Canada: OSC Adopts New Initiatives To Strengthen Enforcement

On March 11, 2014, the Ontario Securities Commission (OSC) issued Staff Notice 15-702 – Revised Credit for Cooperation Program (Staff Notice 15-702). Staff Notice 15-702 carries forward various existing codified or informal practices, and adopts new initiatives previously proposed by OSC Staff (Staff). The stated intention of these initiatives is to: (i) resolve enforcement matters more efficiently by providing market participants with incentives to "self-police, self-report and self-correct" potential misconduct that may breach Ontario securities laws or otherwise be contrary to the public interest; and (ii) cooperate with Staff during its investigations.

These initiatives include: (i) the acceptance of no-contest settlements in circumstances considered appropriate by the OSC; (ii) a new program for no-enforcement action agreements; (iii) a clarified process for self-reporting under the revised credit for cooperation program; and (iv) enhanced public disclosure by Staff of credit granted for cooperation in actual cases. These initiatives are similar to a number of current enforcement policies and practices in the United States.

The initiatives described in Staff Notice 15-702 were initially proposed in OSC Staff Notice 15-704 – Request for Comments on Proposed Initiatives on October 21, 2011 and have been adopted following a public consultation process, including a public OSC hearing convened on June 17, 2013.1  

No-Contest Settlement Program

The most notable addition to the suite of enforcement tools available to Staff since the introduction of the credit for cooperation policy in 2002 is the no-contest settlement program.

Previously, settlement agreements were required to include an acknowledgement of non-compliance with Ontario securities laws or conduct contrary to the public interest, and factual admissions sufficient to support the acknowledgement.2 These requirements proved problematic in cases where respondents who were otherwise prepared to settle faced potential jeopardy in other jurisdictions, for example with the U.S. Securities and Exchange Commission (SEC), or in civil actions. Respondents would refuse to settle or delay settlement rather than make admissions that could lead to civil or regulatory liability.

The adoption by Staff of no-contest settlements is intended to address these concerns. The no-contest settlement program will permit eligible market participants to resolve enforcement matters without making such admissions. However, no-contest settlements will be expected to contain: (i) facts declared by Staff to be true as a result of their investigation and which are not denied by the market participant; (ii) the market participant's acceptance of the settlement agreement; and (iii) agreed sanctions.

All settlement agreements, including no-contest settlements, remain subject to approval by the OSC in their adjudicative discretion. Further, the scope of cases eligible for no-contest settlements is narrower than initially proposed by Staff. In particular, no-contest settlements will not be available when: (i) the market participant has engaged in abusive, fraudulent or criminal conduct; (ii) the market participant's misconduct has resulted in investor harm that has not been addressed to the satisfaction of the OSC; or (iii) the market participant has misled or obstructed Staff during its investigation.

In determining whether to agree to a no-contest settlement in a particular case, Staff will consider a variety of factors, including: (i) cooperation with Staff; (ii) the degree and timeliness of self-reporting; (iii) the degree of investor harm; (iv) the remedial steps taken by the market participant; (v) any agreement to pay such amounts as may be appropriate in the circumstances; and (vi) the prevention of future misconduct.

No-Enforcement Action Agreements

Staff may now enter into no-enforcement agreements under which Staff will agree not to pursue enforcement action against a market participant. This formalized a practice previously addressed on an informal, ad hoc basis, where Staff would advise market participants that no enforcement action would be taken. This initiative should promote greater certainty for market participants.

Factors that will influence the availability of no enforcement action agreements include: (i) the extent of the market participant's self-reporting, cooperation with Staff and self-remediation; (ii) whether the alleged misconduct is technical in nature or an isolated breach (or both); (iii) the degree of investor harm caused by the market participant's conduct and remedial steps taken; (iv) the cessation of the underlying conduct by the market participant and an undertaking to refrain from re-offending in the future; (v) any agreement to pay such amounts as the OSC considers appropriate in the circumstances; (vi) the deterrent effect on future conduct; and (vii) a commitment by the market participant to cooperate in Staff's investigation and prosecution of other applicable third parties.

Clarified Process for Self-Reporting

Staff Notice 15-702 also provides guidance to market participants about how to self-report, and describes limited circumstances in which Staff will agree that statements made will not be used as an admission by a self-reporting market participant. Under this process, a market participant that self-reports misconduct (including anonymously through an intermediary, such as legal counsel) may be permitted to enter an agreement with the OSC whereby any statements made by such market participant to Staff during a meeting would not be used against the market participant in subsequent enforcement proceedings by the OSC. However, even if a market participant is able to enter such an agreement with the OSC, the OSC and Staff would be permitted to use statements made during the meeting for other purposes, including: (i) as a source of leads to discover additional evidence; (ii) for impeachment purposes if the market participant makes later statements that are inconsistent; (iii) in prosecution for perjury, obstructing justice or the giving of contradictory evidence (or all of them); and (iv) sharing the information with other regulatory authorities or self-regulatory bodies or organizations. In addition, a self-reporter will likely be expected to offer reasonable particulars about their conduct and the circumstances to obtain any offer of credit from Staff for cooperation.

Enhanced Public Disclosure of Credit Granted for Cooperation

In order to educate and induce greater cooperation from market participants, Staff plans to enhance disclosure regarding the credit granted for cooperation in respect of proceedings before hearing panels, settlements and matters relating to no-enforcement action agreements. Such disclosure can be expected in various forms, including: (i) details of cooperation and corresponding credit being set out in settlement agreements; (ii) submissions to hearing panels at the sanction stage regarding cooperation and proposed credit; and (iii) periodic reporting, on a generic basis, of circumstances in which Staff took no enforcement action.

The Meaning of Cooperation

As previously set out in the original 2002 credit for cooperation policy and updated in Staff Notice 15-702, Staff expects market participants to cooperate by providing access to relevant information and by facilitating rather than obstructing investigations. In addition, in order to be considered cooperative, market participants are expected to: (i) self-report any problems internally identified relating to the market 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; (ii) take appropriate remedial measures to ensure misconduct is not repeated and offer appropriate compensation to harmed investors; and (iii) provide Staff with all requested books and records and all analyses and reports prepared by experts retained by the market participant or its counsel.

Conduct that will be viewed as not cooperative includes: (i) destroying documents and records; (ii) misrepresenting facts or withholding material information; (iii) failing to implement remedial measures; (iv) entering into private settlement agreements that prohibit another person from disclosing information to a regulator or pursuing an existing complaint; (v) relying on legal advice as a defense while refusing to disclose that advice; and (vi) arranging the market participant's affairs in such a manner as to delay reporting a matter that should be reported or to claim a privilege to avoid providing details of potential breaches of Ontario securities laws.

If market participants are deemed satisfactorily cooperative, this could lead to, among other things, a no-contest settlement, a no-enforcement action agreement, or Staff narrowing allegations, agreeing to pursue allegations administratively rather than quasi-criminally or seeking reduced sanctions.

Consideration of Whistleblower Program Continues

Staff continues to consider and study the potential introduction of a whistleblower program, under which monetary incentives would be provided to persons who provide information about marketplace misconduct. If implemented, this would be a first for securities regulators in Canada.3  

Implications

Staff Notice 15-702 generally represents an elaboration and codification of existing Staff practices rather than a fundamental shift in OSC policymaking. The success of these initiatives in reversing the historical low participation rate in the credit for cooperation program will turn on whether market participants view them as providing a clear roadmap to obtaining substantial value from proactive reporting of potential misconduct that outweighs any perceived downside. For example, the utility of the self-reporting process will, in large measure, depend upon the level of detail regarding particulars of the conduct required by Staff in order to obtain an offer of credit for cooperation. Going forward, it will be interesting to see how Staff employs the no-contest settlement program at a time when no-contest settlements are falling out of favor with the SEC and the judiciary in the United States.

Footnotes

1. The comment period in respect of Staff Notice 15-702 expired on December 20, 2011.

2. The OSC Rules of Procedure (Rule 12) were recently amended to eliminate the explicit requirement for admissions in settlement agreements to be presented to an OSC panel for approval.

3. On June 9, 2011, the SEC implemented its own whistleblower program in response to Dodd-Frank mandated requirements. This program awards monetary compensation to whistleblowers that voluntarily provide original information to the SEC regarding violations of securities law where the enforcement action leads to monetary sanctions totalling more than $1 million.  

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