AN INTERNATIONAL APPROACH 

Exactly two weeks to the day that Deferred Prosecution Agreements came into force  for enumerated offences in the United Kingdom, the Ontario Securities Commission  (the “OSC” or the “Commission”) also indicated that it was prepared to embrace  flexible enforcement tools that have traditionally been associated with the American  approach to regulatory investigations. 

On March 10, 2014, the Commission released OSC  Staff Notice 15-702 (the “Notice”). The Notice  marks a profound shift in OSC Enforcement policy  and will doubtless have a significant effect on the  manner in which enforcement proceedings are  undertaken and resolved by the Commission.  Amongst other things, the Notice introduces No  Contest settlements and Non-Prosecution  Agreements (or “no enforcement action  agreements”) for market participants that are  deemed to be satisfactorily cooperative by Staff.

The Notice takes on added significance because  the OSC and the British Columbia Securities  Commission are targeted to become a single  entity by July 1, 2015. Depending on the  perceived success of the new policies announced  in the Notice, it is likely that this new American  style approach to securities regulation will  come to define Canadian securities regulation  going forward.

COOPERATION AND NON-COOPERATION  DEFINED

In the Notice, the Commission outlined what will be  considered to be the expected level of cooperation  exhibited by market participants. Equally  importantly, the Notice identifies “what is not  viewed as cooperation” by the Commission. In order to be considered cooperative, the  Commission expects market participants to  self-report any problems internally identified  relating to the participant’s systems and controls,  the reporting or disclosure of financial results,  illegal or improper trading, or any other  inappropriate activity that may affect the integrity  of the capital markets of Ontario. Additionally,  market participants are expected to take  appropriate remedial measures to ensure  misconduct is not repeated and offer appropriate  compensation to harmed investors. 

Queen for a Day

The Commission also expects market participants  to fully cooperate with the Commission and other  regulators to provide all requested information in a  timely manner. The Notice provides that at the sole  discretion of Staff of the Commission, a party that  self-reports misconduct may be permitted to enter  a proffer type agreement with Staff whereby any  information provided by the party to Staff at a  pre-arranged meeting would not be used against  that person in subsequent enforcement  proceedings by the Commission (an arrangement  commonly referred to as “Queen for a Day” in the  United States). This is significant because under  the Ontario Securities Act Staff has the power to  compel a party to be examined under oath and  generally (although not without exception) a  compelled examination is admissible against the  deposed party in administrative proceedings.  However, even if a party is able to enter such a  proffer agreement with the Commission, Staff of  the Commission would be permitted to share any  information so obtained with other regulatory  bodies and use this information for further  investigation. A proffer statement could also be  used to impeach a party should that party later  adopt a position inconsistent with his or her  proffer statement. 

OSC requires waiver of legal privilege in some  circumstances to be considered cooperative

Cooperative market participants are also expected  to provide Staff of the Commission with all  requested books and records and all analyses  and reports prepared by experts retained by the  market participant or its counsel. To this end, the  Commission specifies that a market participant  will not be considered to be cooperative if they  “arrange their affairs in such a manner…to claim  a privilege to avoid providing details of potential  breaches of Ontario securities laws”. It is not clear  if the Commission will expect market participants  to waive privilege in all circumstances over all documents which provide details of potential  breaches of securities laws, or if instead the  Commission will simply not consider a market  participant to be cooperative if it makes active  arrangements to shelter or conceal potential  breaches of securities laws under the protection  of privilege. 

Expecting market participants to waive privilege  over legal documents in order to be deemed  cooperative is potentially troublesome and at odds  with the approach adopted by American agencies  that have far more experience with No Contest  settlements and Non-Prosecution Agreements. 

For example, since the revision of its Principles  of Federal Prosecution of Business Organizations  in August 2008, commonly referred to as the  “Filip Guidelines”, while companies are required  to provide all relevant facts to the government to  receive credit for cooperation, the US Department  of Justice does not require companies to waive  solicitor-client privilege, nor produce materials  protected by solicitor-client privilege or work  product privilege. Similarly, the Securities and  Exchange (“SEC”) Commission Division of  Enforcement Manual (the “Manual”) requires the  SEC to respect legitimate assertions of solicitorclient privilege and attorney work product privilege.  The Manual prohibits SEC staff from asking a party  to waive either privilege without the prior approval  of the Director or Deputy Director and specifically  notes that credit for cooperation is not contingent  on producing documents protected by privilege.

The SEC notes that respecting a party’s right to  assert privilege will encourage parties “to consult  counsel about potential violations of the securities  laws”, a desirable outcome to ensure an orderly  capital market. It is hard to imagine that the OSC  would want anything different and if No Contest  settlements are intended to increase efficiency  in policing the Ontario capital markets the  Commission will likely have to clarify or revisit  its position on waiving legal privilege with respect  to cooperation.

Other factors which will be viewed as indicative of  non-cooperation will include destroying documents  and records, misrepresenting facts or withholding  material information from the Commission and  failing to implement remedial measures

NO CONTEST SETTLEMENTS

In limited circumstances, Staff will now  recommend that administrative proceedings be  resolved in a manner that permits a Respondent to  neither confirm nor deny facts declared to be true  by Staff based on their investigation. Of  significance, a Respondent will not be required to  admit that it violated Ontario securities law or  otherwise acted contrary to the public interest. It  appears, however, that a Respondent would have  to agree with the sanctions recommended by Staff  in a No Contest settlement agreement.

The Commission will retain the adjudicative  discretion to decide whether or not to approve any  No Contest settlement proposed by Staff. Staff  retains a broad discretion to decide when it is  appropriate to recommend a No Contest  settlement. A No Contest settlement will not be  appropriate if a Respondent has engaged in  abusive, fraudulent or criminal conduct; has misled  or obstructed Staff during the course of an  investigation; or if the Respondent’s actions have  resulted in investor harm which has not been  addressed in a satisfactory manner. Provided none  of these factors are present, Staff will consider  several factors in determining whether a No  Contest plea is appropriate, including the degree  and timeliness of a Respondent’s self-reporting of  discovered misconduct, as well as their  cooperation with any investigation undertaken by  Staff. Other factors that will be considered include  any remedial steps taken by the Respondents, the  willingness of Respondents to undertake to refrain  from re-offending, the ability of the Respondent to  make payments towards compensating affected  persons and the cost of Staff’s investigation, and  the deterrent effect of any settlement on other  participants in the capital markets.

No contest settlements will not be available when  Staff elects to bring quasi-criminal proceedings  before the Ontario Court of Justice.

NO ENFORCEMENT ACTION AGREEMENTS 

In limited circumstances Staff may also exercise  its prosecutorial discretion to refrain from taking  any enforcement action against parties that are  sufficiently cooperative. In exercising its discretion,  Staff will consider numerous factors, including  whether the misconduct in question was an  inadvertent or technical breach of Ontario  securities law, the degree of investor harm  occasioned by the misconduct, the level or  cooperation and self-reporting demonstrated by  the party, and the deterrent effect on the particular  party in question. 

OTHER OUTCOMES REFLECTING CREDIT  FOR COOPERATION

In addition to no enforcement actions, parties  that are deemed to sufficiently cooperate with  the Commission may still receive credit for  cooperation by avoiding the issuance of a  formal Notice of Hearing and instead enter into  an enforceable undertaking or have terms and  conditions placed on their registration with the  Commission. If a Notice of Hearing is issued the  fact that a Respondent cooperated may be  reflected in narrowing the scope of the allegations  or receiving a reduced recommendation for  sanctions by Staff of the Commission.  Additionally, the Commission states that it may  recommend that parties that cooperate be dealt  with exclusively by way of administrative action  and not court proceedings, some of which could  involve jail time.