The Ontario Securities Commission recently released Staff Notice 15-704 requesting comments on proposed enforcement initiatives. Such enforcement initiatives are aimed at resolving enforcement matters more quickly and effectively, and at increasing the amount of protective orders made in the public interest.
The new measures being proposed by the OSC are as follows:
- New Program for Explicit No-Enforcement Action Agreements – Parties would explicitly not be subject to enforcement action in exchange for prompt self-reporting and for cooperating in an investigation. In the past, staff would simply advise the market participant that no action would be taken. This measure is intended to provide greater certainty of result.
- New No-Contest Settlement Program – Settlement agreements could be finalized in the absence of a specific admission by the respondent of a breach of the Securities Act or specific conduct contrary to the public interest. This initiative reflects the fact that respondents may not be willing to make admissions due to the potential risk of these admissions being used in other proceedings. The no-contest settlement option, however, will not be made available to all respondents as the staff notice specifies certain conditions for its use.
- Clarified Process for Self-Reporting under the Credit for Cooperation Program – This proposal would ensure that all parties are informed on how best to self-report and come forward with information. Elements of the process could include self-reporting through an intermediary (i.e. legal counsel) which protects the identity of the self-reporter and agreements that set out the circumstances in which testimony provided by a person during an investigation may or may not be used against them in enforcement proceedings.
- Enhanced Public Disclosure of Credit Granted for Cooperation – This initiative would provide certainty of potential outcomes for all parties that may consider self-reporting. This may be achieved through public announcements by the OSC disclosing information about cooperation provided by a party and through settlement agreements that refer to the credit that was granted in exchange for cooperation.
Rationale for the New Enforcement Initiatives
These initiatives will expand on the OSC's credit for cooperation program, which is intended to provide market participants with incentives to self-police, self-report and self-correct matters that may involve breaches of Ontario securities law or activities that would be considered contrary to the public interest.
The staff notice states that the current credit for cooperation program has not worked as expected due to its low rate of use. Part of the reason for this has been a disconnect in expectations between OSC staff and market participants as to what is meant by cooperation, a lack of understanding as to what type of credit would be provided, and misunderstandings as to how a market participant might approach staff to initiate discussions.
The staff notice recognizes that persons or companies contacted during investigations are increasingly concerned about concurrent civil litigation, particularly class action lawsuits, that may arise against them. This has created hesitation to disclose documents and provide testimony to the OSC for fear that such disclosure would result in a waiver of privilege for the purpose of civil litigation.
Such enforcement initiatives are also the result of the OSC's limited resources being spread across a larger number of files, which is resulting in fewer enforcement orders and creating lengthy delays.
The OSC proposal will bring the OSC's settlement practices into closer alignment with the general practice of the US Securities and Exchange Commission. Although not referred to in the notice, these initiatives may have the additional benefit of simplifying the resolution of cross-border investigations where there are civil liability risks in both the United States and Canada.
The OSC is seeking public comment on these initiatives until December 20, 2011.
Further OSC Enforcement Initiatives
In addition to these proposals, the OSC is examining the prospect of introducing a new whistleblower program to provide incentives (possibly through financial compensation and/or protection from retaliation) to persons who provide the OSC with information about misconduct in the marketplace. An OSC notice inviting public comment on such initiatives may be published in the near future.