The Quebec Court of Appeal rules that dissident rights do not apply to trust unitholders

On January 21, 2019, the Quebec Court of Appeal ruled  in O’Leary Funds Management c. Boralex Inc., 2019 QCCA 84, that dissident rights under business corporations acts do not apply to trusts. Unitholders of a trust must therefore ensure that their rights are recognized under the trust agreement or the Civil Code of Quebec. The Court was very clear that unitholders may not invoke the rights and protections of shareholders, even by analogy.


In the fall of 2010, Boralex Inc. (Boralex) decided to acquire its income trust fund, the Boralex Power Income Fund (Power Fund), in view of privatization. Boralex offered $5.00 per unit. The Board of Trustees convened an independent committee to consider the offer. The independent committee valued the fair market value of the units between $4.50 and $5.05 and, as a result, the Board of Trustees advised the unitholders to accept Boralex’s offer.

O’Leary Funds Management Ltd. (O’Leary) refused to tender its units, arguing that Boralex’s offer did not reflect fair market value or support the best interests of unitholders. Further, O’Leary contended that Boralex could not proceed with a compulsory acquisition because the trust agreement stipulated that Boralex required approval of at least 90% of the Power Fund units.

Owning only 73% of the units, Boralex decided to acquire the Power Fund through a business combination between the Power Fund and a shell company. In effect, the business combination allowed Boralex to force unitholders to exchange their units for shares of another Boralex shell company. To do so, Boralex took the following steps:

  • convened a special meeting of unitholders;
  • passed a resolution to exchange units in the Power Fund for redeemable shares in the shell company; and
  • forced redemption of the shares at $5 each.

At the special meeting, 85.87% of unitholders approved the forced acquisition; O’Leary did not. Nevertheless, Boralex forced all minority unitholders to tender their units and, on November 2, 2010, O’Leary received payment for its units under protest.

O’Leary subsequently sued Boralex for damages caused by the allegedly unlawful acquisition of the Power Fund. A few months after Paquette J. of the Quebec Superior Court ruled against the plaintiff in O’Leary Funds Management c. Boralex inc., 2018 QCCS 842, the Quebec Court of Appeal affirmed that under both the trust agreement and the defendant’s other legal obligations, Boralex’s acquisition of the Power Fund was lawful.


  • The QCCA reaffirmed that the governing law on trusts remains conceptually and practically different from corporate law:

The Fund is a trust created pursuant to articles 1260 to 1298 of the Civil Code of Quebec and, consequently, the laws governing corporations are not applicable. Yet, all the appellants arguments are intended to invoke rights and protections reserved for dissenting shareholders in corporate law. However, these laws do not apply here, even by analogy. The only rights of unitholders are those provided for in the trust arrangement. [Unofficial translation]

  • Where claimants are unitholders of a trust, and not shareholders of a corporation, they may not claim rights and protections afforded to shareholders in corporate statute. The QCCA explained that unitholders cannot use corporate law to “distort the text of the trust deed and try to make it say what it does not say.”
  • The only rights and protections afforded to unitholders are those found in trust agreements and the Civil Code of Quebec.


The author would like to thank Sophie Doyle, student-at-law, for her contribution to this article.

Motion Judge Erred in Law by Approving Class Counsel’s Fees

The Court of Appeal for Ontario recently set aside a decision approving the legal fees of class counsel on the condition that counsel would donate 40% of the approved fees to charity.

The appeal provides useful guidance for practitioners on fee approval motions in class actions.

The Settlement Agreement

Welsh v. Ontario, 2019 ONCA 41 involved a class action commenced in August 2015 under the Class Proceedings Act, 1992, S.O. 1992, c. 6 alleging that the province of Ontario had, for decades, negligently operated schools for the deaf and had breached its fiduciary duty and duty of care to students.

The action was certified on consent in August 2016. Through mediation, the parties achieved a settlement in November 2017.

Under the settlement agreement, Ontario was to establish a $15 million settlement fund. It was agreed that class counsel’s fees could be up to 25% of the settlement funds in an amount to be approved by the Court.  The settlement agreement expressly provided that if any amounts remained after payment for all fees, claims, and costs, they were to revert to Ontario.

The Motion Judge’s Decision

At the motion to approve the settlement, class counsel requested that the motion judge approve fees of $3.75 million, which represented 25% of the $15 million settlement fund.

The motion judge found that a counsel fee of $3.75 million was not fair and reasonable to all the class members because “the results achieved for the whole of the Class [were] disappointing” in that only about 10% of the class would benefit from the settlement.  As a result, the motion judge approved class counsel’s fees of $3.75 million on the condition that counsel would donate $1.5 million of its fees to a charity for the deaf.

The motion judge also determined that the $2.25 million balance of class counsel’s fees would be subject to a proportionate reduction depending on the reversion to Ontario of the settlement funds not taken up by the class claimants.

Error to Impose a Charitable Donation

On appeal, a panel of Justices Sharpe, Juriansz, and Roberts, unanimously held in reasons by ‘the Court’ that the motion judge had erred.

It was an error of law to impose a charitable donation condition, particularly in the absence of submissions from the parties. By requiring class counsel, without the parties’ input or consent, to donate part of its fees to a designated charity, the motion judge inserted into the settlement agreement a material condition not agreed to by the parties.


The Court of Appeal noted that the appropriate way to address the Court’s concerns with class counsel’s fees is to allow the parties to make submissions with respect to those concerns and, if the parties wish, to agree to change the terms of the settlement. The Court is not permitted to unilaterally modify the terms of a negotiated settlement – including provisions on legal fees – without the consent of the parties.

The Court of Appeal declined to determine and approve class counsel’s fees, and remitted the matter to be heard afresh by a different judge on the class action list of the Superior Court of Justice.

The decision clarifies the limits of first instance decision-makers on fee approval motions and is a useful precedent for class counsel.


The author would like to thank Elana Friedman, Articling Student, for her contribution to this article.

Be Careful What You Say – SEC successfully concludes enforcement proceedings against robo-advisors for false advertising and misleading disclosures

On December 21, 2018, the Securities and Exchange Commission (SEC) settled proceedings against two robo-advisors for making false statements about investment products and publishing misleading advertising. The proceedings were the SEC’s first enforcement actions against robo-advisors, providing guidance on some of the disclosure issues robo-advisors may face going forward.

Wealthfront proceedings

The first action involved Wealthfront Advisers, LLC  (Wealthfront), a robo-advisor holding approximately $11 billion USD in client assets under management. Among other things, the SEC found that Wealthfront made false statements regarding a proprietary tax loss harvesting program (the Tax Program) it applied to clients’ taxable accounts over a span of more than three years. Wealthfront stated in its Tax Program whitepaper that it would detect and avoid certain transactions with negative tax consequences, when in fact no such monitoring existed. This resulted in around 31% of accounts enrolled in the Tax Program experiencing negative tax consequences.

Additionally, the SEC found that Wealthfront selectively retweeted certain tweets from its clients on its Twitter account that constituted testimonials, including posts from individuals which the company knew, or ought to have known, had an economic interest in the company, without disclosing the potential conflict of interest. Wealthfront also paid bloggers for new client referrals without complying with the applicable disclosure and documentation requirements.

Hedgeable proceedings

The second action involved Hedgeable, Inc. (Hedgeable), a robo-advisor holding approximately $81 million USD in client assets under management at the time of the conduct in issue. Among other things, the SEC found that Hedgeable posted on its website and social media platforms a purported comparison of the investment performance of the robo-advisor’s clients with those of two of its competitors. However, Hedgeable’s advertised client performance was based on a subset of only around 4% of its clients who were more likely to have received higher than average returns. Hedgeable also made other misrepresentations, both in its comparison and in its published fact sheets describing its performance.

Disclosure failures breached the Investment Advisers Act

In both actions, the SEC found that the robo-advisors violated the Investment Advisers Act of 1940 (the Act) by engaging in fraudulent and/or deceitful practices and by distributing advertisements containing untrue statements of material facts. Additionally, both robo-advisors were found to be in violation of the Act by failing to adopt and implement policies and procedures reasonably designed to prevent violations of the Act.

With respect to Wealthfront, the SEC also found that Wealthfront breached the Act by publishing advertisements containing testimonials, making untrue statements in material filed with the Commission, and breaching record-keeping requirements. Wealthfront’s utilization of bloggers was also found to be in breach of the Act, which requires payments to third parties for client referrals to (among other things) be disclosed to, and acknowledged in writing by, the referred clients before any services are provided.

Along with agreeing to general cease and desist orders regarding future conduct, both companies consented to substantial cash penalties in their respective settlements: $250,000 USD for Wealthfront and $80,000 USD for Hedgeable. Wealthfront also undertook to advise each of its clients of the order within 30 days.


These settlements indicate that the SEC will hold robo-advisors to the same standards of conduct as other advisors when it comes to application of rules regarding advertising, marketing and promotion of funds and products.


The author would like to thank Ahmed Labib, Articling Student, for his contribution to this article.

Personal jurisdiction in the age of blockchain

As commercial activity increasingly intertwines with applications of blockchain technology with participants around the world, courts have had to grapple with the personal jurisdiction implications of such arrangements. Will participants in these blockchain applications based outside the United States find themselves subject to U.S. jurisdiction when disputes arise, based on how they have conducted their activities? Two recent New York federal court decisions examined such questions under traditional personal jurisdiction principles and upheld exercising personal jurisdiction over nonresident defendants.

Read the full article.

Originally published:  November 27, 2018

Forum Selection Clauses in Delaware Corporate Charters Invalid as to Securities Claims

The Delaware Chancery Court recently faced a challenge to forum selection clauses in certificates of incorporation of three Delaware corporations that required shareholder claims under the Securities Act of 1933 be brought in U.S. federal court, thereby barring the state forum.  For securities cases, defendant corporations generally prefer the U.S. federal courts which are viewed as less plaintiff friendly than state courts, particularly at the motion to dismiss stage.  Recognizing that the 1933 Act established concurrent federal and state court jurisdiction for claims thereunder with no right of removal, the Delaware Court held that such clauses barring the state forum were “ineffective and invalid.”  Sciabacucchi, et al. v. Salzberg, et al., C.A. No. 2017-0931-JTL (Del. Ch. Dec. 19, 2018).


The plaintiff in this action had purchased securities in the initial public offerings of three corporations.  As such, he had standing to bring claims under Section 11 of the 1933 Act for any material misrepresentations or omission in connection with those offerings.  The plaintiff brought an action for declaratory judgment seeking to invalidate those corporations’ federal forum selection clauses that barred 1933 Act claims from being brought in state court.

The Ruling

In a December 19, 2018 decision, the Chancery Court agreed.  While Sections 102(b)(1) and 109(b) of the Delaware General Corporate Law permit forum selection clauses in certificates of incorporation and bylaws to regulate claims involving the internal affairs of Delaware corporations, the Court found that claims under the Securities Act of 1933 do not relate to a corporation’s internal affairs.  The Court observed that such a claim arises from an investor’s purchase of shares at a time the purchaser is not yet a stockholder “and lacks any relationship with the corporation that is grounded in corporate law.”

The Court further held  that “Delaware’s authority as the creator of the corporation does not extend to its creation’s external relationships, particularly when the laws of other sovereigns govern those relationships.”  The Court’s ultimate holding extended well beyond claims under the 1933 Act: “Under existing Delaware authority, a Delaware corporation does not have the power to adopt in its charter or bylaws a forum-selection provision that governs external claims.”

Ontario Court of Appeal Grants Leave to Appeal Tiffin Decision: Will Determine Role of the “Family Resemblance” Test in Defining Securities under the Securities Act

It seems that the saga of the Ontario Securities Commission’s prosecution of Daniel Emerson Tiffin and Tiffin Financial Corporation is not over yet.  On November 28, 2018 (2018 ONCA 953), the Ontario Court of Appeal granted leave to appeal the May 15, 2018 merits decision of Charney, J which rejected the “family resemblance” test and found that certain promissory notes were “securities” within the meaning of the Securities Act (the Act).


As we’ve previously discussed, Mr. Tiffin and his company, Tiffin Financial Corporation (TFC), were charged with three offences under the Act related to TFC’s issuance of a number of promissory notes to investment clients while Mr. Tiffin and TFC were prohibited from trading in securities or relying upon any exemption under Ontario securities law.  Kenkel, J’s trial decision (2016 ONCJ 543) focused on whether the promissory notes could be considered “securities” within the meaning of the Act.

In dismissing the charges against Tiffin and TFC, Kenkel, J applied the “family resemblance” test articulated by the United States Supreme Court in Reves v Ernst & Young, 494 US 56 to determine that the promissory notes did not meet the statutory definition of a “security” under the Act.  The family resemblance test presumes that a note is a security unless it bears a strong resemblance to one of a number of categories of instruments that are not considered securities. In determining whether a strong resemblance exists, courts are required to examine the following four factors:

  • whether the borrower’s motivation is to raise money for general business use and whether the lender’s motivation is to make a profit;
  • whether the borrower’s plan or distribution of the note resembles “common trading for speculation or investment”;
  • whether the investing public reasonably expects that the note is a security; and
  • whether there is a regulatory scheme that protects the investor other than securities laws.

On appeal (2018 ONSC 3047), Charney, J rejected the family resemblance test, finding that because the term “security” is defined under the Act, and defined broadly enough to cast a wide net to protect investors, it was not necessary to import the family resemblance test.  Charney, J found that, while there were conflicting decisions from the British Columbia Court of Appeal and the Alberta Court of Appeal with respect to whether the family resemblance test applied in Canada, the Alberta Court of Appeal’s decision, which rejected the family resemblance test, ought to be followed.  Ultimately, Charney, J held that the promissory notes were “securities” within the meaning of the Act and allowed the appeal.  Read our previous analysis of Charney, J’s decision here.

In a decision released September 26, 2018, (2018 ONSC 5419) Charney, J sentenced Tiffin to six months in custody and 24 months of probation, finding that restitution and financial penalties alone were not sufficient to achieve general and specific deterrence.  Learn more about the aggravating and mitigating factors that informed Tiffin’s sentence by reading our previous post on the topic.

Leave to Appeal Granted

In its reasons for granting leave to appeal, the Ontario Court of Appeal noted that Tiffin’s conviction raises two main issues of public importance: (i) the interpretive principles to be applied in determining whether an instrument is a “security” within the meaning of the Act; and (ii) whether a loan agreement of the type issued by TFC is a “security” under the Act.  The Court noted that the determination of both issues requires a consideration of the role, if any, played by the “family resemblance” test.

Given that the British Columbia Court of Appeal and the Alberta Court of Appeal have taken different positions on the applicability of the family resemblance test in Canadian courts, the Ontario Court of Appeal’s decision on the topic is sure to be hotly anticipated.

Findings of Fraud Constitute “Other Good Reason” to Order Security for Costs

Hung v Ontario Securities Commission, 2018 ONSC 6729 (Div Ct)

The Divisional Court has released yet another chapter in the saga of one of the largest frauds in Canadian history.  In 2017, after a 188-day merits hearing, the Ontario Securities Commission (the Commission) released its decision concerning allegations of fraud against Sino-Forest Corporation (Sino-Forest) and its senior officers.  In that decision, the Appellants, as senior officers of Sino-Forest, were found to have authorized, permitted, or acquiesced in the company making misleading statements in its disclosure documents and to have misled Staff of the Commission during their investigation.  The hearing panel also found that the Appellant, Mr. Chan, committed fraud in the sale of his undisclosed interest in Greenheart Resources Holdings Limited to Sino-Forest.  Almost a year later, the Commission released its sanctions and costs decision.

The Appellants, Messrs. Hung, Ip, Ho, and Chan, appealed both the decision on the merits and the decision on sanctions and costs. The Commission subsequently sought an order for security for costs.  The Divisional Court released its decision on the motion for security for costs on November 26, 2018.

The Legal Framework

Rule 61.06(1) of the Rules of Civil Procedure, RRO 1990, Reg 194, states when security for costs may be ordered.  The Commission relied on rules 61.06(1)(a), (b), and (c):

61.06(1) In an appeal where it appears that,

(a) there is good reason to believe that the appeal is frivolous and vexatious and that the appellant has insufficient assets in Ontario to pay for the costs of the appeal;

(b) an order for security for costs could be made against the appellant under rule 56.01; or

(c) for other good reason, security for costs should be ordered,

a judge of the appellate court, on motion by the respondent, may make such order for security for costs of the proceeding and of the appeal as is just.

With respect to rule 61.06(1)(b), Horkins, J. noted that the Court of Appeal has determined that a respondent on an appeal may not rely on rule 61.06(1)(b) to obtain an order for security for costs of an appeal as against an appellant. The policy rationale is not to impose security for costs upon foreign or impecunious defendants who are forced by others to defend themselves in a legal proceeding.  Because the appellants were compelled to attend the hearing before the Commission to defend themselves, the Commission was only entitled to rely on rules 61.06(a) and (c).

The appeal did not appear to be vexatious

Under rule 61.06(1)(a), the Commission must show that it “appears” there is good reason to believe that the Appellants’ appeal is frivolous and vexatious, and that they lack sufficient assets in Ontario to pay the costs of the appeal. The lack of sufficient assets was not disputed.

Horkins, J. found that there was good reason to believe that the grounds of appeal were frivolous: The hearing lasted 188 days and the panel issued detailed reasons in support of its findings of wrongdoing. However, the Commission did not show that there was good reason to believe the appeal was vexatious given that the usual indicia of vexatiousness were not present.  The Appellants had expeditiously proceeded with their appeal, and there was no history of non-compliance with court and Commission orders.

There was some other good reason to order security for costs

Horkins, J. relied on the Ontario Court of Appeal’s decision in Mechanical Services Inc. v Flesch, 2010 ONCA 633 to determine what constitutes “other good reason” under rule 61.01(1)(c):

The court does not have a closed list of cases in which security for costs has been ordered under the residual category. […] However, the “other good reason” must be related to the purpose for ordering security: that a respondent is entitled to a measure of protection for costs incurred and to be incurred in the proceeding, which is now on appeal. And, the “other good reason” should be a fairly compelling reason…

The Commission submitted that the “other good reason” to order security for costs was the fact that the merits panel made “powerful findings of fraud” against the Appellants.

Horkins, J. agreed that strong findings of fraud constitute “other good reason” to order security, particularly where an appellant has taken steps to put assets out of the reach of creditors. There was evidence that the appellants received substantial monies as a result of the breach of Ontario securities law.  These monies were obtained by the Appellants outside Ontario and were beyond the reach of the Commission.  There was also evidence that Messrs. Ho and Ip transferred real property to their respective wives after the Commission’s Statement of Allegations was filed against them.

It was just to order security for costs

Once the Commission proved that rule 61.06(1)(c) was satisfied, part two of the test triggered an inquiry into the justness of the order sought.

Horkins, J. held that it was just to order security for costs. The Commission was not using the motion for security for costs as a litigation tactic to prevent the appeal from being heard.  The parties were working together to ensure that the appeal proceeded without delay.  Further, the Commission had good reason to be concerned about the costs of the appeal and being able to collect on a costs order that may be made if the appeal was dismissed.  The Appellants had, after all, orchestrated an elaborate premeditated and coordinated fraud to overstate the assets and revenue of Sino-Forest – one of the largest frauds in Canadian history, resulting in a loss of approximately US$6 billion in market capitalization.

Accordingly, Horkins, J. ordered that the Appellants post security for the costs of the hearing before the Commission and the appeal in the amount of $100,000.00.


The author would like to thank Elana Friedman, articling student, for her contribution to this article.

Stop the presses! Canadian securities regulators raise concerns about press releases and other promotional activities

The Canadian Securities Administrators (CSA) have issued a notice regarding misleading promotional activities by issuers.  The notice includes examples such as press releases, presentations, social media posts and other marketing materials that provide insufficient or unbalanced information or that include unsubstantiated claims about the issuer.

Problematic Promotional Practices

Examples of potentially misleading promotional activities identified by the CSA include:

  • describing early-stage plans with “unwarranted certainty”, or making unsupported predictions about growth of the market or future product demand;
  • issuing multiple press releases that do not disclose any new material facts;
  • compensating third parties for promotion through social media and investing blogs without disclosing the relationship between the issuer and third party;
  • announcing a change of business, particularly in a trendy industry such as cannabis, cryptocurrency or blockchain, without a supporting business plan or comprehensive risk disclosure; and
  • announcing a positive event such as a large acquisition but:
    • not filing the corresponding material contracts;
    • not disclosing the material conditions necessary to complete the transaction such as financing or due diligence; and/or
    • subsequently changing or cancelling the transaction with no announcement.

The CSA also provides industry-specific examples of potentially misleading promotional activities in the notice.

Top 10 Ways to Ensure You Comply

  1. Provide sufficient and balanced information so as not to be misleading or inconsistent.
  2. Announce material changes in a factual and balanced way.
  3. Disclose unfavourable news just as promptly and completely as favourable news.
  4. Avoid exaggerated third-party reports and potentially misleading promotional commentary, do not cherry-pick analyst reports and prominently disclose when you pay for reports and articles.
  5. Ensure that any person or company you engage in investor relations activities clearly and conspicuously discloses in all publications and oral statements that such information has been issued by or on your behalf.
  6. Disclose forward-looking information only if there is a reasonable basis for such information, identify it as being forward looking, state the factors or assumptions used to develop such information and provide appropriate cautions.
  7. Update any previously disclosed forward-looking information if something happens (or doesn’t happen) that will likely cause actual results to differ materially.
  8. Ensure that material company information is not released on social media before being generally disclosed in a press release or other disclosure document, and do not (as an issuer) participate in, host or link to chat rooms or bulletin boards.
  9. Limit the number of people authorized to speak on behalf of the issuer to analysts, the media and investors.
  10. Establish written corporate disclosure and social media governance policies and establish appropriate board and/or senior management oversight of disclosures.

Additional Information

The CSA notice is available here.

Refer also to our publication from March 2017: #needsimprovement: CSA releases report on social media disclosure practices by Canadian public companies here.

Crime Doesn’t Pay: OSC Permanently Bans Convicted Fraudster

On November 26, 2018, the Ontario Securities Commission (OSC) issued an order permanently prohibiting Daniel Reeve, a financial planner based in the Kitchener, Ontario area, from participation in Ontario’s capital markets, including trading in any securities and becoming or acting as a registrant.

The permanent ban came after Reeve was convicted in the Ontario Superior Court of Justice in 2017 for having defrauded at least 41 investors of nearly $10 million (see R v Reeve, 2018 ONSC 3744). Justice Skarcica found Reeve’s conduct to have “presented virtually every aggravating circumstances recognized by the Criminal Code and the case law”. Accordingly, Reeve was sentenced to 14 years in custody—the maximum sentence under the Criminal Code—and ordered to pay $10.9 million in restitution to his victims, which included “the disabled, the elderly, …close long-time friends and loyal clients”.

Mr. Reeve’s criminal conduct involved soliciting investors to make “low-to-no risk investments”, which he promised would return between 12 to 20 percent. He was later found to have diverted those investor funds for his personal use, such as making payments for his spousal support, his failing business as well as repayments to other investors. Investors lost more than $10 million.

Subsection 127(1) and 127(10) of the Ontario Securities Act work together to allow the OSC to make an order in the public interest with respect to a person who has been convicted of an offence arising from conduct related to securities. In particular, subsection 127(10) allows the OSC to impose regulatory sanctions under subsection 127(1) in respect of a person who has been convicted in any jurisdiction of an offence under a law respecting the buying or selling of securities.

The two issues the OSC panel was called upon to consider were:

  1. Did Mr. Reeve’s conviction involve transactions relating to the purchase or sale of “securities”; and
  2. If so, what sanctions should the Commission order against Mr. Reeve?

In answering the first question, the OSC applied the three-pronged test identified by the Supreme Court of Canada in Pacific Coast Coin Exchange v Ontario (Securities Commission), 1977 CanLII 37 (SCC) at para 128, and came to the conclusion that all three prongs have been satisfied. The transactions in question were investments with a view to profit, in a common enterprise between Mr. Reeve and the investors, where the profits were to be derived solely from the efforts of others.

Having found that the test under subsection 127(10) has been met, the Commission next deliberated on what sanctions, if any, should be ordered. The panel observed that orders made under subsection 127(1) are meant to be “protective and preventative”,  not punitive. It is essential that the imposed sanction serves to protect Ontario investors both by specifically deterring Mr. Reeve, and by acting as a general deterrent to other like-minded individuals.

By imposing a permanent ban against Mr. Reeve, the OSC panel agreed with Justice Skarcica’s characterization that this matter was “an overwhelming case of fraud”. Not only did the fraud scheme involve a large number of victims and a high dollar value of financial losses, the fraudster showed no remorse for taking full advantage of the high regard he had in the investment and general community in addition to breaching the personal trust and faith the victims had in him.

The OSC’s decision is a reminder of the severity of penalties available for securities fraud and that perpetrators may find themselves prosecuted and sanctioned under both the Criminal Code and provincial securities legislation.


Danny would like to thank Coco Chen, articling student, for her contribution to this article.

When Will Referral Arrangements Constitute Trading under the BC Securities Act?

In a recent decision of the BC Securities Commission (BCSC), the BCSC provides helpful guidance concerning when referral arrangements cross the line and become trading for which registration is required.

Chien-Hua Liu (Liu) and two affiliated corporations referred BC and Hong Kong investors to two issuers, leading to the purchase of over $6.5 million in securities, and earning nearly $450,000 in commissions.

In Re Liu, 2018 BCSECCOM 372, the BCSC scrutinized the details of the referral arrangements and determined that Liu and the corporate respondents had contravened section 34(a) of the BC Securities Act (the Act) by acting in furtherance of trades while not registered under the Act.


Liu is a registered insurance agent and former registrant under the Act for selling mutual fund securities.  This registration lapsed in March 2013.  During the material time, he was the sole shareholder and a director of NuWealth Financial Group (NuWealth), and the sole director and officer of CPFS Professional Financial Services Inc. (CPFS, together with NuWealth and Liu, the Respondents).   CPFS was an insurance company which sold segregated funds and employed approximately 20 insurance agents, including Liu.

The Respondents entered into formal referral agreements with two companies: W, a registered exempt market dealer which sold only proprietary products; and GB, an issuer whose principal business was an early stage real estate development project.

Pursuant to these referral agreements, during the period between April 2013 and January 2016, NuWealth referred investors to W and GB, resulting in 160 trades of securities totaling $4,826,504.52 and CPFS referred investors to W and GB, resulting in 54 trades of securities totalling $1,696.878. Liu was personally involved in referrals which resulted in 48 trades totaling $1,713,070.80.

In the absence of direct evidence to the contrary, the BCSC accepted Liu’s evidence about the referral arrangements:

  • he provided general promotional brochures about W and GB […] to investors, without any discussion of specific investments;
  • he referred the investors to representatives of W and GB and, on occasion, assisted in setting up those meetings;
  • he and other representatives of the corporate respondents attended seminars put on by W and GB. but none of the investors were ever at these sessions;
  • he, NuWealth and individual brokers of CPFS received commissions from W and GB, as the case may be, for these referrals; and
  • he believed that NuWealth, CPFS and their representatives also did what he testified that he had done himself.

The referral arrangements were terminated in late 2016.


The BCSC considered whether the Respondents were in breach of section 34(1), which provides that “A person must not…trade in a security… unless the person is registered in accordance with the regulations…”.  The BCSC observed that the definitions of “trade” and “acts in furtherance” of a trade are intentionally broad in order to support the Act’s purpose of investor protection.  These broad definitions include both direct and indirect conduct.

The BCSC rejected the notion that an introduction or referral was, in and of itself, an “act in furtherance” of a trade.  Referrals occur on a spectrum and vary from uncompensated introduction to full service registrants offering a range of securities, to highly compensated introductions to issuers who offer limited securities.  The context and circumstances will determine where a referral is on this spectrum and whether it is an act in furtherance of a trade within the meaning of the Act.

The BCSC set out a non-exhaustive list of factors that are material for determining where a referral falls on the spectrum:

  • was there material (relative to the amount invested in securities) compensation paid for the referral?
  • was that compensation tied to specific trades in securities? If so, this suggests that the referrer played a material role in causing the trade.
  • what is the range of securities offered by the person to whom the investor is referred? If there is only one product, this suggests that the referrer anticipated a trade in that product as the likely outcome of the referral.
  • was the investor receiving financial services from the referrer prior to the referral? An existing financial services relationship indicates a level of trust and that a referral would be more likely to be interpreted as a recommendation.

Each of these factors in this case supported a finding that the Respondents, in making referrals to W and GB, were engaged in acts in furtherance of trades and were therefore “trading” for the purposes of s. 34(a) of the Act.

The BCSC rejected the Respondents’ submission that since there was no evidence of investor harm there was no need to consider their referral activities to be “trades”.  Investor protection concerns are raised in the circumstances regardless of whether any harm is established: the investors here could not benefit from the Respondents satisfying “know your product” and “know your client” obligations required of registrants.

The BCSC also rejected the Respondents’ reliance on the guidance set out in the Companion Policy to NI 31-103 regarding permissible referrals by registrants.  Not only is the Companion Policy not binding on the BCSC, but also on a technical basis this only applies where registrants made referrals, which the Respondents were not.

The Respondents further submitted that they were entitled to an exemption as they were “not in the business of trading”.  The BCSC disagreed, finding that by finding and soliciting a large number of investors, and connecting them with issuers over many months and in exchange for significant compensation, the Respondents were “in the business of trading”.

The Respondents made a number of submissions urging the BCSC to find that sanctions are not necessary and not in the public interest.  The BCSC distinguished this case from others where such a finding was made at an early stage, and deferred these submissions to a later sanctions hearing.  Written submissions on sanctions are scheduled for January 2019.