Regulatory Investigations: Applying 'Jarvis' In The Securities Context

1) INTRODUCTION

In R v. Jarvis,1 the Supreme Court of Canada set out the test for determining when Charter rights are engaged in the context of a regulatory investigation conducted by regulatory officials. Writing for the Court, Iaccobucci and Major JJ. stated that evidence may be validly compelled using statutory inquiry or inspection2 powers as long as the "predominant purpose" of the inquiry is not "penal liability".3 Once the predominant purpose of the inquiry or inspection is penal liability, an adversarial relationship between the state and the individual crystallizes and the "Rubicon" or "point of no return" has been crossed.4 In such instances, the "full panoply" of Charter rights is available to the individual, requiring the regulator to cease using regulatory compulsion powers and to make use of criminal investigative tools, such as search warrants.5 Among the Charter rights most often at issue in the case of regulatory investigations are the investigation target's s. 7 right against self-incrimination, when life, liberty or the security of the person is at stake; and the target's s. 8 right against unreasonable search and seizure.

Although the Jarvis decision arose in the context of an audit and subsequent criminal investigation under the Income Tax Act,6 the decision has clear implications for other regulatory contexts that employ broad inquiry powers to compel information and regulatory offences that attract penal consequences.7 Securities regulation is one such context. In this paper, we compare regulatory enforcement in the income tax and securities contexts and explain why certain aspects of securities enforcement create challenges for applying the Jarvis factors. Drawing from recent cases, we suggest securities context specific factors that courts may add to the Supreme Court's non-exhaustive list of factors. Finally, to assist Enforcement Staff in avoiding the exclusion of evidence, we provide a general protocol for securities regulators operating in a post-Jarvis world, commenting on what implications the proposed Canadian Securities Act may have on securities law enforcement. By way of background, we have first briefly summarized the Supreme Court's decision in Jarvis below.

2) THE SUPREME COURT OF CANADA'S DECISION IN JARVIS

In Jarvis, an auditor from the Canada Customs and Revenue Agency's (CCRA's) Business Audit Section began an audit to follow up on a "lead" that Jarvis had failed to report substantial income from the sale of his deceased wife's artwork for the 1990 and 1991 tax years.8 After contacting third party art-galleries and reviewing their books and records,9 the auditor found that the lead had some validity and arranged to meet with Jarvis, to interview him and to review his books and records relating to his tax returns.10 At the interview, Jarvis was not cautioned, nor was he represented by counsel. Jarvis answered the auditor's questions and agreed to provide information about his banking arrangements, as well as receipt books tracking sales and expenses.11 Based on the information obtained after the interview and the review of Jarvis' books and records, the auditor discovered a significant discrepancy in reported income and transferred the file to an investigator in the Special Investigations Section of the CCRA.12

After reviewing the auditor's file, the investigator felt there were reasonable grounds to believe that an offence under the Income Tax Act had been committed and obtained a search warrant based on information in the file.13 The evidence obtained pursuant to the warrant formed a substantial portion of the Crown's evidence at trial.14

Jarvis alleged that the auditor began pursuing a criminal investigation after she completed her review of the books and records of the third party art galleries. According to Jarvis, all of the evidence subsequently obtained, including his statements during the interview and the documents he provided in response to the auditor's requests was obtained in violation of his ss. 7 and 8 Charter rights.15

The Court held that when the "predominant purpose" of an investigation is one of penal liability, an adversarial relationship between the individual taxpayer and the state exists, which triggers the "full panoply" of Charter rights, such as ss. 7 and 8 rights.16 The "predominant purpose" test is derived from the Supreme Court's decision in Branch v. British Columbia Securities Commission, where the Court upheld the British Columbia Securities Commission's statutory power to compel witnesses to give testimony provided that the "predominant purpose" of the compulsion was not to obtain evidence that would incriminate the witness.17

The Court's challenge in Jarvis was to determine at what point the adversarial relationship crystallizes, and the predominant purpose of an investigation becomes one of penal liability. Recognizing that the inquiry is contextual and must take into account all relevant factors or the "totality of the circumstances,"18 the Court listed the following factors for trial judges to consider:

Did the authorities have reasonable grounds to lay charges? Does it appear from the record that a decision to proceed with a criminal investigation could have been made? Was the general conduct of the authorities such that it was consistent with the pursuit of a criminal investigation? Had the auditor transferred his or her files and materials to the investigators? Was the conduct of the auditor such that he or she was effectively acting as an agent for the investigators? Does it appear that the investigators intended to use the auditor as their agent in the collection of evidence? Is the evidence sought relevant to taxpayer liability generally? Or, as is the case with evidence as to the taxpayer's mens rea, is the evidence relevant only to the taxpayer's penal liability? Are there any other circumstances or factors that can lead the trial judge to the conclusion that the compliance audit had in reality become a criminal investigation?19 Applying these factors to the facts, the Court found that there was no investigation into penal liability before the auditor referred the file over to the Special Investigations Section.20 All evidence obtained prior to that date had been validly obtained and properly formed the basis for the search warrant.

3) JARVIS IN THE SECURITIES CONTEXT

The Court in Jarvis clearly contemplated that its predominant purpose test, and the factors enunciated under it, would have implications for other regulatory contexts beyond that of the Income Tax Act.21 In particular, the Court suggested that the mix of factors needed to determine when the predominant purpose of an inquiry is penal liability may vary depending on the nature of the government agency involved and its organizational setting.22 In this section, we explore the application of Jarvis in the securities regulatory setting. First, we compare the tax and securities contexts and explain why certain Jarvis factors do not apply neatly in the securities setting. Second, we summarize the three most significant securities-related cases applying Jarvis. Finally, based on the securities cases applying Jarvis, we suggest other relevant factors judges might add to the list of Jarvis factors in securities cases.

1. Comparing tax and securities enforcement

   At one level, the regulatory schemes for collecting income tax and regulating securities share certain similarities. Successful tax collection and securities regulation rely on the honesty and integrity of taxpayers and market participants. Both schemes include remedies, offences and penalties to ensure compliance and to deter wrongful conduct.23 To supervise and ensure the integrity of the regulatory scheme, both rely on broad inquiry powers.24 Finally, In light of their regulatory nature, under both schemes, there is a relatively low expectation of privacy for information or records; in the case of the taxpayer, in records that might be relevant to the...