Market trends and climate
Market trends and climate
What is the general state of the securities markets in your jurisdiction, including any notable trends and recent transactions?
The two organisations that regulate Canada’s investment and mutual fund dealers – the Mutual Fund Dealers Association and the Investment Industry Regulatory Organisation of Canada – have increased their enforcement activity. Their focus is on compliance, complaint handling, suitability, issues affecting senior citizens, falsification of account opening documents and sales incentives.
The focus of the provincial securities commissions, from an enforcement perspective, remains on insider trading, disclosure and fraud.
Regulatory framework and enforcement
What is the primary legislation governing the offer and trade of securities in your jurisdiction (both primary and secondary markets)?
The primary legislation is the Ontario Securities Act (RSO 1990, c S5) (and comparable legislation in each Canadian province). In addition, the Mutual Fund Dealers Association and the Investment Industry Regulatory Organisation of Canada enforce their own bylaws, policies, rules and guidelines.
Regulatory authorities and enforcement trends
Which authorities regulate the securities markets in your jurisdiction and what is the extent of their enforcement powers?
Ontario Securities Commission
The Ontario Securities Commission has broad powers to enforce the Ontario Securities Act and the Commodity Futures Act (RSO 1990, c C20). It investigates allegations of misconduct in the capital markets and can initiate proceedings against individuals or companies suspected of violating securities law or acting contrary to the public interest.
Mutual Fund Dealers Association
The Mutual Fund Dealers Association is structured as a not-for-profit corporation and its members are mutual fund dealers that are licensed with provincial securities commissions.
The association is formally recognised as a self-regulatory organisation by the provincial securities commissions in Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario, Prince Edward Island and Saskatchewan.
As a self-regulatory organisation, the association is responsible for regulating the operations, standards of practice and business conduct of its members and their representatives with a view to enhancing investor protection and strengthening public confidence in the Canadian mutual fund industry. The majority of the association’s staff, centred in Toronto with offices in Calgary and Vancouver, primarily conduct compliance and enforcement activities.
The Enforcement Department receives information about potential violations of the association’s rules, bylaws, policies and applicable securities regulations in various ways. The most common are event reports filed on the Member Event Tracking System (METS) that are made when members receive a complaint or identify issues through their branch review programmes and other supervisory activity. Event reports also come from the public, other regulators and the association’s Compliance Department. This information is screened and cases are opened where there is a possibility of a violation of the association’s requirements.
Investment Industry Regulatory Organisation of Canada
The Investment Industry Regulatory Organisation of Canada is the national self-regulatory organisation that oversees all investment dealers and trading activity on debt and equity marketplaces in Canada.
The Enforcement Department is responsible for the enforcement of the organisation’s Dealer Member Rules relating to the sales, business and financial conduct of its members and their registered employees, as well as the Universal Market Integrity Rules relating to the trading activity on all Canadian debt and equity marketplaces.
Have there been any notable public enforcement trends, including any key recent actions?
In 2017 the enforcement branch of the Ontario Securities Commission:
- levied 48 administrative sanctions;
- sent four members to jail;
- entered into three no-contest settlements; and
- returned $143 million to investors.
The types of case that the Ontario Securities Commission has been prosecuting include senior citizens’ cases, vulnerable investors and misappropriation of funds.
The focus of the Investment Industry Regulatory Organisation of Canada recently has been on suitability, senior citizens’ issues, misappropriation cases and the failure to cooperate with the organisation.In 2016 suitability represented over 40% of all prosecutions. Cases involving senior citizens represented approximately one-third of both the case assessment matters reviewed and prosecutions completed.
In 2016 the Mutual Fund Dealers Association concluded 85 hearings and imposed fines of $21,104,750 (approximately 3% of these have been collected). The association has focused on signature falsification, accounting for 60 of 111 formal proceedings in 2016. It has also focused on the complaint handling of its members, compliance failings, adviser misconduct and sales incentives.
How is the court system structured in your jurisdiction? Are there any specialist courts with jurisdiction over securities-related actions?
The court system is structured as follows:
- the Ontario Superior Court of Justice:
- the Small Claims Court (for cases worth less than $25,000);
- the Ontario Divisional Court (appeals of the Small Claims Court and some interlocutory appeals of the Ontario Superior Court of Justice);
- the Ontario Court of Appeal; and
- the Supreme Court of Canada.
No particular court has specific jurisdiction over securities-related actions, but the Commercial List Court in Toronto hears significant cases focusing on commercial interests (including many securities class actions made pursuant to the Securities Act (RSO 1990, c S5)).
What rules govern court procedure? Are there any provisions specific to securities cases?
The Ontario Rules of Civil Procedure (RRO 1990, Reg 194) govern all civil court procedure. There are no provisions in the rules exclusively on securities cases, but the Ontario Securities Commission, Investment Industry Regulatory Organisation of Canada and Mutual Fund Dealers Association all have their own specific rules of procedure.
What rules and procedures govern the appeal process?
The Ontario Rules of Civil Procedure apply, as well as the Practice Direction Concerning Civil Appeals at the Ontario Court of Appeal.
Recent case law and litigation trends
Have there been any notable recent cases involving private securities claims or trends in private securities litigation?
The Ontario Court of Appeal considered a forum argument in Kaynes v BP PLC, 2014 ONCA 580. The underlying claims related to alleged secondary market misrepresentations made by the issuer and there was a parallel proceeding in the United States based on the same alleged misrepresentations. Both the claim in the United States and the claim in Ontario were based on statutory secondary market civil liability provisions.
The Court of Appeal primarily relied on the fact that the applicable US legislation, the Securities Exchange Act 1934, asserts that the United States has jurisdiction over secondary market misrepresentation claims regarding securities purchased on a US exchange market, and that the plaintiffs in Ontario had the opportunity to advance their claims in the United States as they purchased the securities on a US exchange. The Ontario Court of Appeal also relied on the fact that one of the forum non conveniens factors is to avoid conflicting results in parallel proceedings.
The court held that to allow an Ontario proceeding to continue in the face of a parallel US proceeding where the plaintiffs would also be class members would be contrary to this factor.
Court approach to securities cases
Would you consider your jurisdiction to be a more claimant-friendly or defendant-friendly forum for securities litigation?
In respect of securities class actions, Ontario can sometimes be perceived as plaintiff-friendly from a certification perspective. From a merits perspective, it is hard to determine because the vast majority of cases settle post-certification.
In respect of other securities-related claims, there is no discernible trend that would lead to the conclusion that Ontario is either plaintiff or defendant-friendly.
How do the courts in your jurisdiction address cross-border securities litigation?
Courts in Ontario are increasingly prepared to assume jurisdiction of claims, including securities litigation claims, where there is a real and substantial connection to Ontario. However, there are limited instances where courts in Ontario will decline to exercise such jurisdiction, including cases where plaintiffs have the ability to advance their claim in the other jurisdiction (as is what happened in Kaynes).
Causes of action
Which causes of action can be asserted by claimants in relation to the offer and trade of securities and which are most commonly asserted?
Claimants may assert claims for misrepresentations in both primary and secondary markets.
Directors’ and officers’ liability
In what circumstances and to what extent can directors and officers be held liable for misrepresentations, omissions or other fraudulent conduct in relation to the offer and trade of securities?
Each director of the corporation issuing securities under a prospectus is personally liable to the investors for losses suffered if the prospectus misstates or omits a material fact. A fact is material if it would reasonably be expected to have a significant effect on the market price or value of the issuer’s securities.
Directors can be potentially liable for any misrepresentation in a document, subject to the availability of a defence. They are, however, liable for a misrepresentation in a public oral statement or the failure to make timely disclosures if they “authorized, permitted or acquiesced in” the disclosure violation.
Can liability be limited in any way?
A director will not be liable for a misrepresentation (including a misstatement or omission) in a prospectus if he or she can discharge the due diligence defence. The defence is discharged if he or she can prove that he or she conducted a reasonable investigation to provide evidence that there was no misrepresentation. The legislation requires the court to consider “all relevant circumstances”, including a list of specified factors.
In what circumstances and to what extent can secondary actors (eg, attorneys, auditors and underwriters) be held liable for misrepresentations, omissions or other fraudulent conduct in relation to the offer and trade of securities?
The secondary market civil liability provisions of the Ontario Securities Act (RSO 1990, c S5) include, among the class of potential defendants for misrepresentations contained in disclosure documents, experts whose report, statement or opinion is included in, or summarised or quoted from, a disclosure document if the expert consented in writing to the use of the report, statement or opinion in the document.
Can liability be limited in any way?
The Securities Act provides a defence from liability (commonly referred to as the ‘expert defence’) to an issuer and others involved with the publication of the continuous disclosure document with respect to any part of that document that includes such information provided by an expert where the issuer or other did not know and had no reasonable grounds to believe that there had been a misrepresentation in that part of the document.
Who may file securities claims? Are there any restrictions on foreign claimants? Who are the most common claimants (eg, pension funds, institutional investors)?
Subject to jurisdiction issues, there are no restrictions on foreign claimants. The most common claimants tend to be individual investors; however, institutional investors have also initiated some significant securities claims.
Pleading and evidentiary standards
What pleading and evidentiary standards apply to securities claims, including with regard to:
(a) Proof of reliance on the relevant misrepresentation, omission or other fraudulent conduct?
In Ontario, reliance is not a requisite element of the statutory right to make claims for misrepresentations under the Securities Act. Courts in Ontario have considered civil claims for negligence misrepresentation. In Carom v Bre-X Minerals Ltd ((1998), 41 OR (3d) 780) the court rejected the US fraud-on-the-market theory that would have vitiated the reliance requirement on the representation.
(b) Proof of loss causation?
Loss causation is presumed by reason only of a difference in share price during the relevant period, unless the defendant can prove otherwise. The defendant is not liable for all or any portion of such damages that the defendant proves does not represent the depreciation in value of the security as a result of the misrepresentation relied upon.
(c) Materiality requirements?
Misrepresentation requires a material fact. The revised definition of ‘material facts’ in Section 1(1) of the Securities Act continues to impose a market price or value test: ‘material fact’, where used in relation to securities issued or proposed to be issued, means a fact that significantly affects, or would reasonably be expected to have a significant effect on, the market price or value of such securities.
In Re YBM Magnex International Inc 2003, 26 OSCB 5285, the Ontario Securities Commission concluded that the test for materiality in the Securities Act is objective and is one of market impact. An investor wants to know facts that would reasonably be expected to affect the market price or value of the securities significantly. The investor is an economic being and materiality must be viewed from the perspective of the trading markets – that is, the buying, selling or holding of securities.
(d) Scienter requirements?
Canadian misrepresentation claims, whether statutory or at common law, do not have the scienter requirement that exists in Rule 10b-5 actions in the United States.
(e) Any other requirements, standards or considerations?
What pre-trial disclosure/discovery mechanisms are available to support claims, if any?
In Ontario there is a discovery process governed by the Ontario Rules of Civil Procedure. All parties must list and produce documents in their possession, power or control, and list them in a Schedule A. Any documents over which a party claims privilege must be listed in a Schedule B. Any documents that were formerly in their power, possession or control, but are no longer, must be listed in a Schedule C.
The parties may then conduct examinations for discovery of a representative of each party for no more than seven hours. If the parties wish to examine more than one party or examine a party for more than seven hours, it must seek leave from the court.
What rules and standards govern non-disclosure of documents on the grounds of professional privilege or other confidentiality considerations?
The parties must list all documents that they are claiming privilege over (on the basis of solicitor-client, litigation or common interest) in a Schedule B. The party must list a sufficient description so that the other side can determine the author, recipient, date and type of document.
What interim measures are available to claimants in securities cases?
There are no interim measures that are particular to securities cases; however, in each Canadian province interim extraordinary remedies are available, such as Mareva injunctions, interim and interlocutory injunctions and other extraordinary relief.
Statute of limitations
What is the statute of limitations for filing claims?
The statute of limitations is two years for common law civil claims.
In respect of actions for misrepresentation in a prospectus made under the Securities Act, the claimant must make a claim within 180 days of the plaintiff first having knowledge of the facts giving rise to the cause of action or three years after the date of the transaction that gives rise to the cause of action.
What defences are available to defendant issuers and broker-dealers?
In an action related to a forward-looking document, the person or company may prove the following to mount a successful defence:
- The document containing the forward-looking information contained:
- reasonable cautionary language identifying the forward-looking information as such, and identifying material factors that could cause actual results to differ materially from a conclusion, forecast or projection in the forward-looking information; and
- a statement of the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection set out in the forward-looking information.
- The person or company had a reasonable basis for drawing the conclusions or making the forecasts and projections set out in the forward-looking information.
In an action related to a misrepresentation in a document that is not a core document, or a misrepresentation in a public oral statement, a person or company is not liable unless the plaintiff proves that the person or company:
- knew, at the time that the document was released or the public oral statement was made, that the document or public oral statement contained the misrepresentation;
- at, or before, the time that the document was released or public oral statement was made, deliberately avoided acquiring knowledge that the document or public oral statement contained the misrepresentation; or
- was, through action or failure to act, guilty of gross misconduct in connection with the release of the document or the making of the public oral statement that contained the misrepresentation.
In an action in relation to a failure to make timely disclosure, a person or company is not liable unless the plaintiff proves that the person or company:
- knew, at the time that the failure to make timely disclosure first occurred, of the change and that the change was a material change;
- at the time when, or before, the failure to make timely disclosure first occurred, deliberately avoided acquiring knowledge of the change or that the change was a material change; or
- was, through action or failure to act, guilty of gross misconduct in connection with the failure to make timely disclosure.
What preliminary procedural mechanisms are available to defendants to counter claims, if any (eg, motions to dismiss)?
A party may move to strike a counterclaim if it does not disclose a reasonable cause of action or is frivolous or vexatious. A party may also move for summary judgment on the basis that the claim is not suitable for trial and should be dismissed.
Damages and costs
What rules and standards govern the calculation and award of damages?
The calculation of damages in Ontario is discretionary. Parties generally tender expert evidence to demonstrate a quantification of damages.
Are damages capped?
In general terms, damages are not capped, but must be proved by the plaintiff. In secondary market misrepresentation cases, the Ontario Securities Act (RSO 1990, c S5) sets a maximum amount that may be recovered from each director or officer: $25,000 or 50% of his or her aggregate compensation for the previous 12 months, whichever is greater.
Are punitive damages allowed?
Yes, punitive damages are permitted in Ontario proceedings where a party has demonstrated that the defendant has acted in a callous and high-handed manner, and/or has had wanton disregard for the plaintiff.
Are any other remedies available?
Declaratory and equitable relief is also available in Ontario.
Who bears the costs of proceedings? Can this burden be shifted in any way?
In Ontario, the losing party generally pays costs. The scale of costs is dependent on a number of factors, including whether a party beat an offer to settle, the conduct of the party during the litigation and whether fraud was pleaded and not proved.
How are costs calculated? Does interest accrue on costs?
Cost awards are discretionary. The court considers what an unsuccessful party could reasonably expect to pay in a similar case, taking into account the lawyers’ experience, hourly rates and actual time spent. The court may also consider:
- the complexity and importance of the case;
- the amount that the plaintiff claimed compared to what the court paid;
- the conduct of the parties; and
- whether one party is entirely liable or liability is divided.
The court generally awards ‘partial indemnity’ costs, which usually amount to less than 50% of lawyers’ fees.
Substantial indemnity costs are higher than partial indemnity fees, but are usually awarded only where:
- the winning party made an offer to settle prior to trial and obtains a more favourable judgment than the offer at trial; and/or
- there has been reprehensible, scandalous or outrageous conduct by the losing party.
What rules and procedures apply to the provision of security for costs?
A party may move for security for costs under Rule 56.01 of the Ontario Rules of Civil Procedure where:
- the plaintiff is ordinarily resident outside of Ontario; or
- the plaintiff is a corporation or ‘nominal’ plaintiff and there is good reason to believe that it has insufficient assets in Ontario.
Security for costs is discretionary and a court may not grant it where the plaintiff can prove that it has sufficient assets in Ontario or it is impecunious, and that forcing it to post security for costs would bar it from having its claim proceed.
Are class actions or any other collective proceedings available for securities claims in your jurisdiction? If so, what is the procedure for their formation and what benefits do they afford claimants? Are class actions formed on an opt-in or opt-out basis?
Securities class actions are available in Ontario. In Ontario, persons falling within the class definition are automatically included in the class after certification, unless they opt out.
The first step in a class action is to issue a statement of claim that both names a representative plaintiff who will act on behalf of the class, and cites the Class Proceedings Act (SO 1992, c 6).
The next step is to bring a motion to certify the class. In Ontario, all class actions must be certified. In order to certify a class action successfully, the moving party must demonstrate to a judge that:
- the pleadings or the notice of application discloses a cause of action;
- there is an identifiable class of two or more persons that would be represented by the representative plaintiff or defendant;
- the claims or defences of the class members raise common issues;
- a class proceeding would be the preferable procedure for the resolution of the common issues; and
- there is a representative plaintiff.
Once the action has been certified, a notice will go out to all class members advising that the class action has been certified and providing an opportunity for those who do not want to be included in the class to opt out of the claim (usually 30 to 90 days).
Production of documents and examinations for discovery proceed thereafter in the ordinary course.
A mediation must also be held in Ontario (this can be held before or after certification and discoveries). Most cases settle post-certification.
If the mediation is unsuccessful, the claim moves on to the trial of common issues and then to the damages trial.
There are other collective proceedings available in Ontario. Most often, such proceedings are brought by naming multiple plaintiffs that have similar claims. Such claims generally proceed as regular claims, but with some of the efficiencies of a class action (one counsel, a collective group, common issues adjudicated by the same trier of fact and a common goal). Such claims are quite common in investor loss cases.
Is public or third-party litigation funding available in your jurisdiction? If so, what rules, standards and procedures apply?
Third-party funding is available in Canada and has been widely used in class proceedings. Previously in Canada, the laws of champerty and maintenance limited the availability of third-party funding. In the early 2000s, various appellate decisions considered and allowed several fee structures, including contingency fees and third-party funding for class proceedings. In doing so, the courts specifically recognised the role that third-party funding has in providing access to justice to plaintiffs.
In 2015 an Ontario case specifically allowed third-party funding in respect of single-party commercial litigation.
Is insurance available to cover the costs of litigation?
Insurance is available to Ontario litigants and routinely covers litigation in Ontario, particularly in respect of claims arising from errors and omissions, and directors’ and officers’ liability.
Rules and procedure
What rules and procedures govern the settlement of securities litigation?
With the exception of the rules that govern the settlement of class actions, which include securities class actions, there are no special rules governing settlement of securities litigation civil claims. Securities class action settlements must be approved by a judge of the Ontario Superior Court of Justice in accordance with the provisions of the Class Proceedings Act (SO 1992, c 6).
How common are settlements in securities-related cases?
Securities claims, both class actions and regular proceedings, frequently settle in Ontario.