When a mutual fund rep was terminated by his dealer amid compliance concerns, the firm didn’t have just cause for the firing — but the misconduct that it discovered after he was let go gave the firm a valid reason for the move, a British Columbia court says.
In a decision of the Supreme Court of British Columbia on Tuesday, a rep’s claim against their former firm, Investors Group Financial Services Inc. (now known as IG Wealth Management), alleging wrongful dismissal was ultimately rejected — as was the firm’s counterclaim against the rep, alleging that he improperly solicited his old clients.
According to the decision, in 2018, the firm terminated Sergio Salina, who’d been a rep with Investors Group for 27 years at that point, in the wake of a compliance investigation, which found that he had moved a number of clients from no-load funds to deferred sales charge (DSC) funds between 2014 and 2017 — and, amid the firm’s concerns that many of his clients had aggressive, high-risk portfolios despite being near retirement age.
The firm maintained that he was terminated for cause, the court noted.
But Salina sued his former dealer, alleging that he was wrongfully dismissed. And, the firm countersued, claiming that he breached the non-solicitation and confidentiality clauses of their rep agreement after he was fired.
Among numerous other issues, the court wrestled with the question of whether Salina was considered an employee of IG or not — noting that there’s no hard and fast test for answering this question.
Salina argued that he should be considered an employee, as the firm had “a high level of control over all aspects of his day-to-day practice, his client interactions, and the products and services he could offer clients.”
Conversely, the firm argued that he was an independent contractor with “wide latitude in structuring his financial advisor practice, subject to Investors Group’s oversight.”
The court noted that there were a variety of factors weighing on each side of the question. While the firm’s level of control over its reps, and the high degree of integration between their business interests, favoured reps being considered employees, other considerations, such as the highly-variable compensation arrangements and the fact that he wasn’t considered an employee for tax purposes, weighed in favour of independent contractor status.
Ultimately, the court concluded, “the relationship falls between that of an employee and an independent contractor, and thus Mr. Salina’s role at Investors Group is best characterized as a dependent contractor.”
Based on that conclusion, unless he was fired for just cause, Salina was entitled to compensation for a reasonable notice period, the court said.
And, the court found that despite the firm’s compliance concerns, it didn’t have just cause to terminate him at the time.
“Overall, I find that Investors Group has not established that Mr. Salina’s conduct up to that point was fundamentally antithetical to the continuation of the dependent contractor relationship, nor was it irreconcilable with sustaining the employment relationship,” the judge presiding over the case said.
However, the court also found that the just cause came later, in the wake of his termination.
In 2022, Salina — who became licensed as an investment rep after leaving IG and moved to Echelon Wealth — settled with the then-Mutual Fund Dealers Association of Canada (MFDA) over alleged rule violations that occurred back when he was with IG — including breaches related to the conflicts created by the DSC switches, and the fact that it was discovered that Salina possessed 24 pre-signed forms for 13 of his former IG clients.
Based on those events, IG argued that it had just cause to fire him, based on misconduct that it learned about after termination.
The court agreed, ruling, “Mr. Salina’s severe misconduct in collecting and possessing these forms while under close supervision and in making a false attestation was irreconcilable with the continuation of the dependent contractor relationship with Investors Group and establishes just cause for his termination.”
As a result, it dismissed the rep’s claim for wrongful dismissal.
The court also rejected the firm’s counter-claim, which alleged that Salina breached the non-solicitation and confidentiality clauses of the rep agreement.
While the court found that he did breach those clauses, those breaches didn’t necessarily result in damages to the firm, even though a number of his former IG clients did end up moving to his new firm.
The court found that there was no evidence from those clients about why they moved firms.
“It could be that they were convinced to move their portfolios to Mr. Salina as a result of the solicitation. But it could also be that they were not happy with being moved to a new consultant at Investors Group, or with the specific new consultant they were assigned to. In other words, regardless of Mr. Salina’s actions, the clients may have intended to move their files to him as soon as they learned he had been reestablished,” the court said.
As a result, it concluded that IG failed to establish “causation for its losses arising from Mr. Salina’s breaches of the non-solicitation clause and the confidentiality clause” — and it dismissed the firm’s counterclaim.