Canada: OSC Announces New Resolution Options In Enforcement Matters

The Ontario Securities Commission (OSC) has published Staff Notice 15-702 Revised Credit for Cooperation Program (Revised Cooperation Program), which implements four initiatives of staff affecting resolution of enforcement matters.

In particular, the Revised Cooperation Program sets out criteria for no-contest settlement agreements and no-enforcement action agreements, a process for self-reporting to staff, and for greater public disclosure by staff of credit granted for cooperation in actual cases.

BACKGROUND

The OSC first announced its consideration of a Revised Cooperation Program in October 2011, when it issued a Request for Comments on Proposed Enforcement Initiatives. For more information, please see our previous Blakes Bulletin: OSC Immunity for Co-operation Initiative. The Revised Cooperation Program has been implemented following public consultation on its contents, including via a hearing before the OSC in June 2013.

The stated aim of the program is to encourage market participants and others to "self-police, self-report and self-correct" breaches of Ontario securities law and other conduct contrary to the public interest. Staff's Revised Cooperation Program contains incentives to self-report and to cooperate with staff during its investigations.

THE FOUR INITIATIVES

No-Contest Settlement Agreements

Under the Revised Cooperation Program, staff has indicated its willingness to resolve certain enforcement matters without requiring the respondent to admit facts or liability. The adoption by staff of this "no-contest" settlement concept, a form of which has been available in the United States for some time, is intended to address concerns that requiring respondents to admit to facts or liability may delay or prevent settlements of OSC enforcement proceedings where respondents have concerns about other legal proceedings.

Instead of admissions by the respondent, no-contest settlement agreements will be expected to contain:

  • facts stated by staff as a result of their investigation;
  • no denial of those facts by the respondent;
  • the respondent's acceptance of the settlement agreement; and
  • agreed sanctions.

No-contest settlement agreements will be subject to approval by the OSC under the Rules of Procedure. Importantly, the OSC itself expressed support for staff's Revised Cooperation Program in the press release announcing the same.

Staff will consider a variety of factors in determining whether to agree to a no-contest settlement. Such factors include, among others:

  • the respondent's cooperation with staff;
  • the degree and timeliness of self-reporting by the respondent;
  • the investor harm caused by the conduct;
  • remedial steps taken by the respondent;
  • any agreement to pay compensation and/or costs of the investigation; and
  • the deterrent effect of the settlement on the respondent and others.

No-contest settlements will not be available where a person has engaged in abusive, fraudulent or criminal conduct; where the misconduct has resulted in investor harm that has not been satisfactorily addressed; or where the person has misled or obstructed staff in its investigation.

No-Enforcement Action Agreements

Staff may grant persons immunity from OSC action in respect of misconduct in certain limited circumstances by way of a no-enforcement action agreement.

As with no-contest settlements, staff will consider a variety of factors in deciding whether to agree to take no-enforcement action. Key factors to be considered will include the person's degree of cooperation with staff – potentially including a commitment to provide active and ongoing cooperation in the investigation and prosecution of others – and whether the person self-reported the conduct. Staff will also consider:

  • self-remediation;
  • whether the misconduct is technical in nature and/or an isolated breach;
  • the degree of investor harm caused and remedial steps taken;
  • any agreement to pay compensation and/or costs of the investigation; and
  • the deterrent effect of such an agreement.

Self-Reporting Processes

Persons potentially interested in self-reporting and/or offering to cooperate with staff are permitted to anonymously contact staff through legal counsel to explore the opportunity for cooperation and for the potential credit for such cooperation. It can be expected that a person will have to offer reasonable particulars about their conduct and the circumstances to obtain any offer of credit from staff for cooperation.

Staff Disclosure of Credit Granted for Cooperation

Staff has indicated it will provide greater disclosure of the credit granted for cooperation in actual cases going forward. Such disclosure can be expected in various forms, including details of cooperation and corresponding credit being set out in settlement agreements; submissions to hearing panels at the sanction stage regarding cooperation and proposed credit; and periodic reporting, on a generic basis, of circumstances in which staff took no enforcement action.

WHISTLEBLOWER COMPENSATION STILL UNDER CONSIDERATION

In its 2011 Request for Comments, OSC staff indicated they were considering whether to adopt a whistleblower program which included financial incentives for information about market misconduct.

In its announcement of the Revised Cooperation Program, staff has confirmed that they are continuing to consider the introduction of such monetary incentives for whistleblowers, as has been done by the U.S. Securities and Exchange Commission.

IMPLICATIONS

Whether the Revised Cooperation Program turns out to be a meaningful response to stated concerns about prior settlement processes at the OSC – and in turn serves the aims of staff – will only be revealed with time and experience.

For example, the no-contest settlement option may provide market participants and others with greater flexibility in resolving certain enforcement issues with staff. However, the utility of such settlements will depend in part on how staff interprets and applies the requirement that such settlements be based on facts not denied by the respondent. Strict insistence that respondents not deny facts stated by staff may not be sufficient to allay concerns about collateral use of settlements with the OSC. In addition, although greater transparency about credit granted by staff in past cases may allow market participants to better assess their options for resolution in future cases, disclosure of the scope of cooperation and credit in individual cases could also create new concerns arising from the public dissemination of such details, which previously have been confidential.

What is clear from the Revised Cooperation Program is that staff is trying to show tangible value to proactive reporting and being a first-in-time reporter of misconduct. Given the potential benefits of early reporting and cooperation, those that may be concerned about compliance with securities laws and regulations within their organization or industry would be well-advised to investigate and consider their options at the earliest opportunity.

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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