Task force proposes power boost

Proposals such as boosting the collection powers of the Ontario Securities Commission (OSC) and giving binding decision-making authority to the Ombudsman for Banking Services and Investments (OBSI) could prompt change at the national level, advocates say.

“If Ontario says [OBSI decisions] are going to be binding, that will put a lot of pressure on the other provinces to come along,” says Ermanno Pascutto, executive director of the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada), which has long advocated giving OBSI the power to make binding decisions.

Under OBSI’s current structure, registered firms can reject the ombudsman’s recommendations or offer lower settlement amounts, leaving investors with no further alternative but the courts. The task force proposed a framework that it says “would increase investor confidence in the capital markets by assuring that investors are compensated, when warranted, for financial losses that relate to the trading or advising activity of a registered firm.”

The task force recommended developing an independent internal appeals process for OBSI and raising the limit on OBSI’s compensation recommendations to $500,000 from the current $350,000. The new limit would be indexed to inflation.

Neil Gross, president of Toronto-based Component Strategies Consulting and chair of the OSC’s Investor Advisory Panel, says appeals of OBSI decisions should be available only in cases involving higher compensation amounts.

“It would be tragic to see the vast majority of these disputes that involve sums under $5,000 be weighed down with a lot of [appeals and review processes],” Gross says.

Pascutto agrees, noting that a right to appeal would turn OBSI “into a much more legalistic system” and make it tougher for investors to achieve redress.

“The whole system [would get] bogged down,” Pascutto says. “Let’s stick with the way [OBSI] works now, [give] it binding authority and get that important milestone achieved.”

Ian Russell, president and CEO of the Investment Industry Association of Canada, says the industry is “quite supportive” of giving OBSI binding powers and believes the task force has the political heft to “break the logjam” on the issue. He suggests a more powerful OBSI must have board representation from across the retail markets and a balance of member independence and market expertise.

“You want to make sure you’re coming up with the right number” when determining compensation amounts in binding decisions, Russell says.

Pascutto says he supports the proposed increase to OBSI’s compensation limit, but adds he “wouldn’t want to see people use [it] as a way to oppose the binding authority [proposal],” noting that the vast majority of OBSI cases involve modest amounts. “If you get into really large amounts, you’re probably going to see a lawyer,” Pascutto says.

The task force also proposed providing the OSC with the power “to freeze, seize or otherwise preserve property” when collecting monetary sanctions, especially in cases involving firms and individuals who are not market participants. This power would cover property transferred to family or friends at prices below fair market value to shield that property from the OSC.

Furthermore, the proposal would allow Ontario to refuse to issue or renew driver’s licences or licence plates to people who have failed to pay monetary sanctions.

“It’s important that the regulators put energy into collection, and find creative ways [to do so],” Pascutto says. He adds that while regulators’ efforts at collections improved in recent years, the enforcement system remains “pretty weak.”

“We impose administrative penalties and fines that aren’t paid, and we don’t get convictions in the criminal courts,” Pascutto says.

The task force’s report also acknowledged that harmed investors have had challenges in receiving disgorged amounts. It recommends that courts be responsible for distributing these amounts to investors in cases “where there is sufficient evidence that [investors] have suffered direct financial harm.”

Poonam Puri, professor at Osgoode Hall Law School at York University in Toronto and co-founder and director of the Investor Protection Clinic, says this proposal would make getting money back easier for wronged investors.

“While [investors] welcome an OSC order sanctioning a bad actor, they [often] cannot afford the expensive civil litigation needed to get money back on their own,” Puri says. “The task force’s proposal will provide an easier path.”

The OSC recently used a court-appointed receiver to distribute disgorged funds in two test cases, although the regulator is not required to do so under the Ontario Securities Act.

Gross says there “is a compelling case” to be made for requiring disgorged funds go to harmed investors: “Disgorgement by its nature suggests ill-gotten gains. Where that has happened, justice cries out that the money be returned to the people who have been deprived.”

Other enforcement proposals included raising the maximum administrative penalty for failure to comply with securities law to $5 million per failure from $1 million; creating a new, more specific prohibition on making misleading or untrue statements about public companies; and making it easier for OSC staff to obtain documents and data.

The task force proposed curtailing other OSC enforcement powers, including limiting the regulator’s use of contempt proceedings.

The report also included many proposals that are in line with the Ontario government’s long-stated goal of reducing regulatory burden, such as streamlining reporting requirements and transitioning to full digital delivery of documents.

Puri sees no inherent conflict between burden reduction and investor protection, noting that regulators need to strike a balance: “Businesses requiring public capital cannot and should not be overburdened by the regulator. But, at the same time, there cannot be a Wild West without any protections for investors — and, in particular, retail investors.”

Comments on the task force’s recommendations are due Sept. 7, and the task force plans to issue its final recommendations by the end of the year.