Oasis: the test for OSC’s public interest power

On July 21, the Capital Markets Tribunal released its decision in Oasis World Trading Inc. (Re)¹. The Tribunal addressed several important issues, including the test for making an order in the public interest—in the context of an enforcement proceeding—where there is no breach of Ontario securities law. The decision represents a significant development in the Tribunal’s public interest jurisprudence.

What you need to know

• A two-part test. The Tribunal will apply a two-part test to determine whether to make an order in the public interest absent a contravention of Ontario securities law. The Tribunal must be satisfied that the impugned conduct (a) undermined the animating principles of securities law, and (b) caused an effect with a public dimension. This is the same test that applies in the context of disputes between private parties (e.g., a merger or other contested transaction).
• Conduct contrary to the public interest. This case represents the first time the Tribunal has considered whether to make an order in the public interest for the failure of a proprietary day-trading firm to establish and maintain adequate systems of supervision and control where there is no accompanying contravention of Ontario securities law. The Tribunal found that the respondent’s conduct met the test: the respondent’s failure to establish and maintain an adequate trade supervision system and an adequate culture of compliance amounted to conduct contrary to the public interest.
• Exceptional circumstances. In the context of disputes between private parties, it is open to the respondent to demonstrate that there are exceptional circumstances such that conduct that would otherwise meet the test should be allowed to proceed. The Tribunal did not address this question. It thus remains to be seen whether exceptional circumstances can be used to avoid a public interest order in the context of an enforcement proceeding.

The Oasis decision builds on well-established law relating to the scope, purpose and use of the public interest power as a tool for regulating capital markets.

Background

Oasis World Trading Inc. (Oasis) was a proprietary day trading firm. It had hundreds of traders located in China who conducted a high volume of day trading. The traders used Oasis’s trading platform to place trades on Canadian and Australian markets through an Oasis account.

The Ontario Securities Commission (OSC) alleged that Oasis engaged in unregistered trading and market manipulation, and that it failed to establish and maintain systems of control and supervision. On the last allegation—the failure to maintain systems of control and supervision—the OSC specifically alleged that if Oasis was required to register under the Securities Act (the Act), Oasis lacked the required supervisory systems. In the alternative, if Oasis was not required to register under the Act, the OSC alleged that it acted contrary to the public interest by failing to have adequate supervisory systems.

The Tribunal found that Oasis was not required to register under the Act; thus, it had to consider whether Oasis’s system of control and supervision was nonetheless contrary to the public interest.

The test for public interest orders

Under section 127 of the Act, the Tribunal has the power to make an order where “it is in the public interest”—even if there is no breach of Ontario securities law². While the Tribunal has made no-breach public interest orders in other enforcement contexts, this was the first time the Tribunal had considered whether to make an order in the public interest for a failure to establish and maintain adequate systems of supervision and control where there was no accompanying breach of Ontario securities law.

In Riot Platforms Inc. v Bitfarms Ltd³, which involved a transaction dispute over a shareholder rights plan, the Tribunal held that to make a no-breach public interest order, the applicant needed to prove that the shareholder rights plan

• undermined, in a real and substantial way, one or more clearly discernible animating principles underlying applicable provisions of Ontario securities law; and
• caused an effect that had a public dimension, such that it was in the public interest for the Tribunal to intervene.

If these two elements are satisfied, the burden shifts to the responding party to demonstrate that exceptional circumstances exist that would nonetheless justify allowing the plan to continue.

In Oasis, the Tribunal applied the test set out in Riot. This is the first time the Tribunal applied this test in the context of an enforcement proceeding brought by the Commission.

This is also the first time the Tribunal considered whether to make an order in the public interest for a failure to establish and maintain adequate systems of supervision and control where there is no accompanying contravention of Ontario securities law.

While the Tribunal acknowledged that parties may argue for a different test in future enforcement proceedings, capital market participants should use this test as guidance when assessing whether their proposed or actual capital markets conduct—which does not contravene the Act—is otherwise contrary to the public interest, and may attract regulatory scrutiny and intervention.

Step 1: Conduct must undermine animating principles of securities law in a real and substantial way

The first step of the test considers whether and how the impugned conduct undermines the animating principles of securities law. The animating principles of securities law are the policy and rationale underlying the law. The principles include the purpose of the Act (s. 1.1), the fundamental principles set out in the Act (s. 2.1), and the policies underpinning the Act, related regulations, and Tribunal jurisprudence. Importantly, the conduct at issue must undermine the animating principles in a “real and substantial” way. While the Tribunal in Oasis did not define what constitutes “real and substantial,” the Tribunal’s previous decision in Riot described “real” as “well-grounded, reasonably likely, and not illusory” and “substantial” as “serious and non-trivial.”

The Tribunal found that Oasis’s conduct met the first step of the test. Specifically, it found that Oasis’s failure to establish and maintain an adequate supervision system in the context of a high volume of trading undermined—in a real and substantial way—a “core animating principle of Ontario securities law regarding the maintenance of fair capital markets in which trading is conducted with integrity and in which all market participants can have confidence.”

Step 2: Conduct must cause an effect with a public dimension

The second step of the test requires the Commission to establish that the impugned conduct has effects with a public dimension. In other words, the conduct must have a negative impact extending beyond the immediate dispute, such as by impacting investors generally, capital markets as a whole, or future transactions.

The Tribunal found that the second step of the test was also met. Specifically, it found that Oasis’s inadequate approach to supervision and compliance exposed other investors to a heightened risk of improper trading practices and irresponsible conduct by Oasis’s traders, which constituted a public effect.

Given that both steps of the test were satisfied, the Tribunal concluded that Oasis’s failure to establish and maintain an adequate trade supervision system and an adequate culture of compliance amounted to conduct contrary to the public interest.

Residual power: Exceptional circumstances

In proceedings between private parties, such as those involving mergers and other contested transactions, the Tribunal has held that there may be exceptional circumstances which justify allowing conduct that would otherwise be contrary to the public interest. The Tribunal in Oasis did not address this question.

It thus remains to be seen whether exceptional circumstances can be used to avoid a public interest order in the context of an enforcement proceeding.