Canada: OSC Announces Adoption Of Flexible American-Style Enforcement Tools To Police Capital Markets

Last Updated: March 13 2014
Article by Tyler Hodgson

Most Read Contributor in Canada, September 2016

An International Approach

Exactly two weeks to the day that Deferred Prosecution Agreements came into force for enumerated offences in the United Kingdom, the Ontario Securities Commission (the "OSC" or the "Commission") also indicated that it was prepared to embrace flexible enforcement tools that have traditionally been associated with the American approach to regulatory investigations.

On March 10, 2014, the Commission released OSC Staff Notice 15-702 (the "Notice"). The Notice marks a profound shift in OSC Enforcement policy and will doubtless have a significant effect on the manner in which enforcement proceedings are undertaken and resolved by the Commission. Amongst other things, the Notice introduces No Contest settlements and Non-Prosecution Agreements (or "no enforcement action agreements") for market participants that are deemed to be satisfactorily cooperative by Staff.

The Notice takes on added significance because the OSC and the British Columbia Securities Commission are targeted to become a single entity by July 1, 2015. Depending on the perceived success of the new policies announced in the Notice, it is likely that this new American style approach to securities regulation will come to define Canadian securities regulation going forward.

Cooperation and Non-Cooperation Defined

In the Notice, the Commission outlined what will be considered to be the expected level of cooperation exhibited by market participants. Equally importantly, the Notice identifies "what is not viewed as cooperation" by the Commission. In order to be considered cooperative, the Commission expects market participants to self-report any problems internally identified relating to the participant's systems and controls, the reporting or disclosure of financial results, illegal or improper trading, or any other inappropriate activity that may affect the integrity of the capital markets of Ontario. Additionally, market participants are expected to take appropriate remedial measures to ensure misconduct is not repeated and offer appropriate compensation to harmed investors.

Queen for a Day

The Commission also expects market participants to fully cooperate with the Commission and other regulators to provide all requested information in a timely manner. The Notice provides that at the sole discretion of Staff of the Commission, a party that self-reports misconduct may be permitted to enter a proffer type agreement with Staff whereby any information provided by the party to Staff at a pre-arranged meeting would not be used against that person in subsequent enforcement proceedings by the Commission (an arrangement commonly referred to as "Queen for a Day" in the United States). This is significant because under the Ontario Securities Act Staff has the power to compel a party to be examined under oath and generally (although not without exception) a compelled examination is admissible against the deposed party in administrative proceedings. However, even if a party is able to enter such a proffer agreement with the Commission, Staff of the Commission would be permitted to share any information so obtained with other regulatory bodies and use this information for further investigation. A proffer statement could also be used to impeach a party should that party later adopt a position inconsistent with his or her proffer statement.

OSC requires waiver of legal privilege in some circumstances to be considered cooperative

Cooperative market participants are also expected to provide Staff of the Commission with all requested books and records and all analyses and reports prepared by experts retained by the market participant or its counsel. To this end, the Commission specifies that a market participant will not be considered to be cooperative if they "arrange their affairs in such a claim a privilege to avoid providing details of potential breaches of Ontario securities laws". It is not clear if the Commission will expect market participants to waive privilege in all circumstances over all documents which provide details of potential breaches of securities laws, or if instead the Commission will simply not consider a market participant to be cooperative if it makes active arrangements to shelter or conceal potential breaches of securities laws under the protection of privilege.

Expecting market participants to waive privilege over legal documents in order to be deemed cooperative is potentially troublesome and at odds with the approach adopted by American agencies that have far more experience with No Contest settlements and Non-Prosecution Agreements.

For example, since the revision of its Principles of Federal Prosecution of Business Organizations in August 2008, commonly referred to as the "Filip Guidelines", while companies are required to provide all relevant facts to the government to receive credit for cooperation, the US Department of Justice does not require companies to waive solicitor-client privilege, nor produce materials protected by solicitor-client privilege or work product privilege. Similarly, the Securities and Exchange ("SEC") Commission Division of Enforcement Manual (the "Manual") requires the SEC to respect legitimate assertions of solicitor-client privilege and attorney work product privilege. The Manual prohibits SEC staff from asking a party to waive either privilege without the prior approval of the Director or Deputy Director and specifically notes that credit for cooperation is not contingent on producing documents protected by privilege.

The SEC notes that respecting a party's right to assert privilege will encourage parties "to consult counsel about potential violations of the securities laws", a desirable outcome to ensure an orderly capital market. It is hard to imagine that the OSC would want anything different and if No Contest settlements are intended to increase efficiency in policing the Ontario capital markets the Commission will likely have to clarify or revisit its position on waiving legal privilege with respect to cooperation.

Other factors which will be viewed as indicative of non-cooperation will include destroying documents and records, misrepresenting facts or withholding material information from the Commission and failing to implement remedial measures

No Contest Settlements

In limited circumstances, Staff will now recommend that administrative proceedings be resolved in a manner that permits a Respondent to neither confirm nor deny facts declared to be true by Staff based on their investigation. Of significance, a Respondent will not be required to admit that it violated Ontario securities law or otherwise acted contrary to the public interest. It appears, however, that a Respondent would have to agree with the sanctions recommended by Staff in a No Contest settlement agreement.

The Commission will retain the adjudicative discretion to decide whether or not to approve any No Contest settlement proposed by Staff. Staff retains a broad discretion to decide when it is appropriate to recommend a No Contest settlement. A No Contest settlement will not be appropriate if a Respondent has engaged in abusive, fraudulent or criminal conduct; has misled or obstructed Staff during the course of an investigation; or if the Respondent's actions have resulted in investor harm which has not been addressed in a satisfactory manner. Provided none of these factors are present, Staff will consider several factors in determining whether a No Contest plea is appropriate, including the degree and timeliness of a Respondent's self-reporting of discovered misconduct, as well as their cooperation with any investigation undertaken by Staff. Other factors that will be considered include any remedial steps taken by the Respondents, the willingness of Respondents to undertake to refrain from re-offending, the ability of the Respondent to make payments towards compensating affected persons and the cost of Staff's investigation, and the deterrent effect of any settlement on other participants in the capital markets.

No contest settlements will not be available when Staff elects to bring quasi-criminal proceedings before the Ontario Court of Justice.

No Enforcement Action Agreements

In limited circumstances Staff may also exercise its prosecutorial discretion to refrain from taking any enforcement action against parties that are sufficiently cooperative. In exercising its discretion, Staff will consider numerous factors, including whether the misconduct in question was an inadvertent or technical breach of Ontario securities law, the degree of investor harm occasioned by the misconduct, the level or cooperation and self-reporting demonstrated by the party, and the deterrent effect on the particular party in question.

Other Outcomes Reflecting Credit for Cooperation

In addition to no enforcement actions, parties that are deemed to sufficiently cooperate with the Commission may still receive credit for cooperation by avoiding the issuance of a formal Notice of Hearing and instead enter into an enforceable undertaking or have terms and conditions placed on their registration with the Commission. If a Notice of Hearing is issued the fact that a Respondent cooperated may be reflected in narrowing the scope of the allegations or receiving a reduced recommendation for sanctions by Staff of the Commission. Additionally, the Commission states that it may recommend that parties that cooperate be dealt with exclusively by way of administrative action and not court proceedings, some of which could involve jail time.

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