It will take years for Canada to escape its reputation for lax enforcement of securities laws, and the change won’t begin until policy-makers show they are truly determined to lose the label.

About a decade ago, regulators pointed to a lack of resources when they were criticized for having weak enforcement records. Their provincial masters simply weren’t willing to fund serious efforts to fight white-collar crime or discipline regulatory scofflaws.

Fast-forward to today, and the finances of the securities commissions have changed dramatically, boosting salaries and staffing levels. Enforcement powers have been beefed up, too. But the headlines are much the same.

Last year, for instance, the B.C. Securities Commission lost a high-profile case after a hearing that lasted almost three years. The Ontario Securities Commission won a split decision on a prominent insider-trading case, only to have the partial conviction reversed on appeal. Its own request for leave to appeal the decision was recently denied. The OSC then had to ask the Ontario Court of Justice to dismiss charges in another case after new information emerged, making a conviction impossible.

Such stumbles aren’t doing much to enhance the already battered reputation of the regulators’ enforcement abilities. And it’s not just a matter of recent embarrassing defeats. Papers published late last year as part of research commissioned by the Task Force to Modernize Securities Legislation indicate that enforcement was already considered inadequate.

A paper by former Supreme Court of Canada justice Peter Cory and Marilyn Pilkington, former dean of Osgoode Hall Law School in Toronto, found that enforcement is perceived to be ineffective in Canada. It cited numerous reasons, including: a lack of enforcement in high-profile cases; the length of time it takes to bring a case to court; and fragmented jurisdiction among the provinces and among regulators, police and courts.

As for the regulators themselves, consider a paper by Jeff MacIntosh, the Toronto Stock Exchange chair in capital markets law in the faculty of law at the University of Toronto: “The greatest criticisms of the securities regulators were aimed at the activities of enforcement staff.”

The paper says that critics felt there were insufficient resources for enforcement, and that regulators have not deployed such resources very effectively.

Steve Sibold, former chairman of the Alberta Securities Commission and now corporate counsel at Bennett Jones LLP in Calgary, says that while enforcement departments could use more resources, such assets are available to the commissions. Instead, he sees one of the biggest problems as a lack of expertise at various levels — which hampers the police that should be investigating white-collar crime, the Crown attorneys who should be prosecuting the offences, the judges that are expected to hear the cases and the regulators themselves.

The problem is compounded, he says, by the fact that people with securities expertise tend to earn far beyond what the public sector can afford to pay. So, it becomes tremendously challenging to recruit them, particularly when there may not be much of a career boost associated with public service in Canada.

Sibold suggests that one way to deal with the talent deficit is specialized training. He proposes that a few judges could be trained to hear complex securities cases, similar to the commercial list established by Ontario’s Superior Court of Justice to deal with intricate commercial law cases. In provinces in which Crown prosecutors are expected to try white-collar cases, a small group could be specially trained in securities law. Commissions could also be doing much more to train their own staff, perhaps hiring outside counsel to run seminars on specific topics, such as takeover bids, to enhance staff proficiency.

A more securities-savvy judiciary would also make it easier for regulators to reorient their approach to enforcement, which is what Joe Groia would like to see.

Groia, principal of Groia & Co. in Toronto and a former OSC director of enforcement, says regulators should be taking more cases to civil court rather than pursuing criminal charges or using their own tribunals. He also recommends that regulators generally take a less adversarial approach to the industry.

“There will always be a certain amount of fraud in the marketplace. That needs to be dealt with severely,” Groia says. “Those cases, however, are quite different than accounting issues that, absent self-dealing or direct personal gain, are more civil in nature and hence are more easily dealt with in a civil court.”

@page_break@Additionally, Groia recommends that regulators stop overcharging defendants; offer a Canada Revenue Agency-style amnesty for certain violations; conduct regulators’ hearings in front of independent adjudicators; and marshal regulators’ resources to pursue the “real bad guys.”

“The regulation of an industry in which the vast majority of the participants are trying to do the right thing seems to me to require a much different approach than the present one, which is to always throw the book at defendants if and when you can,” says Groia.

Of course, absent expert judges, regulators may not be eager to expand their use of the already overburdened court system. And there’s no sign that the Ontario government is about to introduce the separate tribunal it promised if its pursuit of a national regulator didn’t work. Still, Ontario and the federal government seem keen on the model proposed by the Crawford panel on a single securities regulator, which would include a separate tribunal.

Until systemic reform occurs, any effort to reorient the enforcement approach becomes primarily a management challenge. Indeed, some critics argue, many of the problems of enforcement can be traced back to personnel, and that the situation could be improved by getting more of the right people in the right jobs.

“The most important area is case assessment,” says a former enforcement executive. “It’s easy to move cases to the investigation stage — and then they drown in litigation.”

The fear is closing a file too early — and missing a big case. So, too many files stay open too long. His solution: there needs to be good integration between investigators and litigators to ensure, at an early stage, that there’s a viable case. And there needs to be more senior positions in case assessment. Case assessment is often an entry-level job. The glamour is in investigations and litigation, so young lawyers that are hired for case assessment aspire to move up to the other areas.

“The bottom line is you join the investigator and the litigator at the hip and make them accountable,” suggests the former enforcement executive.

The trick is making commission staff accountable outside of the often insular enforcement department. Typically, there is tension between a commission’s executives and its enforcement department. The executives want cases brought to court more quickly to show they are getting tough, whereas enforcement staff want to be 150% convinced they can win before they bring a case, making them cautious and ultra-thorough.

One way to build more accountability, the ex-enforcer proposes, could be to create a new vice chairman-level position to oversee enforcement, leaving the enforcement director to handle more of the day-to-day management of the branch.

Indeed, the federal government appears to believe that human resource issues are one of the reasons for the failure of the RCMP’s integrated market enforcement teams to produce better results.

In the latest federal budget, it proposes to appoint a “senior expert advisor” to the RCMP’s IMETs to develop a plan to improve the effectiveness of its resource allocation and usage. Once that plan is in place, Ottawa will add $10 million to the IMETs’ current $30-million annual budget.

Technology offers another way to improve the process. Paul Bourque, senior vice president of member regulation at the Investment Dealers Association of Canada, says the IDA is trying to speed up its enforcement activities with the introduction of a new electronic document-management system. The upgrade should reduce the time it takes to complete procedural tasks, such as making disclosure to a defendant, or moving a file from one stage of the process to another, such as going from investigation to prosecution.

The IDA system aims to be a Google-style search engine for enforcement files. It will scan every document associated with a case and convert the information into a searchable database, says Alex Popovic, IDA vice president of enforcement. Having all of a case’s documents in an electronic format makes it significantly easier to access information, then share, process and produce it as needed in the course of a prosecution.

For now, Popovic says, the IDA is starting to use the system for cases that have at least two banker’s boxes worth of documents, but it may eventually be used in all cases.

Apart from using better technology, Popovic says there is more that policy-makers could be doing to enhance the ability of enforcers to do their jobs, such as giving more power to compel evidence from third parties and imposing stricter time limits on orders to produce documents.

Perhaps the most pressing issue, he suggests, is improving the ability to share information among jurisdictions. Currently, mutual legal assistance treaties are the only way jurisdictions can share information. Popovic says that some jurisdictions just drop such requests in the bottom of their “in basket” and take forever to respond.

IMET officials have also complained that investigations often get bogged down by witnesses refusing to co-operate with them.

“At the end of the day, it’s the system that needs to be changed,” Popovic says. “Some of the tools that we see in the U.S., and even in Britain, that we don’t have would provide a bigger impetus to change.”

The Cory/Pilkington paper considered whether it’s time for a return to the grand jury system in Canada, which seems to be used to great effect in the U.S. to propel investigations. But the paper recommends against the idea, noting that the procedural traditions and constitutional protections are so different between Canada and the U.S. that it doesn’t make sense to emulate the U.S. model.

Sibold says the Canadian system’s image suffers by comparison to the U.S. because the cultural context is very different. “The U.S. is a very law-and-order society,” he says. And not just in the securities area. With everything from capital punishment and high incarceration rates to three-strike criminal laws and mandatory sentencing guidelines, the U.S. takes punishment much more seriously than does Canada.

Sibold says it will take legislation, such as minimum sentences for securities offences, for Canada to be comparable to the U.S. Canada has not adopted such an approach to violent crime — let alone white-collar crime — so it’s not clear that Canadians truly want to go down that road.

As the Cory/Pilkington paper notes: “The real challenge, in our view, will be one of political leadership and willingness to address the issues in the best interests of the country as a whole.”

Given the size of the challenge, it will probably be many years before Canada has a reputation as being truly effective at securities law
enforcement. IE