On March 11, 2014, the Ontario Securities Commission (OSC) issued Staff Notice 15-702, Revised Credit for Cooperation Program, which clarifies self-reporting procedures and Staff’s expectations in respect of cooperation with investigations. Staff Notice 15-702 also sets out significant new enforcement tools that will allow Staff of the OSC to resolve more enforcement matters more efficiently: no-contest settlements and no-enforcement action agreements.
The original notice describing these initiatives was issued on October 21, 2011 and a public policy hearing was held on June 17, 2013 (as reported in a 2013 Torys bulletin OSC Considers Enforcement Initiatives).
Self-Reporting and Cooperation
Staff Notice 15-702 sets out what Staff expects of market participants with respect to self-reporting potential misconduct and cooperation with investigations. Staff’s objective is to increase the frequency with which market participants govern, report and correct conduct that may breach Ontario securities laws or be contrary to the public interest. Staff expects market participants to be alert to potential misconduct in their organizations, to report any misconduct to Staff and to take steps to address the circumstances that gave rise to the potential misconduct, including through internal investigations. The Staff Notice provides guidance to market participants about how to self-report, and describes limited circumstances in which Staff will agree to discuss potential misconduct off the record.
Staff also expects market participants to cooperate with them by providing access to relevant information and by facilitating rather than obstructing investigations. The Staff Notice sets out conduct that will be viewed as not cooperative, including entering into private settlement agreements that prohibit another person from cooperating with or pursuing an existing complaint, and relying on legal advice while refusing to disclose that advice. Staff plans to publicize instances of cooperation to educate market participants and induce greater cooperation. Cooperation with Staff could lead to one of the resolutions described in the Staff Notice (and discussed below), or could lead Staff to narrow allegations or agree to pursue allegations administratively rather than quasi-criminally or to seek reduced sanctions.
New Enforcement Initiatives
This method of enforcement resolution allows the settlement of appropriate enforcement cases with Staff without admissions by a respondent of breaches of Ontario securities law or conduct contrary to the public interest. No-contest settlements remain subject to approval by the Commission on public interest grounds.
No-contest settlements will not be available in three circumstances: (i) when the person has engaged in abusive, fraudulent or criminal conduct; (ii) when the person’s misconduct has resulted in investor harm which has not been addressed in a satisfactory manner; or (iii) when the person has misled or obstructed Staff during its investigation. In addition, Staff will consider the appropriateness of no-contest settlements taking into account the degree of investor harm, compensation to investors and the prevention of future misconduct.
The OSC has adopted no-contest settlements at a time when their pervasive use is under pressure in the United States. While some judges have declined to approve no-contest settlements reached by the Securities Exchange Commission (SEC), the Chair has stated that the SEC will continue to use this approach to resolve appropriate cases.1 The circumstances in which Staff of the OSC has stated it will recommend no-contest settlements are broadly similar to those identified by the Chair of the SEC, indicating an alignment between the two regulators’ approaches.
No-enforcement action agreements
Staff may now enter into an agreement whereby Staff will agree to not pursue enforcement action in exchange for a person self-reporting and cooperating with an investigation.
No-enforcement action agreements are available in "limited circumstances" based on the following considerations: (i) the extent of the person’s self-reporting and self-remediation; (ii) whether the alleged misconduct reflects an inadvertent technical and/or isolated breach; (iii) the degree of investor harm caused by the person’s conduct; (iv) the cessation of the underlying conduct by the person and undertaking to refrain from reoffending in the future; (v) the agreement of the person to pay such amounts as may be appropriate in the circumstances; (vi) the deterrent effect on future conduct; and (vii) a commitment by the person to provide Staff with cooperation in Staff’s investigation of any applicable third parties.
Staff Notice 15-702 confirms many of the practices relating to enforcement that have informed OSC investigations and approaches to resolution; in particular, the expectation that persons will self-report and cooperate with Staff in connection with their status as market participants. To induce this behavior and enable more efficient resolution of cases, this Staff Notice creates significant new enforcement tools for Staff.
1 See the speeches of Mary Jo White, Chair of the SEC, on September 26, 2013, November 14, 2013 and February 21, 2014, available at www.sec.gov
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