Market participants of every description should be increasingly concerned with regulatory compliance issues, since they affect not just the bottom line, but also one’s reputation, credibility and livelihood. Further, with the election of a new federal and two new provincial governments in Canada with mandates for change, regulated conduct is likely to come under increased scrutiny, whether in the securities, insurance, trade, financial, energy or other spheres of activity. On the securities side, for example, everything from new rules to staff notices and enforcement settlement agreements warrants a closer look at one’s compliance processes. In addition, declining markets have historically led to investor discontent and complaints to regulators, as well as civil actions. The cost to market participants of an investigation is high (and generally increasing), both in terms of legal costs and internal distraction. The cost of a hearing is, of course, exponentially higher on both counts, given that enforcement actions are publicly announced and have reputational consequences, regardless of the outcome (and, in addition, can provide fodder for civil actions).
The risk to public companies and others who are regulated by administrative bodies is that regulatory requirements (including a requirement to act in the nebulous “public interest”) are not always clearly stated, yet require compliance in order to operate. In 2015, for example, an electricity market participant who argued that the rules were unclear was nonetheless found to have contravened market manipulation and insider trading requirements and ultimately agreed to pay over $56 million in costs and administrative penalties – a sobering reminder of the risks and uncertainties of operating in regulated markets. And also during 2015, financial industry participants were required to self-report to the securities regulators, once certain practices regarding access to lower cost investment options, available to certain qualified investors, came to light in late 2014.
The rules are becoming more and more granular, while still remaining principles-based. It is not enough to focus on the “bare bones” requirements, so executive focus (and board oversight) must be not just on daily operations and strategic initiatives but also on anticipating, planning for and responding to the objectives and policy directions of regulators, which may change depending on leadership. In light of the possible consequences and costs of regulatory investigations, significant costs are being incurred by organizations to comply with the evolving regulatory environment, its additional constraints and imposed rules. Organizations proactively establish systems to avoid complaints and scrutiny in the first instance and to respond effectively to reviews or investigations when they occur. Market participants will be acutely aware that robust compliance systems are critical to establishing “due diligence” or “reasonable investigation” defences, as well as to being able to demonstrate adherence to the “public interest”, and the participants will govern themselves accordingly when carrying on business.