A handful of proposals designed to invigorate enforcement at the Ontario Securities Commission have attracted both vehement supporters and detractors. In an unusual move, the provincial regulator’s former head of enforcement has turned up among the latter.
This past October, the OSC had proposed a series of planned changes to its enforcement procedures, designed to boost the productivity of its enforcement efforts by eliciting more co-operation and speeding up settlements. Among these initiatives, the most controversial has proved to be its proposal to start allowing settlement agreements in which the accused can agree to settle a charge without admitting or denying the conduct alleged by the regulator (so-called “‘no contest’ settlements”).
Early on, a group of prominent defence counsellors had strongly supported the proposal to allow “no contest” settlements — arguing that this will remove one of the central impediments to quick settlements — the reluctance of defendants to admit to conduct that could come back to bite them in a subsequent civil suit. Supporters of the OSC’s proposal claim that “no contest” settlements would allow defendants to resolve allegations against them more quickly and get on with their lives, thereby boosting the number of cases that enforcement can take on.
Plaintiffs’ counsel, and some investor advocates, have been just as adamant that the proposal is a bad one, primarily because the use of such settlements would make it tougher to pursue civil cases against securities-law violators and, as a result, it would be harder for investors to get any restitution in cases in which they have been harmed.
Indeed, the topic has aroused so much interest from both sides that the OSC extended the comment period on the initiative (from mid-December to mid-January), and it has promised to hold a public hearing on the issue (which has yet to be scheduled, but is expected to take place at some point next month).
The deadline for the extended comment period falls just after Investment Executive’s print deadline, which means that there could still be interesting, influential submissions filed after IE goes to press. In the meantime, the most intriguing comment letter so far comes from Mike Watson, formerly the OSC’s enforcement chief, who is strongly against the plans of his former colleagues.
Watson, who was head of OSC enforcement from 1999 to 2008, indicates in his letter that he is against the use of “no contest” settlements for two basic reasons, one practical and the other, principled. In practical terms, Watson argues, the introduction of “no contest” settlements probably won’t lead to the productivity gains being sought by the OSC with this move. And, even if it did, he suggests, it’s just not the right thing to do.
Watson maintains that the reality is that “no contest” settlements will not actually save the OSC time and effort: “Currently, anyone who works on enforcement settlements will confirm that the vast majority of time spent on settlement discussions is spent on negotiating the wording. If staff believe this step in the process will be avoided with a ‘no contest’ settlement, they are mistaken.”
Rather, Watson suggests, if those accused of securities-law violations are going to agree to “neither admit nor deny” certain facts as a part of a settlement, they will be very careful about what they are seen to be not denying; thus, he believes, they will insist on agreeing to the wording of the allegations against them. As a result, he suggests, the intensity of negotiations over the wording of these sorts of deals will not change.
Watson says that staff of the U.S. Securities and Exchange Commission, which routinely uses “no contest” settlements, spend as much time negotiating the wording of their deals as OSC staff spend negotiating settlements in which the accused must admit to certain facts.
“Some SEC cases,” Watson notes, “have taken as long as two years to resolve ‘no contest’ settlement wording.”
That said, even if there are great efficiency gains to be made by introducing “no contest” settlements, Watson argues, they shouldn’t be used — on principle.
“It is the foundation of our justice system that there should be no punishment without guilt,” Watson’s letter notes. “In a ‘no contest’ settlement, guilt is never established.”
Already, OSC tribunals often agonize over whether the proposed penalties agreed to in a settlement are appropriate, given the facts agreed upon. Watson points out that tribunals won’t be able to make that judgment at all without some facts to rely on. (And regulators in other provinces won’t have any basis for reciprocal orders, either.)
Moreover, the sanctions themselves will lose some of their value, Watson suggests. If the offenders don’t have to admit to any wrongdoing, then the deterrent effect of OSC sanctions will be lost, as people will be able to settle cases by claiming that they did so for expediency, not because they did anything wrong. And that would mean that violators don’t have to take responsibility for their behaviour.
As well, Watson suggests, “no contest” settlements will make it tougher for other participants in the securities industry to learn what sort of conduct the OSC has decided is offside if there are no facts to spell this out — so the educational effect of enforcement will also be lost.
Ultimately, Watson concludes: “It would be sad to see the OSC sacrifice principle in the name of an efficiency that probably is non-existent.” IE