Securities enforcement activity on the rise

The CSA report, which captures enforcement activity by regulators across the country, indicates that a total of 145 cases were concluded during the past year, up from 105 cases in 2014 and 133 in 2013.

Of these concluded cases, 52% were resolved in a contested hearing before a regulatory tribunal; 24% were settled; and the remaining 24% were wrapped up in court.

Compared with the previous year, regulators’ use of courts increased notably. In 2014, just 13% of cases were decided in court, and 56% were heard by a tribunal and 31% were settled.

But it’s not the recent volume of cases that regulators are handling that demonstrates their recent progress. Securities authorities launched only 108 new proceedings in 2015, which is in line with the previous year and continues a downward trend in that statistic over the past few years.

However, in the past year, the penalties that regulators are levying and the investor compensation being sought are notably larger. In 2015, the CSA ordered almost $250 million in combined monetary sanctions and disgorgement – $138.3 million in fines and penalties, and $111.7 million in disgorgement and restitution.

These amounts are more than double the total ordered in 2014, and they surpass the previous high mark in 2009, when the regulators handed out slightly less than $246 million in combined monetary sanctions and investor compensation orders.

Typically, these numbers can be skewed by one or two very large cases. For example, in 2009, more than $100 million of the monetary sanctions were a result of proceedings against the brokerage firms involved in the freezing of the non-bank asset-backed commercial paper market; and more than $68 million of the investor compensation comprised the settlement of an options backdating case.

By comparison, although there were a handful of significant cases that generated sanctions or disgorgement orders of more than $20 million in 2015, no single case was big enough to account for the vast majority of the enforcement activity. How much of these record monetary sanctions and compensation orders from last year will be paid remains to be seen, as regulators don’t have a great track record. That said, the data do show that regulators are prepared to order large amounts against securities law violators.

In addition, the latest CSA report reveals that regulators’ use of protective orders, such as cease-trade orders and asset freezes, also rose in 2015. The regulators issued 52 interim cease-trade and asset-freeze orders, up from 35 in each of the two previous years.

Canadian regulators also secured more jail time for violators last year. The CSA report indicates that courts in Alberta, British Columbia, Manitoba, Ontario and Quebec handed out jail sentences for securities offences. In total, approximately 10 years of prison time was ordered against 15 people combined during the year, compared with the 7.5 years handed down in 2014.

Regulators also appear to be stepping up their enforcement efforts in qualitative ways, with innovations designed to improve their surveillance capabilities, enhance the flow of information from the industry to the regulators and improve co-ordination among CSA members.

For example, the Ontario Securities Commission (OSC) began cohabiting with the RCMP’s Integrated Market Enforcement Team during the past year to facilitate greater co-operation between law enforcement and securities regulators. The RCMP is planning to implement similar arrangements in Alberta and B.C. this year.

In the meantime, the OSC’s new no-contest settlement policy is starting to pay dividends by producing some significant enforcement cases. The regulator also is planning to introduce a whistleblower policy that would pay financial awards to tipsters who provide information that leads to significant enforcement sanctions.

The OSC is modelling its proposed whistleblower program on the successful policy pioneered by the U.S. Securities and Exchange Commission. However, no other provincial regulator has said it will follow suit. Already, Quebec’s Autorité des marchés financiers (AMF) has declared it will not. Instead, the AMF intends to promote a whistleblower policy that ensures confidentiality for tipsters, but doesn’t promise financial rewards.

In other areas, various regulators are taking steps to bolster their capabilities in ways that reflect local concerns. For example, the CSA report indicates that the B.C. Securities Commission has created a special unit to monitor offshore trading, while the AMF has developed new tools to trace links between those who pass along inside information and those who trade illegally on that information.

In addition, Alberta is stepping up its efficiency of enforcement with a new policy of automatically reciprocating decisions made by other regulators, so that a ban handed down in B.C. or Ontario also takes effect in Alberta automatically.

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