Canada: Proposed Canadian Securities Act – The Enforcment Provisions

On May 26, 2010, the Government of Canada published a proposed Canadian Securities Act (the "Proposed Act"). In addition to creating a national securities regulator, the Proposed Act would significantly change the way in which securities laws are enforced in those jurisdictions which opt into the new regime.

The mandate of the Canadian Securities Regulatory Authority ("CSRA") consists of three core objectives:

  • provide protection to investors from unfair, improper or fraudulent practices;
  • foster fair, efficient and competitive capital markets in which the public has confidence; and
  • contribute, as part of the Canadian financial regulatory framework, to the integrity and stability of the financial system.

The CSRA would have two distinct divisions: the Regulatory Division and the Canadian Securities Tribunal (the "Tribunal"). The Regulatory Division would be responsible for the regulation of capital markets in Canada, while the Tribunal would be responsible for the adjudication of securities regulatory matters. The separation of the regulatory and policy functions from the adjudicative functions would be unique amongst Canadian securities regulators and would address the perception of bias inherent in a consolidated securities regulator.

The CSRA would have a number of enforcement mechanisms available to it to redress apparent breaches of the Proposed Act. After investigating possible breaches, the CSRA could, among other things: refer administrative enforcement actions and reviews of regulatory decisions to the Tribunal; apply to the court for a civil order of non-compliance with the Proposed Act; assist the police in the investigation of criminal and regulatory breaches of the Proposed Act using sweeping new investigative tools; or refer breaches of the Proposed Act or the Criminal Code to the police.

Administrative Sanctions

After a hearing, the Tribunal could impose a number of administrative sanctions if it considers it in the public interest to do so, including market disqualification, trading bans, and monetary penalties of not more than $1 million for each contravention and/or any amounts obtained, payments, or losses avoided as a result of the contravention. Without a hearing, the Tribunal could, among other things, order that all trading in a security cease for a period of not longer than 15 days if there is unusual fluctuation of the security's volume of trading or its market price or there has been a material change in the business of the security's issuer.

Civil Orders

Under the Proposed Act, an application could be made to a court for a declaration that a person has not complied with the Proposed Act. The court could make an order against the person that is subject to the declaration, including that: the person comply with the Proposed Act; the impugned transaction be rescinded, and/or the person be prohibited from acting as an officer, director or promoter of a security. The court could also direct that the person make restitution to the victim, either directly or through an investor compensation fund, or that the person pay an amount of money to another person that is ordered to be responsible for the allocation of the money for the benefit of the victim. The court could also order the payment of general or punitive damages.

Regulatory Offences

Under the Proposed Act, the CSRA would have the power to undertake a number of regulatory enforcement actions for violations of the Proposed Act that could result in a range of sanctions. Notably, the sanctions for regulatory offences, which would be prosecuted in court by a provincial or federal Crown Attorney, can include fines of up to $5 million or imprisonment for a term of not more than five years less a day.

Criminal Offences

The Proposed Act contains securities-related criminal offences that are equivalent to those that are currently prescribed in the Criminal Code, including offences for securities fraud, market manipulation, insider trading and misrepresentation. These offences would apply to both participating and non-participating jurisdictions.

The Proposed A ct also contains the aggravating circumstances, non-mitigating factors and maximum sentences that currently apply to securities-related criminal offences in the Criminal Code as well as the strengthened sentencing measures for fraud and victims of fraud that are part of recently tabled legislation in parliament to amend the Criminal Code sentencing provisions.

The Attorney General of Canada and the Attorney General of a province or territory would continue to have concurrent jurisdiction over the prosecution of criminal offences, with the provinces and territories having right of first refusal under an administrative arrangement that currently applies to the prosecution of securities-related criminal offences.

Under the new regime, the CSRA would have a significant role in assisting with the enforcement of criminal offences, and would have a role in the investigation of securities-related crime in a manner that would be set out in an agreement with each province. The Proposed Act places a "duty to assist" on parties subject to a CSRA investigations.

Orders for the Production of Information

The Proposed Act includes new evidence-gathering tools for the purpose of enhancing securities-related criminal investigations, including production orders that can be obtained on applications without notice. The Proposed Act would allow criminal investigators to obtain a court order to compel a recognized entity to provide a list of registrants who purchased or traded a security during a specified period, and to compel a registrant to produce a document that contains the names of all persons on whose behalf the registrant purchased or traded a specified security during a specified period as well as the time and date of the purchase or trade. Criminal investigators could also obtain a court order to compel entities, such as publicly-traded companies or brokerage houses, to respond in writing to questions about certain aspects of alleged misconduct. Before making these types of orders, the court would have to be satisfied by affidavit evidence that an offence under the Act had been committed and that the information is required to assist the investigation.

Whistleblower Provision

The Proposed Act also includes a whistleblower provision, which would provide immunity from civil action to persons who cooperate and disclose information to regulatory or criminal investigators that they reasonably believe is true.

Reference to Supreme Court of Canada

The government of Canada has referred the Proposed Act to the Supreme Court of Canada for an opinion as to whether the Proposed Act is within the legislative authority of the Parliament of Canada. Should a favourable opinion be received from the Supreme Court of Canada, the government of Canada has indicated that it intends to introduce the Proposed Act in Parliament as a bill. The CSRA is targeted to be established within the next three years.

Edited by David Di Paolo and Tyler Hodgson

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