On May 1, 2015, the Enforcement Branch of the Ontario Securities Commission (OSC) will launch a mediation pilot program. This program caps a year that has seen significant changes to the OSC’s approach to initiating and resolving enforcement proceedings, from the introduction of no-contest settlements in March 2014, through the recent announcement of the proposed whistleblower program and mediation pilot program.

MEDIATION PILOT PROGRAM

The mediation pilot program provides respondents in OSC enforcement proceedings the option of engaging a third-party independent mediator to conduct a mediation between respondents and OSC staff with a view to resolving all or part of a pending enforcement proceeding. The stated goal of the program is to enable respondents and staff to resolve outstanding enforcement-related issues or matters in a timely, efficient and cost-effective way.

Under the program, respondents and staff must both consent to mediate, and any respondent wishing to mediate must be represented by counsel. The mediations are to be confidential and privileged, and can occur at any time following the delivery of an enforcement notice or the issuance of a notice of hearing.

The OSC has developed a form of mediation agreement to govern the initiation and conduct of mediations under the pilot program. The form of agreement stipulates, among other things, that:

  • The Ontario Commercial Mediation Act does not apply to the mediation;
  • The mediation process shall not delay any of the parties’ disclosure or other pre-hearing obligations;
  • Any settlement agreement arising from the mediation will need to be approved by the OSC at a settlement approval hearing; and
  • Any agreement resolving specific facts or issues but not the matter in its entirety must also be approved by the OSC.

A mediator must be selected by agreement of the parties from a roster of three mediators approved for the pilot program. Each party pays an equal portion of the mediators’ costs. The pilot program is scheduled to run until March 31, 2016, at which time there will be an assessment and recommendation as to whether the program should continue. If the program continues, the OSC intends to implement an application process to solicit names to be added to the roster of mediators.

Ontario securities regulators have quietly been willing to engage in mediations with respondents in enforcement proceedings for the past several years. The pilot program signals the willingness of OSC staff to mediate more broadly and establishes consistent parameters for the process. The next year will determine whether the program is ended, extended or even made mandatory prior to an enforcement hearing.

NO CONTEST SETTLEMENTS

It has now been more than a year since the OSC indicated its willingness to resolve certain enforcement matters without requiring the respondent to admit facts or liability (see our March 2014 Blakes Bulletin: OSC Announces New Resolution Options in Enforcement Matters). In this time, there have been two notable no-contest settlements in September 2014 and November 2014.

While each of the proceedings was distinct, both settlements were approved by the OSC on similar principles. Both settlement agreements included detailed facts and conclusions asserted as a result of staff’s investigation. Staff did not allege or find evidence of dishonest conduct in either case; both respondents had either paid or agreed to pay significant funds to investors; the respondents self-reported and/or cooperated with staff in the investigation; and both respondents agreed to take remedial actions with respect to their internal policies and procedures. In one of the cases, former Commissioner James Turner stated that “it appears to me that, but for the no-contest nature of this settlement, it is unlikely that a settlement of these matters would have been reached.”

If these first two no-contest settlements are indicative, significant compensation to investors, self-reporting and/or cooperation, and internal remedial action will be required by respondents if the OSC is to settle on a no-contest basis. Moreover, the no-contest element of the settlements is limited to other investigations or proceedings. None of the respondents may make any public statement that is inconsistent with the settlement and may not state that there is no factual basis for the settlement. It remains to be seen whether these limits provide respondents sufficient protection from collateral use of settlement agreements.

PROPOSED WHISTLEBLOWER PROGRAM

Moving from changes affecting settlement to changes affecting the initiation of enforcement proceedings, the OSC announced in February 2015 that it is considering establishing a whistleblower program to encourage individuals with knowledge of possible breaches of Ontario securities law to report their knowledge to the OSC, including by offering financial compensation for such information in certain circumstances. Further details of this program can be found in our April 2015 Blakes Bulletin: Whistleblowers to be Rewarded, Protected Under OSC Proposal.

CONCLUSION

The changes to the OSC’s approach to enforcement introduced in the past year—the mediation pilot program, no-contest settlements and the proposed whistleblower program—indicate the OSC’s willingness to update how securities enforcement proceedings are initiated and resolved in Ontario. These changes bring the initiation and resolution of Ontario enforcement proceedings more in line with U.S. Securities and Exchange Commission proceedings, and provide respondents with new options and possible protections when resolving regulatory matters. Market participants and the OSC alike will be monitoring the effects of these changes with interest.