As noted in previous articles, Canada and the US have different
approaches to regulatory enforcement. Canadian securities
regulators overwhelmingly address regulatory non-compliance through
enforcement proceedings commenced before their own adjudicative
tribunals. In the US, the SEC staff often proceeds in the civil
courts. However, enforcement actions can also be pursued by
administrative law judges in certain circumstances.
In the noteworthy decision in Tilton et al. v. SEC, the US Second
Circuit addressed the constitutionality of SEC administrative law
judges, also known as ALJs, who are directly appointed by the SEC.
Tilton is the latest in a series of cases to challenge the
SEC's power to appoint the judges before whom it brings
prosecutions as a violation of the Appointments Clause of the US
ALJs and procedural fairness
Under the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010, the SEC gained increased powers to bring prosecutions
as administrative proceedings before ALJs. Since then, the SEC has
brought an increasing proportion of its prosecutions in front of
ALJs as opposed to Federal courts. A recent report by the New York University
Center for Law & Business and Cornerstone Research, which
analyzed data in the Securities Enforcement Empirical Database
found that "[t]he SEC continued to use its administrative
proceeding forum in the vast majority of its actions. In the first
half of FY 2016, the SEC brought 88 percent of actions against
public company defendants and related subsidiary defendants as
administrative proceedings." By comparison in 2010 only 33% of
actions against public company defendants and related subsidiary
defendants were brought as administrative proceedings.
As reported by the Wall Street Journal in May 2015, the SEC
enjoys a statistical "home court advantage" in front of
its own judges, with a 90% success rate when prosecuting in-house
compared to a 69% success rate in Federal courts. That rises to an
88% success rate on appeals of these decisions (95% including those
where the underlying conduct wasn't in dispute), which are also
brought in front of SEC-appointed judges. Moreover, bringing such
an appeal carries significant risk for defendants: out of the 56
appeals brought by defendants between January 2010 and March 2015,
only one resulted in a reduced fine while seven resulted in
The challenge at the heart of Tilton is that the
appointment of ALJs by the SEC blurs what are supposed to be
separate enforcement and adjudicating functions. As a result, it
invites the question of whether basic fairness and due process for
the accused have been compromised. This issue becomes more
concerning given the increasing amount of proceedings the SEC is
commencing before ALJs instead of before the courts.
The Second Circuit decision
Following similar rulings by the Seventh and D.C. Circuits, the
Second Circuit court in Tilton held that constitutional
and other challenges to SEC proceedings cannot be brought until the
end of the administrative proceedings. The effect of this decision
is that defendants will be required to complete administrative
proceedings before being able to challenge their legitimacy. Given
the length of these proceedings and the high settlement rate, this
is likely to significantly insulate the administrative proceedings
from constitutional challenge.
Implications for Canada
Most of Canada's securities regulators are integrated
agencies, in that their directing mind is the Commission, which
also forms its adjudicative tribunal. In the US, the SEC authorizes
enforcement proceedings, and appoints and employs its ALJs.
Both structures have given rise to challenges to their perceived
unfairness. And while the structure in most provinces has been
found to be constitutional (See Brosseau v. Alberta Securities
Commission,  1 S.C.R. 301), fairness related
questions have often cast a shadow over the integrated structure
(See the Report to the Fairness Committee to the OSC
– March 5, 2004). For this and other practical reasons,
some Canadian jurisdictions, for example, Quebec, reformed its
structure to include a tribunal distinct from its regulator, the
AMF. As noted in previously on our blog, the
proposal for a cooperative capital markets regulatory system also
includes a tribunal distinct from the regulatory body.
The decision in Tilton has deferred judgement on the
constitutionality of the SEC appointment of ALJs. It remains to be
seen whether a significant and growing majority of SEC cases will
continue to be adjudicated by ALJs, and what impact the increasing
scrutiny this draws to in house securities enforcement will have on
future enforcement actions taken by the OSC.
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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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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