers and, ultimately, to the Court of Appeal.

The Legal Profession Act provides that a lawyer who is found guilty of professional misconduct, conduct unbecoming a member of the profession, or a breach of the Act or Rules, may be:

1. reprimanded;
2. fined up to $20,000;
3. suspended from practice; or
4. disbarred.

A discipline panel may also impose conditions of practice on the lawyer. In almost every case, a summary of the case identifying the lawyer by name is circulated to the profession and discipline decisions are also distributed regularly to the media. Publication puts the profession on notice as to unacceptable conduct.

Many of the complaints received by the Law Society do not, however, involve accusations of ethical transgressions by lawyers. Instead, the concern of the complainant is that the lawyer's work does not meet an acceptable standard. The Law Society maintains the Practice Standards Committee and a professional remedial staff to deal with such problems. Most cases of incompetence are resolved through peer reviews, through the use of mentors, by education upgrading or counseling, or counseling out of the profession. Extreme cases of incompetence may be routed through the discipline process.

The Law Society has developed an extensive, sophisticated machinery for monitoring and regulating the conduct and competence of lawyers. A complaint may be received by the Law Society from any source in any circumstances where there is a concern about professional conduct, conduct unbecoming a lawyer, incompetence, or a breach of the Legal Profession Act or the Law Society Rules.

The Law Society is concerned that if any part of its function of monitoring and regulating the conduct and competence of lawyers were delegated or dealt with by the Securities Commission, the Commission would by necessity have to duplicate the facilities already existing in the Law Society. This would result in a redundant process.

Not all securities-related concerns are generated by or come to the attention of the Commission. The Law Society receives complaints from concerned investors, other members of the public, other lawyers, and, in some cases, initiates complaint investigations on its own arising out of information from other sources, such as the media or court decisions. Therefore, the Law Society would obviously need to continue to address such complaints against lawyers even if the proposed Concept 5 were implemented. This fact could well lead to incongruities in the manner by which conduct is dealt with. Differing tests could be applied to the same facts.

There is also an overriding danger that serious transgressions, having been dealt with by the Commission, may not come to the attention of the Law Society. This could result in lawyers, who should be suspended or disbarred from all practice of law, only being suspended from a particular area of law. The public interest would therefore not be adequately protected.

VI. Present relationship with the Securities Commission

As matters presently stand, the Law Society receives securities-related complaints about lawyers' conduct or competence from the Commission. The Law Society also receives such complaints from investors, other members of the public, other lawyers and, in some cases, initiates complaint investigations on its own arising out of information from other sources, such as the media or court decisions.

The Law Society fully investigates all complaints received, from whatever the source, involving professional transgressions or incompetence on the part of a lawyer or lawyers. Usually securities-related complaints are, by their nature, complex and multifaceted. They require much in the way of resources, both in staff time and often in expense due to the fact that witnesses and evidence are often located in other jurisdictions. Obviously, all of the Commission's investigative resources are directed toward securities-related complaints. The Law Society must allocate its investigative resources toward all complaints about lawyers, not just securities-related ones. The Law Society does strive to meet these challenges, however. For example, to facilitate investigations relating to securities law, the Law Society has on staff in its Professional Conduct Department two lawyers familiar, through private practice and, through work at the Law Society, with securities practice, the various securities exchanges, and the Commission. In addition, the Law Society has on staff four investigators who have previously worked with the R.C.M.P. Commercial Crime Division and who are familiar with investigations related to complex financial and securities-related transactions.

In investigating securities-related complaints, Law Society staff consult, as appropriate, with staff at the Commission. The Law Society has developed certain relationships with Commission counsel and with Commission investigators which have allowed some sharing of investigative information. However, due to the provisions of the Securities Act, in order for such sharing of information to occur the Commission must consent to disclose the information in accordance with s. 148 of the Act. It can, of course, take some time for the Commission to give its consent, which can delay the start or progress of a Law Society investigation which addresses the same facts. Where available, the Law Society does appreciate receiving the evidence gathered by the Commission, as the Commission has broader investigative powers than the Law Society. The Law Society has found Commission counsel and investigators to be helpful within their ability to provide assistance, recognizing that the Commission may not, for reasons of privilege or confidentiality, be prepared to share all of the results of its investigation.

It must be emphasized however that, because the Commission is not a Court, the findings of the Commission cannot necessarily be presented as evidence to prove the conduct giving rise to the complaint. There is thus a limit to the usefulness of the information which the Law Society is able to obtain from the Commission during the course of Law Society investigations into the conduct of its members in securities-related matters, unless the Commission is able to provide witness statements or source information as to the provenance of the evidence. The Law Society cannot simply rely on the conclusions of another body in order to prove a case of unprofessional conduct or conduct unbecoming a member.

Therefore, even if the Commission were to make findings upon which it purported to suspend a lawyer from practicing before it, if the Law Society were to investigate and proceed with the matter by way of a citation in order to seek to prove that the lawyer should be suspended or disbarred from all practice of law, the lawyer would essentially be able to re-argue his or her case, possibly with new or additional evidence. This could result in different findings by the two bodies. This would not serve the public interest. It would be much preferable to have the conduct dealt with by one body, rather than two. As the Commission's jurisdiction could not extend to regulating the lawyer's conduct beyond the limited scope of practicing before the Commission, the Law Society, with its mandate of regulating all professional conduct of lawyers, would be the logical body to perform this task, as it presently does.

Not all complaints to the Law Society relating to the securities practice of lawyers are generated by the Commission, however. Where complaints are made by others, the Law Society itself may be precluded, by virtue of provisions of the Legal Profession Act and the Law Society Rules, from disclosing information which we have received to other bodies, such as the Commission. This can have the effect of limiting the nature of assistance which can be provided by bodies such as the Commission. Equally, if the Commission is not the complainant, the Law Society cannot (unless a citation is authorized) share with it the results of the complaint investigation.

The Law Society does not have, for statistical purposes, a category for files under the heading of "securities". Securities-related complaints are generally opened under the category of "corporate/commercial". This means it is difficult to present an accurate number of securities-related complaints which the Law Society has received over any given number of years. A review of Law Society files indicates, however, that approximately thirty securities complaints have been opened since the beginning of 1995. Two have resulted in the authorization of citations. Two more have been referred by the Discipline Committee to a Conduct Review Subcommittee. One has resulted in action being undertaken by the Practice Standards Committee. Some have resulted in notations of minor errors or misconduct, and have been closed at the staff level. Some have been closed on the basis that the complaint was not provable or that it was unfounded. At least one is being held in abeyance pending the determination of a court or another tribunal with respect to the same (or very substantially similar) facts as give rise to the complaint before the Law Society. Thirteen complaints which presently remain open could be categorized as securities-related.

The Law Society has opened over 12,000 complaints since January 1, 1995.

These statistics indicate that there is no particularly pervasive problem with respect to the conduct of lawyers practicing securities law before the Commission. Securities related complaints constitute a fraction of a percent of all the complaints the Law Society receives each year about the conduct of lawyer, although it must be recognized that the complexity of the average securities-related complaint dwarfs that of most other complaints.

While there are certainly some lawyers who have conducted themselves unethically or incompetently with respect to securities matters, generally the statistics give support to the comments made by Clayton Schulz, former Executive Vice-President of the Vancouver Stock Exchange, in a news release dated July 1991:

British Columbia investors are fortunate to have available the services of an informed, competent securities bar which conducts its practice with great integrity. The exceptions are few in number.

While the Law Society appreciates any assistance which the Commission is able to provide when it can to Law Society investigations, it is very important to remember that the focus of the investigations by each body is different. Although the issue of whether or not the lawyer has acted contrary to the provisions of the Securities Act or the Securities Regulations, or has acted contrary to the policies of an exchange (usually the TSX Venture Exchange - previously called the CDNX), often has relevance to the course of the investigation, the Law Society must assess whether the lawyer's conduct, if proven, amounts to unprofessional conduct or conduct unbecoming a lawyer. Such an assessment is not within the jurisdiction of the Commission to address. It may to many seem self-evident that a transgression of the Securities Act, Regulations, or exchange policies will prove on its face to amount to unprofessional conduct. However, facts which may be irrelevant to the Commission's analysis of the conduct may be very relevant to whether the conduct is unprofessional or conduct unbecoming a lawyer. It would therefore be unwise to afford to the Commission the power to suspend a lawyer from practice, temporarily or permanently, if the Commission were unable to assess all the facts in the same manner as the Law Society is required to do by virtue of the Legal Profession Act.

Despite the challenges which may be faced by the Law Society in investigating securities-related complaints, the Law Society is committed to performing its mandate in the protection of the public interest in the administration of justice. The challenges faced by the Law Society do not warrant a bifurcation of regulatory responsibility between the Law Society and the Commission where the conduct of a lawyer is concerned. Therefore, even if the Commission were to make findings upon which it purported to suspend a lawyer from practicing before it, if the Law Society were to investigate and proceed with the matter by way of a citation in order to seek to prove that the lawyer should be suspended or disbarred from all practice of law, the lawyer would essentially be able to re-argue his or her case, possibly with new or additional evidence. This could result in different findings by the two bodies. This would not serve the public interest. It would be much preferable to have the conduct dealt with by one body, rather than two. As the Commission's jurisdiction could not extend to regulating the lawyer's conduct beyond the limited scope of practicing before the Commission, the Law Society, with its mandate of regulating all professional conduct of lawyers, would be the logical body to perform this task, as it presently does.

VII. Conclusion

The independence of the legal profession from Government regulation or interference is in the interests of all members of the public, including the investing public. The regulation and discipline of lawyers should be left to the Law Society which has historically exercised that function. The Legal Profession Act imposes a duty on the Law Society to serve the public interest in preference to those of its members.

Making lawyers subject to potential discipline proceedings by a tribunal before which they appear on behalf of clients would wrongly interfere with the vigorous pursuit of the clients' interests which may at times be necessary. Clients are entitled to have their cases placed before the tribunal in the best way possible by counsel of their choice. That right must not be jeopardized in an attempt to expedite the discipline of a few lawyers.

The Law Society is concerned that Concept 5 as proposed in the Concept Paper would be detrimental to the public interest by compromising an independent legal profession. It is also unnecessary to impose any other authority governing the conduct of lawyers to ensure the proper regulation of securities practice. The Law Society is in the best position to fulfill that mandate, is required by statute to do so, and has had over 100 years of experience in performing this role.