On February 19, 2015 the Canadian Securities Administrators (“CSA”) released their seventh annual Enforcement Report (the “Report”), summarizing the overall enforcement work done by CSA members in 2014. This year’s Report focuses on emphasizing the spirit of collaboration and cooperation among CSA members and between CSA members and local, national and international organizations in targeting illegal activities in Canada’s capital markets. As noted in the CSA Press Release announcing the report, “cooperation is key” in the fight against wrong-doing. The Report comes in the wake of a push in recent years to enhance the tools available to securities regulators across the country to bolster enforcement (including the OSC’s recent introduction of no-contest settlements, discussed previously on this blog), as well as an increased focus on opportunities for cooperation between agencies. For example, the OSC and RCMP recently announced plans to combine enforcement teams under one roof (with the RCMP’s Integrated Market Enforcement Team (IMET) shifting 28 staff members to the OSC’s building by April 1) to take concrete steps toward fighting financial crime.
CSA Report: Key 2014 Enforcement Results
Cases Commenced: Fewer enforcement cases were commenced by CSA members this year, with 105 proceedings commenced in 2014, as compared to 112 proceedings in 2013. However, of the cases commenced over 2014, an increased number of individuals were targeted when compared with 2013. The majority of cases continue to be focused in the areas of illegal distributions, fraud, and misconduct by registrants, however, there has been a marked increase over the past two years in the number of cases alleging market manipulation (13 cases in 2012, 6 cases in 2013, and 23 cases in 2014).
Cases Concluded: Fewer enforcement cases were concluded by CSA members this year, with 105 cases concluded in 2014, as compared to 133 cases in 2013. Specifically, in 2014, CSA members concluded matters involving 149 individuals and 106 companies, or 255 total respondents. By comparison, CSA members concluded matters in 2013 involved 216 individuals and 166 companies (382 respondents). As above, the majority of cases continue to be focused in the areas of illegal distributions, fraud and misconduct by registrants.
How Cases Were Concluded: In 2014, 56% of cases were concluded by contested hearing before a tribunal, 31% of cases were concluded by settlement agreement, and 13% of cases were concluded by court decision (under securities legislation). This marks a drop in the number of cases concluded in court decisions, previously steady at 20% in both 2012 and 2013.
Penalties: In 2014, approximately $58.2 million was ordered in fines and administrative penalties across the country. This is a significant increase from $36.6 and $35.4 million in fines and penalties in 2012 and 2013, respectively. Of the fines and administrative penalties levied by CSA members in 2014, the majority of fines were laid in cases of illegal distributions, fraud, and misconduct by registrants. By way of contrast, restitution, compensation and disgorgement figures remained relatively steady at $65.7 million in 2014, as compared with $120.6 and $54.9 million in 2012, and 2013, respectively. As above, the majority of restitution, compensation and disgorgement was concentrated on illegal distributions, fraud, and misconduct by registrants.
Preventative Measures: The number of interim and asset freeze orders in 2014 (35) held steady from previous years. Under the 35 interim orders and asset freeze orders issues in 2014, trading and other restrictions were placed on 54 individuals and 39 companies. This was up from 2013, where 35 interim orders and asset freeze orders were similarly issued, however trading restrictions were only placed on 38 individuals and 38 companies. In addition to the above, the number of reciprocal orders (orders issued by a court of other securities regulatory authority) was down from 108 in 2013, to 58 in 2014.
Cases Concluded by SROs: Fewer cases were concluded by CSA member self-regulatory organizations (“SROs”) this year, with 112 enforcement cases concluded in 2014, as compared with 132 in 2013. The three key SROs, as overseen by CSA members, are the Investment Regulatory Organization of Canada (IIROC), the Mutual Fund Dealers Association of Canada (MFDA), and the Chambré de la sécurité financière (CSF).
While the number of cases concluded and proceedings commenced in 2014 were lower than both 2012 and 2013, fines and administrative penalties levied in 2014 jumped significantly from previous years. This is in keeping with a trend in securities regulation across Canada toward an effective system of regulation with the investigative and punitive tools necessary to give enforcement agencies real “teeth”. It is also worth noting that the bulk of cases continue to be concluded by CSA members via contested hearings and/or settlement agreements, with a decrease in cases concluded in court. This speaks to an increased push amongst securities regulators and SROs (including IIROC, as previously discussed in a recent Osler Update) to recognize “credit for cooperation” and to enter into settlement agreements with appropriate parties, freeing up necessary resources to bring more cases. However, it is worth noting that the Report fails to provide insight into how long cases take to investigate and to adjudicate, leaving readers with statistics that arguably tell only half the story.
For the past several years, Canadian capital markets regulators have focused on enforcement statistics such as those included in the Report as an essential measurement of our regulatory system’s efficiency and efficacy. However, this is only part of the equation. An effective capital markets regulator also needs a strong track record of motivating and encouraging proper market behaviour by speaking, responding and working with market participants and investors to more effectively achieve the silent goals of regulation (fair, safe and efficient capital markets). Enhanced investigation and prosecutorial tools and avenues, such as whistleblowing programs, the introduction of ‘wiretapping’ as an enforcement tool, stronger coordination and cooperation amongst law enforcement agencies, such as the OSC`s JSOT program and OSC-RCMP initiative recently announced (and referred to above), are useful and necessary given the increased complexities of the capital markets. But it is also important, in our view, that the focus on more aggressive enforcement as a priority and a statistical ‘sound bite’ not distract regulators from the crucial role they play in promoting proactive compliance within a positively engaged and regulated community. To support strong and effective enforcement, successful regulation needs clearly articulated and understandable requirements, priorities and concerns, and consistent reciprocal efforts to build positive working relationships amongst regulators, market participants and investors.