Canada: When The OSC Comes Knocking

In April, staff of the Ontario Securities Commission (OSC) commenced headline-grabbing regulatory enforcement proceedings against Home Capital Group Inc. (TSX:HCG) and three of its current and former executives. OSC staff alleged that these parties failed to disclose a material change in Home Capital's business and operations and misled investors as to the causes of the decline in the mortgage lender's new mortgage originations. Without a doubt, these proceedings – since settled in an agreement in June – were the result of a lengthy, extensive, highly confidential regulatory investigation.

An OSC investigation can be triggered in different ways: whistleblower tips, investor complaints, competitors, self-reporting, newspaper stories, market surveillance technology, referrals from self-regulatory organizations (like the Investment Industry Regulatory Organization of Canada) – and the list goes on. Likewise, OSC staff can investigate a wide range of potential breaches of Ontario securities laws: disclosure violations, as in Home Capital's case, as well as illegal distributions, fraud, market manipulation and illegal insider trading.

What do you need to know if the OSC investigators come knocking on your door? Are you obligated to speak to them? Could you end up in jail? Who can you tell? As a director, senior management or in-house counsel of a Canadian public company, it's important for you to understand how the typical OSC regulatory investigation proceeds as well as key risks, opportunities and decision points.

First step, figure out whether you're the subject of a "regulatory" or "quasi-criminal" investigation. An OSC investigation that leads to quasi-criminal proceedings means your case will be heard by a judge in court. The prosecutor in quasi-criminal proceedings will have a high standard to meet (beyond a reasonable doubt), but you could end up in jail if she is successful. On the other hand, an investigation that leads to a regulatory proceeding means the case will be heard by a panel of OSC commissioners. The standard of proof will be lower: OSC staff will have to prove their allegations on a simple balance of probabilities. And, while jail time is out of the question, the sanctions the hearing panel imposes could mean you lose your livelihood – bans from serving as a director or officer, cease trade orders and fines are all on the table.

You also have more protections in a quasi-criminal investigation. The Canadian Charter of Rights and Freedoms kicks in. You have a right against self-incrimination. You have the right to stay silent and you do not have to assist in the investigation. Regulatory investigations are different. OSC investigators can compel you to testify under oath. They can require that you produce documents or things. Let's call it a quid pro quo for your "licence" to operate in the Canadian capital markets.

Next step, carefully consider the risks of sharing information voluntarily. Before OSC staff commence a formal investigation (by obtaining an "investigation order"), they will frequently request documents and information on a "voluntary" basis from the company and key individuals involved. Although cooperating with the regulator is often a good idea, acceding to these voluntary requests can be risky. Information and documents provided to OSC staff on a voluntary basis are not afforded the same protections (against self-incrimination) that compelled testimony and documents are. They can also be used without restriction in quasi-criminal proceedings.

If an informal investigation turns into a formal regulatory investigation, expect a summons compelling you to testify. Here are five things to keep top of mind:

  1. Ask for the order. If you receive a summons compelling you to testify and produce documents, you should request a copy of the OSC order commencing the investigation. It's important to understand the scope and target of the investigation.
  2. Shhhh, keep it quiet. A recipient of a summons shouldn't disclose the summons to anyone other than legal counsel, not even to a spouse! It's a breach of securities laws to disclose the existence of the summons or its contents, or the testimony or documents given in response to the summons. It doesn't matter if your breach is inadvertent. In your compelled interview, it's pretty standard for OSC investigators to probe and explore whether you disclosed the summons and to whom.
  3. Don't jeopardize your case in the U.S. The OSC and the Securities and Exchange Commission (SEC) frequently cooperate during investigations. Where a company is cross-listed, it is best to assume that regulators on both sides of the border are sharing information. There are critical differences between the rights against self-incrimination in each country and this can create issues. It is important not to lose sight of the risk that testimony compelled by the OSC in a regulatory investigation could be shared with the SEC where immunity against its use in criminal proceedings might not apply.
  4. Prepare, prepare, prepare. If you are summonsed by OSC staff to give testimony under oath, go prepared. Anticipate that the OSC investigators have access to a wealth of documents and testimony, phone records, trading records and other information from multiple sources that they will not share with you. So, familiarize yourself with any relevant documents or critical timelines of events prior to the interview. The best advice is to have your legal counsel with you at the interview. She will prepare you in advance and ensure that your interests are protected during the interview by obtaining clarifications, protecting privilege and making sure that you have conveyed your evidence correctly. Remember to appropriately qualify your responses if you are unsure of relevant details because of the passage of time or a lack of documents to remind you.
  5. Follow up. Best practice is to review the transcript of your interview and notify OSC staff of any corrections. If staff have any reason to believe that you have attempted to mislead them, which is itself an offence under securities laws, you can expect that this will form part of any subsequent enforcement proceedings that might be commenced. When the OSC investigation is complete, what's next? If OSC staff believe there has been a breach of securities laws, their practice is to issue a non-public enforcement notice (or so-called Wells notice) to the company or individuals against whom they believe enforcement proceedings should be brought. This enforcement notice typically sets out high-level details about the relevant facts as understood by OSC staff and how such facts amount to a breach of securities laws. In this context, you should explore these strategic, legal and pragmatic questions:

    • How do you get OSC staff to see your side of the story? The enforcement notice gives the recipient an opportunity to make voluntary written submissions to OSC staff. Your goal is to attempt to influence the OSC staff's understanding and perception of the relevant facts and the law. This is an important juncture that may allow you to avoid enforcement proceedings altogether or have them scaled back. Remember that your written submissions should be taken very seriously. If OSC staff ultimately commence enforcement proceedings, those submissions can be used against you as evidence of an admission against interest or (if factually inaccurate) as evidence of attempting to mislead OSC staff.
    • Do you want to have a hand in shaping the message? If so, consider settling early. While it is possible to settle OSC regulatory enforcement proceedings at any time, a natural point for such settlements to occur is after an enforcement notice has been issued to the individual or the company but before public enforcement proceedings commence. Although any settlement reached with OSC staff must be approved by the OSC and will ultimately be public, reaching a settlement prior to the commencement of public enforcement proceedings can be beneficial because it permits the negotiation of an "agreed statement of facts" with OSC staff and an opportunity for input into what is ultimately filed in the public record.
    • Can you settle without admitting liability? Discuss whether you qualify under the OSC's newly implemented "no-contest" settlement program. So long as your conduct isn't abusive, fraudulent or criminal and you've been cooperative or have self-reported, OSC staff can now reach a settlement agreement which doesn't require an admission of facts or liability. Where a company is facing both the prospect of a civil class action and OSC regulatory enforcement proceedings, the possibility of settling with the OSC without making admissions of fact or liability is very attractive. But the limited number of no-contest settlements approved to date by the OSC have been in cases where the party pays a significant amount in compensation to the individuals harmed by the conduct in question. It is doubtful that no-contest settlements will be a practical option in anything but very narrow circumstances. Even if you don't qualify for the no-contest settlement program, remember that the OSC's "credit for cooperation" policy should allow you some reduction in sanctions for being cooperative with the regulator. Self-reporting or presenting a remedial plan showing the processes you will put in place to prevent the misconduct from recurring should both count.
    • Is the company required to make public disclosure of the OSC investigation? Generally OSC staff don't publicly disclose the existence of an investigation. But companies must consider it, and are obligated to do so if the investigation would constitute a "material fact" or "material change." Remember that materiality may evolve and if the company decides not to disclose in the first instance, it will need to revisit the question as an investigation progresses.

Bottom line for directors, senior management and in-house counsel: be aware of the risks and opportunities that lie ahead if you become embroiled in an OSC regulatory investigation. But equally important, proactively manage the risks ahead of time and prepare for the worst.

A version of this article originally appeared in Listed Magazine.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions