Compliance

Cole v. Merrill Lynch Canada Inc., 2005 CanLII 56201 (ON SC)

[13] The letter of dismissal and the UTN indicate that Mr. Cole was dismissed for violation of industry standards regarding credit and compliance issues. Mr. Cole’s manager, Mr. Benedict, testified that he was the one who made the decision to dismiss Mr. Cole, in consultation with the credit and compliance departments at head office. He said that his concerns with Mr. Cole’s performance were with respect to unsuitability of trades, a concentration in speculative trades, under margin accounts and free riding.

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[17] The investment industry is highly regulated. As a financial advisor, Mr. Cole was required to comply with a framework of regulations, rules and policies set out by the Securities Act, R.S.O. 1990, c. S.5, and its Regulations; the Toronto Stock Exchange; the Investment Dealers Association (IDA); the Conduct and Practices Handbook (published by the Canadian Securities Institute); and the policies and rules of his employer, Merrill Lynch. Compliance with this set of rules and standards was an essential component of Mr. Cole’s job.

[18] Ensuring compliance with the applicable regulations and standards is a major concern for companies such as Merrill Lynch. As noted by Sharpe J.A. in Venture Capital USA Inc. v. Yorkton Securities Inc., 2005 CanLII 15708 (ON CA), [2005] O.J. No. 1885 (C.A.) at para.33, the compliance department of a brokerage firm “acts as a ‘gatekeeper’ to the securities markets and is charged with ensuring that trading in the firm’s accounts is in accordance with relevant securities laws”. Thus, Merrill Lynch not only has duties towards its employees and clients but has a duty to ensure it complies with industry laws and regulations. In turn, it relies on its employees, including its financial advisors, to comply with those laws and regulations.

[19] In Dean Witter Reynolds (Canada) Inc. v. Beckingham (1994), 1994 CanLII 18367 (AB QB), 180 A.R. 321, the Alberta Court of Queen’s Bench considered the case of a brokerage house that had dismissed an account executive for cause. It noted at para. 41 that the plaintiff’s business was based on reputation and trust and that it relied upon account executives to follow the rules and regulations. Failure to follow those rules and regulations constituted a deliberate disregard of the requirement that account executives comply with the standards of the securities business.