OSC Considers Enforcement Initiatives

On June 17, 2013, an Ontario Securities Commission (OSC) panel held a public policy hearing on four proposed enforcement initiatives. The panel, comprising two vice-chairs and one commissioner of the OSC heard comments on these proposed initiatives from OSC staff representatives of public interest groups and members of the bar. If the initiatives are approved, Enforcement Staff of the OSC may be positioned to achieve results in enforcement matters faster and more efficiently than through existing mechanisms.

The panel is expected to report the views expressed at the hearing to the OSC, which will then determine if it will approve the initiatives.


The Proposal

The Staff Notice issued by the OSC contained four proposed enforcement initiatives:

  1. No-Enforcement Action Agreements. This initiative would allow Staff to enter into a contract with a party whereby, in exchange for self-reporting and cooperation, Staff would agree not to pursue enforcement action.
     
  2. No-Contest Settlements. These are settlement agreements that are negotiated with Staff and a respondent and that include agreed sanctions, but do not include admissions by a respondent of breaches of Ontario securities law or conduct contrary to the public interest. The proposal is that no-contest settlements should be available in certain circumstances depending on the nature of the proceeding and the sanction. The settlements would continue to be subject to approval by an OSC panel.
     
  3. Self-Reporting. Staff proposes to clarify the manner in which a party should report potential breaches of Ontario securities law or conduct that may be contrary to the public interest, with the objective of increasing the frequency of self-reporting.
     
  4. Credit for Cooperation. The proposal is that the OSC will publicly disclose the kinds of credit that parties have received for cooperating with Staff in regulatory matters. The intention is that this disclosure will encourage more cooperation and self-reporting.

Staff’s original notice describing these initiatives was published on October 21, 2011, and comments were received from interest groups and members of the bar, principally focused on no-contest settlements. Staff issued a further notice on May 6, 2013 in anticipation of the June 17 policy hearing in which Staff clarified its position on eligibility for no-contest settlements and confirmed that Staff remained committed to pursuing the proposed enforcement initiatives.


No-Contest Settlements

The proposed enforcement initiative that has attracted the most attention is the proposal to allow no-contest settlements.

Proponents of the initiative argue that no-contest settlements will expedite regulatory investigations, allowing Staff to achieve results quickly and efficiently. The speed of resolution may be significant where Staff seeks to remove a person from the capital markets permanently or temporarily to protect investors, or to obtain disgorgement of wrongfully obtained funds. Efficiency may be important where Staff has a limited enforcement budget and determines, in the context of a particular case, that the costs and risks of taking a matter to a hearing are outweighed by the benefit of a resolution that is satisfactory to Staff and found by a panel of the OSC to be in the public interest.

Those opposed to no-contest settlements argue that that the deterrence and other policy objectives of securities regulation will not be met unless a respondent is required to admit breaches of Ontario securities law or conduct contrary to the public interest and the facts underlying the admission of regulatory liability.

The debate about no-contest settlements is also informed by U.S. practice and developments in U.S. securities law. The Securities Exchange Commission has used no-contest settlements for years in its civil enforcement proceedings. These settlements, like OSC settlements, are subject to approval. Recently, several U.S. Federal Court judges have questioned the appropriateness of no-contest settlements and have refused to approve them—an issue that is currently before an appellate court. While the U.S. experience is informative, considerations relevant to that experience may not apply in Ontario and to the administrative context in which the OSC may approve no-contest settlements.


The Hearing

The submissions made to the Panel focused largely on the issue of no-contest settlements, and echoed the arguments expressed above. The following issues attracted particular attention at the hearing:

  • Restitution vs. remediation – whether, in determining the appropriateness of a no-contest settlement, Staff should be required to consider the extent to which there has been restitution to the persons harmed by the alleged breach of securities laws (as distinct from considering the extent to which there has been "remediation," which could include enhancing internal controls and not necessarily restitution to the persons harmed);
     
  • Flexibility in no-contest settlements – the amount of flexibility that ought to be afforded to Staff in determining whether a no-contest settlement is appropriate in any particular case, and the content of such a settlement; and
     
  • Extent of Non-Admission – whether a respondent in a no-contest settlement ought to be required to admit the facts that gave rise to the investigation (as distinct from admitting the conclusion that the facts result in a breach of securities laws).


Given the panel's comments, it is expected that investor protection will be at the forefront of the OSC’s analysis.

 

 

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