Canada: New Cooperative Capital Markets Regulatory System: Proposed Changes To Regulatory And Criminal Enforcement

A memorandum of agreement between the federal government and the governments of British Columbia, New Brunswick, Ontario, Prince Edward Island and Saskatchewan (Participating Provinces) formalizes the terms and conditions of the new proposed cooperative capital markets regulatory system (Cooperative System), which will be administered by a single Capital Markets Regulatory Authority (Authority). For more information on this, please see our September 2014 Blakes Bulletin: Cooperative Capital Markets Regulatory System Agreement and Draft Legislation Released.

Blakes is publishing a series of bulletins regarding various aspects of the proposed Cooperative System. This bulletin focuses on how the Cooperative System will affect substantive and procedural aspects of regulatory and criminal securities enforcement. Our bulletin addressing the civil enforcement aspects of the proposed Cooperative System can be found here.

Consultation drafts of the federal Capital Markets Stability Act (CMSA) and the uniform Provincial Capital Markets Act (PCMA) were released in September for public comment. The consultation period will end on December 8, 2014.


If enacted in their present form, the CMSA and the PCMA will replace the current enforcement provisions of the Securities Acts of the Participating Provinces, and will incorporate certain offences that are presently set out in the Criminal Code into the draft CMSA.

The draft PCMA provides the tribunal established by the Authority (Tribunal) with powers that are not conferred on current securities commissions, such as the review and extension of its own cease trade and freezing orders, and the expansion of the categories of orders that can be issued in the "public interest." Expanded investigative powers are also contemplated, with fewer restrictions on communicating information related to investigations.

With a view to reducing systemic risk, the draft CMSA incorporates expanded offences for securities fraud and falsification of securities documents. It also includes a new offence related to the manipulation of financial benchmarks. Both the CMSA and PCMA provide enhanced protection to cooperating witnesses in investigations of securities-related crimes.


Parts 10 and 11 of the draft PCMA confer certain authority on the Tribunal and address matters of enforcement. The provisions augment enforcement and investigative powers with a focus on achieving a common approach across Participating Provinces.

Information that the Authority obtains from surveillance, complaints, compliance reviews and administrative investigation will be available for use by its personnel across the country in a common database. The Authority will also be able to allocate enforcement resources and expertise across the Participating Provinces. The consolidation of enforcement under the Authority will facilitate cooperation with law enforcement and other regulatory authorities (both foreign and domestic), who will no longer need to coordinate with as many different regulators. Orders obtained from the Tribunal under the PCMA will apply across participating jurisdictions, while orders obtained under the CMSA will apply nationally, all without the need for agreement amongst multiple regulators.


The draft PCMA provides the Tribunal with considerable powers, some of which are not conferred on the current securities commissions. For example, the draft PCMA proposes that the Tribunal may, without prior notice, issue cease trade orders (section 87) and freeze orders to preserve funds, securities or other property (section 91). Such orders are presently reviewable by the court in the first instance. Under the draft PCMA, the review power has been shifted to the Tribunal with a view to consolidating enforcement jurisdiction. The categories of orders that the Tribunal is empowered to make in the "public interest" have also been expanded to include prohibitions from engaging in investor relations activities, and from acting in a management or consultative capacity with respect to activities in the securities market (section 89).

The ability for orders in the public interest to be made on consent has also been added, which could provide regulators with a new option when approaching settlements. In a change across all participating provinces, the draft PCMA would also enable the Tribunal to order the payment of disgorgement or restitution upon a determination following a hearing that a person has contravened capital markets law (section 90(2)). This opens the door for compensation to investors without resort to civil actions.


The changes to investigative powers contemplated by the draft PCMA differ in each of the Participating Provinces because of existing differences in the governing legislation. For example, under the draft PCMA, the Chief Regulator can order "that a market participant provide the Authority with any information, record or thing in the market participant's possession or under its control" without starting a formal review or investigation. No such power exists under the current Ontario or Prince Edward Island legislation, although it does in British Columbia, Saskatchewan and New Brunswick. The very definition of a "market participant" has also been significantly broadened. See our November 2014 Blakes Bulletin: New Proposed Provincial Capital Markets Legislation: What it Means for Registrants and Other Market Participants for more details.

In contrast to the current legislation in Ontario and Prince Edward Island, investigation orders made by the Chief Regulator no longer include mandatory restrictions on communicating information related to the investigation. A change that has been implemented across all participating provinces is the provision for a judge or justice to order that a clearing agency, marketplace or self-regulatory organization provide the names of all persons or entities who traded in a particular security during a particular period. This change would expand the Authority's ability to investigate allegations of market manipulation and insider trading.


The draft legislation contemplates that securities offences that are presently set out in Part X of the Criminal Code will be moved into Part 5 of the CMSA. The draft CMSA criminal provisions modernize, refine, and expand these offences, reflecting the Authority's mandate and focus on systemic risk. For example, the offence for securities fraud now expressly includes conduct relating to "a derivative or the underlying interest of a security or derivative." An expanded forgery offence addresses the falsification of securities or derivative-related documents, including the use of trafficking or possession of such forged documents. A new offence relates specifically to the manipulation of financial benchmarks. Every person commits an offence "if they provide another person with information for the purpose of determining a benchmark knowing that, or being reckless as to whether, the information is false or misleading" or if they "engage in conduct relating to a benchmark with the intent to produce a false or misleading determination of the benchmark."


Like the PCMA, the CMSA contains measures designed to promote "voluntary witness cooperation" or whistleblowing in investigations of securities-related crimes. These measures include the creation of an offence for "retaliation" against employees who provide information about the commission of a Part 5 offence to the Authority or other law enforcement officials, and protections for whistleblowers from civil liability. Notably, these provisions do not go to the lengths of U.S. whistleblower incentives which include, in some circumstances, the making of significant monetary awards to voluntary witnesses.


As was previously the case under the Criminal Code, the attorney general of Canada and the provincial attorneys general will have concurrent jurisdiction over the prosecution of these offences and they will be tried in Superior Courts.

The backgrounder to the legislation asserts that "[t]he inclusion of criminal offences and additional production order powers in the CMSA will better position the Authority to contribute to the investigation of capital markets criminal offences" and subsection 6(1)(d) indicates that the Authority's mandate shall be to "provide leadership and coordination in enforcing criminal law related to capital markets." However, the scope of the role the Authority will play in investigating securities-related crimes and how this role may differ from or overlap with the roles of other law-enforcement authorities remains to be seen.


The ongoing public consultation process could result in substantial revisions to the draft CMSA and PCMA. The platform approach that has been taken in the draft legislation could also result in other important changes to criminal and regulatory enforcement by way of regulations that have not yet been promulgated. The regime that ultimately comes into force could differ from that set out in the draft legislation. However, the proposed changes demonstrate a clear intention to revise the regulatory and criminal securities enforcement in ways that could affect all market participants.

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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