The OSC plays nice

The practice of allowing people and firms to enter into settlement agreements in which they don’t have to admit to any wrongdoing is common in the U.S., where the accused will neither admit nor deny the allegations against them in most settlements. In this manner, they save themselves from admitting to conduct that could then be used against them in another proceeding, such as a civil trial that may follow an enforcement hearing.

However, in Canada, settlements have always included an admission of some wrongdoing. Now, the OSC is hoping that people in the securities industry that face an enforcement hearing will be more willing to resolve the case much more quickly — as long as regulatory settlements aren’t going to come back and bite them in court and don’t require them to admit to violations that could hurt their reputation.

The benefit of doing this, from the regulator’s point of view, is that it encourages more and faster settlements, which should then free enforcement staff to work their way through a greater volume of cases.

“The most important thing we’re trying to achieve is better protection for investors by resolving actions more quickly when they’re important to the marketplace,” says Tom Atkinson, director of enforcement with the OSC. “A lot of times, people are willing to settle with us. And the penalty isn’t the problem; it’s the admissions [they have to make] because of class-action suits. So, this is a way we can get our protective orders in place, deal with a lot more [cases] and direct our resources to protect investors better.”

In the OSC’s most recent fiscal year, enforcement was split almost evenly between settlements and cases that resulted in contested hearings. Of the 74 cases that were resolved during the year, 38 ended in settlements, 34 went to OSC hearings and two were resolved in court.

Compared with the Canadian Securities Administrators overall, the OSC has a slightly higher rate of settlements. In 2010, about 40% of cases for the CSA members had resulted in settlements.

Atkinson isn’t willing to speculate on how much enforcement activity may increase with the introduction of no-contest settlements. But he believes it will improve.

In addition to the new “no contest” settlement policy, the OSC also is introducing a new mechanism that will allow the regulator to offer immunity from enforcement action to those who self-report possible breaches of securities law or activities that are contrary to the public interest and co-operate with an investigation.

The OSC also is trying to improve the efficacy of its existing policy of providing credit for co-operation by both clarifying the process for self-reporting and improving the disclosure of the sort of credit that people receive for co-operating. The aim is to ensure that people know both how to come forward with information and what sort of benefit they can expect to receive as a result.

Atkinson says that this could include revealing how a penalty was reduced or the number of charges was limited due to the co-operation.

The OSC indicates that these changes to its existing program of giving credit for co-operation are being proposed because the program just hasn’t had much use since it was introduced back in 2002; thus, enforcement hasn’t benefited, either. Further, one of the primary reasons for the low level of take-up lies in uncertainty about the program, including what constitutes co-operation and what sort of benefit there is to co-operating. And the OSC also believes there’s a lack of precedent that potential collaborators can rely on to illustrate the merits of co-operation.

In addition to trying to cajole more co-operation, the OSC also is considering the introduction of the first whistleblower program at a Canadian securities regulator — including the possibility that it will offer financial compensation and/or protection from retaliation to prospective whistleblowers.

In the U.S., the Securities and Exchange Commission had launched a new whistleblower program in the summer of 2010 as part of the Dodd-Frank regulatory reform. As a result, the SEC has created a whistleblower office to administer its program, which can reward whistleblowers with 10%-30% of the money collected in cases in which at least $1 million in sanctions is ordered.

Atkinson notes that setting up such a program is a major undertaking, so for now, the OSC is studying the idea, and watching the SEC’s experience closely.

The OSC’s proposals are open for a 60-day comment period. IE