Canada: OSC Eyes 'No Contest' Rule To Ease Logjam

Last Updated: March 15 2012
Article by Linda Fuerst

A recent Ontario Securities Commission (OSC) staff proposal to allow enforcement actions to be settled without any admission of fact or wrongdoing by respondents has generated intense debate. A public hearing to consider the proposal will be scheduled in early 2012.

The staff proposal would permit "no contest" settlements of proceedings before the OSC in a narrow set of circumstances. Only a respondent who co-operated with staff and had not been the subject of any prior securities regulatory action would be eligible to settle on this basis.

According to OSC Staff Notice 15-704, the existence of concurrent civil litigation has adversely impacted the prospect of settlement of enforcement proceedings on a timely basis (or at all) because of concerns by respondents that admissions made by them in OSC proceedings will be used against them in related civil proceedings. This has resulted in OSC proceedings under s. 127 of the Ontario Securities Act becoming increasingly litigious and time-consuming. A "no contest" settlement program would act as an incentive for market participants to settle matters expeditiously.

Opponents of the proposal, including FAIR (the Foundation for Advancement of Investor Rights), argue that the proposed "no contest" settlement program is not in the public interest, will make it harder for investors to recover losses and will not deter potential wrongdoers from violating securities laws. They reject the notion that there should be "regulatory neutrality" as between the commission, respondents and investors. Instead, the OSC should require admissions of wrongdoing in order to actively assist investors in pursuing their legal rights against wrongdoers before the civil courts.

Arguments advanced by FAIR against "regulatory neutrality" ignore important distinctions between the role of the OSC in s. 127 proceedings and that of the courts.

It has long been recognized that proceedings brought before the OSC are fundamentally protective in nature and prospective in orientation. According to the Supreme Court of Canada in Committee for Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission) [2001] S.C.J. No. 38, that means that they cannot be used merely to remedy misconduct alleged to have caused harm or damage to private parties or individuals.

The types of sanctions that the commission can impose in s. 127 proceedings reflect this reality. They include orders banning persons from various activities in the capital markets, such as prohibitions on acting as registrants, as officers or directors of issuers and on trading. These orders are protective of investors and the integrity of the capital markets generally. They are not compensatory in nature.

If the OSC wishes to obtain an order requiring a wrongdoer to pay compensation, restitution or damages, it can do so only by applying to the Superior Court under s. 128 and establishing that the respondent has breached Ontario securities law. This reflects the legislature's wisdom that it is primarily the role of the courts, not the commission, to deal with matters of compensation.

In any event, with the creation of a civil cause of action for misrepresentation in secondary market disclosures that does not require proof of reliance, investors have been greatly assisted in their ability to "uncover the truth" and seek compensation privately if they have been harmed. There is simply no compelling case for a retreat from "regulatory neutrality" in the context of OSC s. 127 proceedings. Indeed, increasing numbers of class proceedings have been commenced pursuant to s. 138.3 of the Ontario Securities Act in recent years.

It is precisely because of this explosion of private litigation that securities regulators are encountering increasing resistance to settlements requiring admissions of fault. Unless something changes, this trend should be expected to continue, as courts have been reluctant to give effect to clauses in regulatory settlement agreements prohibiting such admissions from being used in civil cases. (See for example, Hill v. Gordon-Daly Grenadier Securities, [2001] O.J. No. 241; upheld [2001] O.J. No. 4181 (Ont. Div. Ct.); Clarke v. Yorkton Securities Inc., [2003] O.J. No. 4999; Buckingham Securities Corp. (Receiver of) v. Miller Bernstein LLP, [2008] O.J. No. 1859.)

Ontario statutes governing certain other professions contain provisions that completely insulate respondents (and also complainants) having information generated during the regulatory complaints and disciplinary process from being used for any purpose in civil proceedings. These blanket, statutory "cones of silence" have been enforced by the courts precisely because they are designed to avoid the chilling effect of civil litigation relating to the same matters. (See, for example, Forget v. Sutherland, [1998] O.J. No. 1382 (Ont.Div.Ct.))

In the absence of a legislative solution, surely it is appropriate for the OSC to create mechanisms designed to encourage persons who have breached securities law to co-operate with OSC staff and agree to the imposition of sanctions protective of the capital markets without fear that their admissions will be used against them for collateral purposes in other proceedings.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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