Canada: British Columbia Court Of Appeal Upholds Jurisdiction Of The British Columbia Securities Commission

The British Columbia Court of Appeal (the "Court") has ruled that the British Columbia Securities Commission (the "BCSC") has the jurisdiction to adjudicate enforcement proceedings against a person who trades on the TSX Venture Exchange (the "Exchange") regardless of their location. This decision provides an appellate level court precedent upholding a broad approach to the jurisdictional scope of the BCSC's enforcement activities and could have wide ranging impacts on extraterritorial securities regulatory enforcement actions in Canada.

In Torudag v. British Columbia (Securities Commission) ("Torudag")¹, the Court dismissed an appeal of a decision of the BCSC². The BCSC had found that Kegam Kevin Torudag contravened the insider trading provisions of the Securities Act (British Columbia) (the "Securities Act") by purchasing, through the facilities of the Exchange, shares in a reporting British Columbia company listed on the Exchange while he was in a special relationship with the issuer and in possession of material facts that had not been generally disclosed to the public. The appellant purchased his shares through an online trading account held by an off‐shore company that he controlled. The online trading account was with a dealer based in Connecticut that had a Canadian office in Montreal. The trades were processed on the Exchange's server in Toronto. At the time of the trades, the appellant was in the process of moving from Ontario to Quebec and at no time was a resident of British Columbia.

The appellant challenged the authority of the BCSC to adjudicate the proceeding on the basis that the impugned conduct had taken place outside of British Columbia. The BCSC disagreed, holding that the test to determine whether the BCSC has jurisdiction is whether the subject matter has a "real and substantial connection with British Columbia"³, and on this basis found that participation in British Columbia capital markets by making trades through the facilities of the Exchange was sufficient grounds to establish such a connection. On appeal, the Court affirmed this test and found that the BCSC properly asserted jurisdiction over the appellant, in consideration of two significant factors: (i) the regulatory functions of the BCSC with respect to the Exchange, and (ii) the fact that the company involved was a reporting issuer in British Columbia.

Both the BCSC and the Court emphasized the importance of the Exchange to British Columbia's capital markets and found it significant that the securities legislation in British Columbia and Alberta delegated authority for the regulation of the Exchange to the BCSC and the Alberta Securities Commission. As the underlying purpose of the BCSC's regulatory oversight of the Exchange is to provide investor protection, the Court concluded that the enforcement of insider trading provisions is part of the BCSC's duty to ensure a "level playing field"⁴ for investors in companies listed on the Exchange. The effect of Torudag is to uphold a broad scope of jurisdiction for the BCSC in the discharge of this duty.

The Court explicitly adopted an ethical approach to interpretation of the Securities Act, as set out in Bennett v. British Columbia (Securities Commission)⁵. This approach holds that that the "dominant aspects" of the Securities Act, with particular regard to its insider trading provisions, are to set out ethical standards governing trading of securities of a reporting issuer. A focus on mechanical aspects, for example those relating to the specifics of a trading platform or server location, does not align with the pith and substance of the insider trading provisions of the Securities Act. In recognition of the impact of electronic trading systems on extraterritoriality considerations, the Court referenced several cases in support of the proposition that the physical location of a server or even a defendant were not conclusive factors in determining jurisdiction and that other factors, such as whether the impugned trades were conducted on the Exchange, should be given more importance. The Court assigned some weight to the fact that most of the shares purchased by the appellant were sold by residents of British Columbia, but indicated that this connection was not necessary for the BCSC to properly assert jurisdiction.

The Court's decision in Torudag suggests that the BCSC and the ASC have a broad jurisdiction to regulate trading on the TSXV regardless of the location of the impugned conduct and that, analogously, the OSC would have a similar extraterritorial jurisdiction with respect to trades conducted on the Toronto Stock Exchange. The Court restricted its comments to the insider trading provisions of the Securities Act. It remains open as to whether courts in other provinces would adopt a similar approach, and whether this same analysis would apply to other provisions of securities legislation, such as enforcement actions relating to illegal distributions or unregistered trades. Absent subsequent case law to the contrary, however, the Torudag decision means that any person who conducts trades on a Canadian stock exchange should be aware that their conduct may be subject to review by Canadian securities regulatory authorities, regardless of their residency and the location of their trading activity.

Footnotes

1 2011 BCCA 458.

2 Torudag and Chan, 2009 BCSECCOM 1.

3 Ibid., at paragraph 27.

4 Supra note 1, at paragraph 27.

5 [1992] BCJ No 1021.

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