Regulators are often taken to court. One measure of success is where the regulator is vindicated on every legal ground raised. By that measure, the Mutual Fund Dealers Association (MFDA) and the Ontario Securities Commission (OSC) succeeded in Herner v. Mutual Fund Dealers Association of Canada et al., 2026 ONSC 4889 (CanLII). However, it may not have felt that way as the regulators endured a 21-day trial in which ten members of their staff testified, where entire files on the matter were subject to painstaking scrutiny, and where every decision was characterized by the registrant as malicious.
The MFDA discipline tribunal found that serious allegations against the registrant (related to unsuitable investments for a client) were not proved. The OSC was sued for imposing terms and conditions on the individual’s registration when he reapplied for registration after changing investment firms.
Some highlights that may be of interest to regulators in the 124-page judgment include the following:
- The Court could not make inferences of bad faith on the part of the regulators from neutral circumstantial evidence (some of which is described below). The Court said: “Inferences may be drawn which logically and reasonably flow from proven facts. To do otherwise is to speculate.”
- A claim for malicious prosecution cannot be made out where those referring and prosecuting the allegations had an honest belief in the concerns, thought that the concerns could be made out, and where those beliefs were objectively reasonable considering the information known at the time. In addition, to establish a claim, the decision to proceed with the discipline hearing must also be made for a predominant purpose other than enforcing professional standards. The failure to interview a key witness where the regulator reasonably believes they have nothing to add to what they have already said does not meet that test. Nor does the failure to interview two other key witnesses separately, as expected in the regulator’s manual, where the investigators had a reasonable rationale for interviewing them together. Similarly, investigative delay beyond the regulator’s benchmarks does not establish malice (“benchmarks are not limitation periods or hard cutoffs”). The delays were not intended to harm the registrant. Also, explaining the options to the registrant, including settlement options, does not, in itself, amount to pressuring the registrant to “plead guilty”.
- The MFDA is a non-statutory body that does not have an immunity provision. However, the registrant must still establish bad faith to succeed in a monetary claim against the regulator. To permit a claim for mere negligence would impede the regulator’s “ability to regulate its members and advisors and protect the public…. It could also have a chilling effect on the MFDA’s investigative and enforcement functions and its mandate to protect the public.” In any event, the registrant did not establish that the MFDA had fallen below the standard of care even though it deviated from the procedures set out in its manuals and exceeded timeline benchmarks.
- The sharing of information about the registrant between the MFDA and the OSC does not establish a civil conspiracy to harm him. “The sharing of information was done for the legitimate purpose of furthering the defendants’ duties and obligations, avoiding duplication of work, and ensuring each had a complete picture of the necessary facts.”
The “comfort” regulators might take from the legal principles reinforced in this judgment is mitigated by the challenging litigation experienced in this matter.
