CSA releases Annual Enforcement Report for fiscal year 2020/2021
On June 22, 2021, the Canadian Securities Administrators (the CSA) released their annual Enforcement Report [PDF] for the 2020/2021 fiscal year. Building on the emphasis placed on collaboration and cooperation in recent years (as we have written), this year’s report emphasizes the fact that collaboration amongst regulators was particularly important in the face of the COVID-19 pandemic.
CSA and the COVID-19 pandemic
The report highlights that the initial urgency of the pandemic mandated a high degree of cooperation between CSA members and constant coordination with law enforcement, self-regulated organizations, federal counterparts and foreign regulators through the International Organization of Securities Commissions. Furthermore, throughout the pandemic, the CSA enforcement committee helped members investigate and prosecute multijurisdictional securities law violations by sharing tools and techniques.
According to the report, this year also saw a rise in wrongdoers who attempted to capitalize on uncertainty related to the pandemic and the economy. As we have written, this is consistent with the global surge in white-collar crimes seen in 2020 following dramatic increases in emergency aid and governmental programs. In response, the CSA participated in the North American Securities Administrators Association (NASAA) Sweep, which targeted COVID-19 related investments scams. This initiative involved disruption and prevention activities, such as reviewing and shutting down websites and advertisements promoting financial fraud.
Conducting virtual investigations and virtual hearings became the new norm for the CSA in 2020. Remote hearings enabled CSA members to continue the principles of credible deterrence in a timely and transparent manner. The digital format also made participation by respondents and witnesses easier and more affordable, particularly for those in remote locations.
CSA Report: Key enforcement results
Matter administration: During the 2020/2021 fiscal year, 52 matters were commenced, involving 133 respondents. The majority of these matters involved illegal distribution (49 respondents), misconduct by registrants (27 respondents) and fraud (23 respondents). The number of matters commenced was higher than 2019/2020 with 38 matters/86 respondents, but not as high as 2018/2019 with 68 matters/172 respondents. A total of 43 matters were concluded, involving 93 respondents. The number of matters concluded was lower than 2018/2019 and 2019/2020, with 94 matters/177 respondents and 75 matters/163 respondents, respectively. In addition, 124 enforcement referrals were provided between CSA members, with 36 instances of formal assistance provided by a CSA member to another member.
Sanctions and penalties: CSA members imposed $20 million in sanctions, administrative penalties and voluntary payments in 2020/2021. These sanctions are obtained or imposed for securities laws violations, for conduct contrary to the public interest, or settlements or through no-contest settlements. This number is lower than the past two years where sanctions imposed amounted to $77 million (2018/2019) and $45 million (2019/2020). This could be attributed to the lower number of concluded cases in the 2020/2021 fiscal year. Regulators and courts additionally ordered more than $42 million in restitution, compensation and disgorgement penalties. This number is higher than 2019/2020 ($13 million), but lower than 2018/2019 ($109 million).
Jail terms: Under the various securities acts, six individuals received total jail terms of 13.4 years, with sentences ranging from five months to 4.5 years. A total of six individuals were also found guilty by the courts under the Criminal Code, with one individual receiving a two year jail term.
Preventative measures: A total of 49 respondents received interim cease-trade and asset-freeze orders. A total of 22 asset-freeze orders were issued, representing freezes on over $19 million in bank accounts and property liens. This is lower than the two previous years, with 89 asset freeze orders in 2018/2019 and 84 in 2019/2020. To prevent further misconduct and harm, 38 individuals and 22 companies were banned from participating in the capital markets. Of these, 47% of individuals and 95% of companies were banned permanently. All other bans ranged from one to 20 years, with many bans extending until the full monetary sanction is paid.
Investor warnings and whistleblower programs: A total of 159 investor warnings and alerts were issued through CSA members’ websites, emails and social media channels, as well as on the CSA website. This number is up 140% compared to previous years, with 66 warnings issued in 2019/2020, and 46 warnings issued in 2018/2019. CSA members received a total of 461 whistleblower tips through their respective programs in 2020/2021. This number is higher than previous years with 291 tips in 2019/2020 and 156 tips in 2018/2019. Since the inception of the whistleblower program in Ontario, the OSC has awarded $8.6 million to whistleblowers on separate matters.
The 2020/2021 fiscal year appears to have had less securities regulatory activity than previous years, with fewer penalties and sanctions imposed, and fewer cases concluded. However, the number of new cases commenced is similar to previous years, and the number of whistleblower tips received and the investor warnings and alerts administered exceeds the number received in the previous year. The depressed number of cases concluded may be attributed to the courts and hearings being postponed during the COVID-19 pandemic. Notably, it is challenging to discern comprehensible trends compared to previous years given the effects of the pandemic.
As noted in the report, collaboration and cooperation among CSA members, and between CSA members and other agencies, were emphasized as essential throughout the COVID-19 pandemic. This collaboration between members is likely to remain after the pandemic, placing CSA members in a better position to investigate and prosecute multijurisdictional securities law violations.