The Ontario Securities Commission ("OSC") recently issued long-awaited revisions to its Credit for Cooperation Program (OSC Staff Notice 15-702), which include new enforcement resolution tools, such as no-contest settlements and no enforcement agreements. In addition, the revisions provide much-needed clarification on Staff's expectations for cooperation and self-reporting and the circumstances under which the various forms of credit for cooperation will be applicable.
Under the Revised Credit for Cooperation Program, full cooperation with Staff may result in:
a. a no-contest settlement or a settlement in which the respondent makes no admissions of fact or liability;
b. a no enforcement action agreement with Staff;
c. a narrower scope of allegations; or
d. a reduction in the sanctions recommended by Staff to an OSC hearing panel.
Full cooperation is required in order to qualify for credit for cooperation, which entails, among other things, that a potential respondent provide assistance when requested, fully respond to all production orders and summonses, produce witnesses for interviews, take necessary corrective action, take appropriate disciplinary action against employees, officers or directors and, where appropriate, provide compensation to any investors that were harmed by inappropriate conduct or by a failure of internal controls.
No Contest Settlements
The availability of no-contest settlements will depend on a number of criteria, including the timeliness and degree of cooperation, the degree of investor harm, the remedial steps undertaken by the respondent to compensate investors and prevent future misconduct and the deterrent effect of the settlement agreement on future conduct.
No-contest settlements will not be available where:
a. the respondent has engaged in abusive, fraudulent or criminal conduct;
b. the respondent's misconduct has resulted in investor harm which has not been addressed in a satisfactory manner; and
c. the respondent has misled or obstructed Staff during its investigation.
No Enforcement Action Agreement
Staff may, in limited circumstances, enter into an agreement not to pursue enforcement action in exchange for cooperation. The availability of no enforcement action agreements will depend on a number of criteria including the extent of the person's self-reporting and remediation, the commitment of the person to provide active and ongoing cooperation in Staff's investigation and prosecution of any other persons in cases involving multi-person misconduct, the degree of investor harm, whether the alleged misconduct reflects an inadvertent, technical or isolated breach, the commitment of the person to pay appropriate amounts in the circumstances, including compensation to third parties and the deterrent effect on future conduct.
The Revised Credit for Cooperation Program provides clearer guidance to market participants on how to self-report and outlines limited circumstances where Staff will discuss potential misconduct off the record. Staff's expectation is that market participants will watch for potential misconduct within their organization, take steps to address any suspected misconduct through internal investigations and report any such misconduct to Staff. Of note, Staff also expect market participants to provide any reports or analyses by experts retained by the market participant or its legal counsel.
Potential respondents must, however, still consider the risks of communicating with Staff concerning potential misconduct in the context of self-reporting. Even in circumstances where an agreement is reached with Staff not to use any statements against the person in subsequent enforcement proceedings, statements made during any meeting or self-reporting interviews may be used for impeachment purposes, as a source of leads to discover additional information or shared with securities or criminal authorities in other jurisdictions.
Increased Transparency of Credit Granted for Cooperation
Importantly, the Revised Credit for Cooperation Program provides that Staff will now disclose examples of credit that have been granted for cooperation in actual cases. This development will provide much needed guidance to market participants on the likelihood and extent of leniency and address the uncertainty faced by market participants as to whether their cooperation will be appropriately or fairly recognised.
The Revised Credit for Cooperation Program creates significant new enforcement resolution tools and provides opportunities for companies and individuals to resolve certain types of securities regulatory matters in an efficient and cost effective manner. Among other benefits, market participants facing concurrent civil liability may now be able to resolve regulatory proceedings without the risk of any admissions being used in such other proceedings.
What remains unclear, however, is precisely the circumstances under which Staff will agree to no-contest settlements and an OSC hearing panel will approve such settlements. The recent judicial criticism of no-contest settlements in the United States has cast an unfortunate shadow on the utility and propriety of settlements with no admissions of wrongdoing. The Securities and Exchange Commission has affirmed its commitment to use no-contest settlement in appropriate cases despite such criticism and the OSC's Revised Credit for Cooperation Policy demonstrates a much needed similar commitment by a Canadian securities regulator. It remains to be seen whether this will spark similar initiatives by other provincial securities regulators.
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