OSC loses case against suspended securities advisor who issued promissory notesBy Andrew Rickard | September 13 2016 01:30PM
The Ontario Court of Justice has ruled that an advisor who sold interest-bearing promissory notes to clients while he was banned from being a securities registrant did not violate provincial legislation.
In a ruling delivered on August 31 and released last week, Justice Joseph Kenkel dismissed charges against Daniel Tiffin, a financial advisor who is currently licensed to sell life insurance and insurance-based investments through his company Tiffin Financial Corporation (TFC).
After Tiffin issued 14 interest-bearing promissory notes to investment clients with a total value of $700,000, the Ontario Securities Commission (OSC) charged him with violating the provincial Securities Act, claiming he was trading in securities without being registered, without filing a prospectus, and did so while he was prohibited from working in the securities industry.
An American case from 1990
In reaching his decision, Justice Kenkel had to determine whether the TFC notes could be said to constitute a security. In particular, he relied on Reves v. Ernst & Young, an American case from 1990 which set out four points to consider:
- 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 of distribution of the note resembles “common trading for speculation or investment”.
- Whether the investing public reasonably expects that the note is a security.
- Whether there is a regulatory scheme that protects the investor other than securities laws.
Ultimately, Kenkel found that the TFC notes did not meet the overall statutory definition of a security.
An administrative penalty of $25,000
"An examination of the four Reves factors shows that the TFC notes are similar to notes secured by a lien on a small business or its assets, one of the ‘family’ of recognized non-security notes in Reves," reads the decision. "Neither the statutory goals in s.1.1 of the Act nor the circumstances of the particular transactions require that these promissory note loan agreements be regulated as securities."
In the contretemps Tiffin had with the OSC in 2014, he was ordered to pay an administrative penalty of $25,000, disgorge $517,000, and pay $15,000 in costs for his part in the Rezwealth illegal distribution case. He was also banned from acting as a registrant, as an investment fund manager, or as a promoter for five years.