The consultation drafts of the proposed uniform provincial capital markets legislation, Provincial Capital Markets Act (PCMA), and federal capital markets legislation, Capital Markets Stability Act (CMSA), (Consultation Drafts) propose new, and in some instances unprecedented, civil liability and regulatory and criminal enforcement provisions which, if enacted, will have important implications for capital markets participants.
The PCMA and CMSA arise from the memorandum of agreement (Agreement) entered into by the Canadian government and the British Columbia, Ontario, Saskatchewan, New Brunswick and Prince Edward Island governments (Participating Provinces, and with the Canadian government, the Participating Jurisdictions) relating to the principal components of a proposed cooperative capital markets regulatory system (Cooperative System) and establishing a markets regulatory authority (Authority) under the Cooperative System.
Given the scope of the Consultation Drafts and comment letters, Blakes is publishing a series of bulletins reviewing issues raised by the comments received. This bulletin addresses civil liability and regulatory and criminal enforcement issues identified in the public comments. For more information on the Cooperative System, please see our various bulletins posted on our website.
EXPANDED CIVIL CAUSE OF ACTION FOR INSIDER TRADING
The provisions setting out a civil cause of action for insider trading and related misconduct of tipping and recommending at section 129 of the PCMA appear to be the most controversial of the proposed changes based on the volume of commentary they attracted and the divergent responses they provoked. As explained in our November 2014 Blakes Bulletin: New Cooperative Capital Markets Rules Affect Civil Liability for Misrepresentation, Insider Trading, section 129(1) provides an expanded cause of action which, unlike the current civil cause of action for insider trading in the Ontario Securities Act (OSA), will be available regardless of whether the plaintiff sold securities at issue directly to or purchased the securities directly from a contravening defendant (or from a person who received material information or a recommendation from a contravening defendant). In other words, any investor who trades in the opposite direction from the insider during the relevant period could have a cause of action, regardless of whether there was a direct trade with the insider. This could have the effect of vastly expanding the pool of potential plaintiffs.
At one end of the spectrum, a law firm that frequently represents plaintiffs in securities class actions lauded this change in its comment letter, arguing that by removing the requirement of “privity” between the investor and a party trading on insider information, a serious hurdle to the prosecution of civil insider trading actions has been removed. On the other end of the spectrum, a prominent professor of business law argued vigorously against the proposed expanded cause of action on the basis that it could lead to excessively punitive results, especially when large civil damages awards are imposed in conjunction with regulatory or criminal fines or even jail terms.
A number of comment letters raised concerns about a lack of specificity as to how civil damages will be calculated under section 129, especially in light of the fact that proposed section 129(4) of the PCMA would provide for a broad discretion for a judge to consider “any other measure of damages that may be appropriate in the circumstances.”
CHANGES TO THE DEFINITION OF ‘MISREPRESENTATION’
Several commenters noted that the definition of “misrepresentation” in the PCMA has been revised, in that the requisite element of an “untrue” statement has been changed to a “false or misleading” statement. The definition is central to civil and regulatory exposure for disclosures in primary and secondary market contexts. Some commenters took issue with the fact that this change was not raised in the backgrounder to the proposed legislation and argued that a change of this type should be subject to further consultation, warning that any change to this long-standing definition could potentially alter the standard of liability in these contexts in unforeseen ways.
CHANGES TO REGULATORY OFFENCES
Some commenters pointed out that proposed prohibitions against market manipulation at section 62 of the PCMA and against fraud at section 63 of the PCMA do not require the person engaging in the conduct to have “known” or “reasonably ought to have known” that the conduct would result in market manipulation or fraud, as is the case in the OSA. These commenters argued that the proposed PCMA provisions should be harmonized with the OSA.
Similarly, commenters noted that the prohibition against “unjust deprivation” at proposed section 63 of the PCMA is a significant substantive change from the OSA, and should not be implemented without thorough public consultation.
Proposed section 78 of the PCMA prohibits a person required under capital markets law to hold another person’s assets in trust from converting those assets to an unauthorized use. A number of commenters noted that this prohibition does not appear in existing securities legislation, and questioned the justification for its inclusion.
NEW INVESTIGATORY POWERS
Some commenters expressed concerns that the Chief Regulator’s powers to order reviews and investigations under proposed sections 102, 103 and 104 of the PCMA “for the purposes of the administration or enforcement of capital markets law or the regulation of capital markets” are unnecessarily broad. One commenter recommended that these provisions specifically provide that orders cannot be made for the purpose of investigating an offence under sections 112 to 114 of the PCMA, a criminal offence under Part 5 of the CMSA or a penal offence in another jurisdiction. This commenter also suggested that a market participant’s obligation to provide any information, record or thing pursuant to section 103(3) should extend only to what is reasonably required for the purpose of the review to avoid the provision being used for “fishing expeditions.” However, several comments from groups representing investors’ rights expressed approval of these broad review and investigation powers.
Section 45 of the PCMA gives the Chief Regulator sweeping powers to require a director, officer, promoter or control person of an issuer to produce to the Authority any information, record or thing in the person’s possession or under the person’s control relating to the administration or enforcement of capital markets law. Some commenters expressed concern that this power is drafted so broadly as to authorize the Chief Regulator to confiscate property, including property that does not belong to the person but is in the person’s control, that it imposes no safeguards with respect to this power and that it provides no exception for privileged communications.
Similarly, proposed sections 10 and 18 of the PCMA require designated entities to provide certain information to the Chief Regulator. A number of comment letters noted that these provisions do not provide an exception to the disclosure requirements that would exempt information subject to solicitor-client privilege, and urged that such an exemption be added to the legislation.
OVERLAPPING TRADING OFFENCES
Other commenters took issue with the “web” of overlapping trading offences imposed by the combined operation of the CMSA and the PCMA. While the duplication of trading offences under the proposed regime reflects the existing overlap between federal and provincial legislation, some expressed disappointment that the establishment of a national regulator is not planned to obviate the need for substantially similar criminal/penal offence regimes. One suggested that the criminal provisions should be confined to the CMSA, with matters that can be dealt with through the “public interest” mandate to be dealt with under the PCMA.
MANDATORY MINIMUM SENTENCE FOR SERIOUS FRAUD
Criticism was also levelled at the imposition of a mandatory minimum sentence for serious fraud convictions by section 62(4) of the CMSA, with the argument that judicial and public aversion to mandatory minimums is likely to render the provision less useful than intended and result in prosecutions being pursued under the PCMA rather than the CMSA. However, comments from groups representing the interests of investors were supportive of the mandatory minimum sentence and its anticipated deterrent effects.
There has been no response as of yet from the Participating Jurisdictions as to how the comments will be addressed, whether in the form of revised draft legislation or an enhanced consultation process. As noted, the Participating Jurisdictions have announced draft regulations will be released for comment in early spring 2015.
Given the scope of the proposed PCMA and CMSA, the number of changes from existing legislation, and the number and breadth of comments on these, readers are cautioned that our bulletins may not summarize all matters that may be of interest or concern to them.