The Ontario Securities Commission (the "OSC") recently published for comment new enforcement initiatives which offer incentives to market participants to self-report and encourage cooperation with the securities regulator. One of the initiatives, a US-style "No-Contest Settlement Program," which allows for settlement without an admission of wrongdoing, sparked a heated debate amongst the public's responses, requiring the OSC to extend the original comment deadline from December 20, 2011, to January 16, 2012, and to institute plans for a public policy hearing.
the proposed initiatives and the "no-contest settlement program"
One of the OSC's goals is to resolve enforcement matters more quickly and effectively as its limited resources are being spread across a larger number of files, resulting in fewer enforcement orders and creating lengthy delays. OSC Staff Notice 15-704 includes four proposed initiatives: a new program for explicit "Non-Enforcement Action Agreements" (where a self-reporting party would explicitly not be subject to an enforcement action), a "Clarified Process for Self-Reporting", an "Enhanced Public Disclosure of Credit Granted for Cooperation" and the controversial "No-Contest Settlement Program."1
The Staff Notice describes the "No-Contest Settlement Program" as providing a cooperating market participant an option to resolve an enforcement matter without admitting facts or non-compliance with Ontario securities law or conduct contrary to the public interest. To enter into a no-contest settlement the respondent must cooperate with OSC staff during the investigation by self-reporting, remediating in a "timely manner" and by reporting third-party involvement. The settlement must meet the public interest requirements set out in the Securities Act2 and the respondent is also required to have no history of prior enforcement or regulatory activity by any securities regulator.
The Staff Notice endorses no-contest settlements as a strategy to expedite resolutions and increase the number of protective public interest orders. Currently, a significant concern for persons or companies contacted during an OSC investigation is the threat of civil litigation, including class action lawsuits. Many are hesitant to make admissions which could be used against them in civil proceedings. This hesitancy has hampered Staff's investigative work and made it more difficult to agree on a settlement. The Staff Notice suggests that the availability of no-contest settlements would address these concerns.
In the United States, "neither admit nor deny" settlements have been routinely used and approved by the courts in Securities and Exchange Commission (the "SEC") enforcement proceedings for decades. Recently, however, such settlements have borne the brunt of some harsh criticism, specifically by Justice Rakoff in the SEC v Citigroup Global Markets case where he refused to approve the SEC's proposed "neither admit nor deny" settlement with Citigroup as it was "neither reasonable, nor fair, nor adequate, nor in the public interest."3
The OSC posted the comments submitted by the public on its website. Almost all of the sixteen responses made extensive submissions on the "No-Contest Settlement Program." Both sides of the debate were equally represented with approximately half of the responses condemning the initiative and half praising it.
the argument against: no accountability or deterrence
The main opposition to no-contest settlements came from a variety of investors' advocate groups, legal counsel for investors in civil and class action proceedings, and other interested individuals, including the OSC's former Director of Enforcement, Michael Watson. The following are some of the arguments submitted in opposition:
- Accountability: There is an over-riding public interest to know the truth and with no-contest settlements there will be no accountability or deterrence. Absent any stigma or reputational effects, these types of settlements will just become the "costs of doing business".
- Investor Compensation: The OSC does not provide restitution to investors4 so investors themselves must seek compensation through civil litigation. It is only "fair" that investors be able to use admissions made in OSC enforcement cases in their civil and class action lawsuits in order to obtain restitution.
- Will Not Save Time: The vast majority of time spent in enforcement proceedings is on the wording of settlements and this will not change with the implementation of no-contest settlements. Some SEC "neither admit nor deny" settlements have taken 2 years to complete.
the argument in support: swift justice for investors
The main proponents for no-contest settlements, not surprisingly, were individual counsel and group representatives of market participants and respondents. The following are some of the arguments submitted in support of the proposed settlements:
- In the Public's Interest: Acceptable sanctions will be imposed in a timely manner and at a much lower cost which will fulfill the OSC's goal to restrain future conduct, reduce costs and free staff to pursue greater number of cases.
- Protect Privilege: The OSC will be able to take action that still punishes the respondent as well as deters undesirable behaviour without putting the party at risk in other contexts such as civil litigation.
- Opponents Concerns are Out of Proportion: There should be no concern that a no-contest settlement would hamper investors' rights to pursue civil remedies against the respondents. The US has had "neither admit nor deny" settlements for decades and it continues to have a robust securities class actions practice.
The OSC must decide what is more important: resolving cases and imposing sanctions quickly, when it is actually relevant to the investors in the marketplace, or seeking out full admissions and accountability from respondents which may take time and money, but could deter further wrongdoings? It is clear that the OSC has definitely struck a nerve. What is unclear is whether the OSC will be swayed by public opinion and whether the public hearing (which has yet to be scheduled) will assist with its decision-making.