CSA Releases Annual Enforcement Report
On February 27, 2017, the Canadian Securities Administrators (“CSA”), the umbrella organization of the Canadian provincial capital markets regulators in Canada, released its ninth annual Enforcement Report, highlighting enforcement efforts undertaken by CSA members in 2016 (the “Report”). Overall, the CSA reported a year-over-year decrease in several of the CSA’s key enforcement statistics. However, as discussed below, the report emphasized a number of other important indicators, which are perhaps more important than basic year over year statistics. These include an increase in the usage of non-traditional enforcement tools such as whistleblowing and no-contest settlements, and an increase in CSA members’ enforcement efforts in the criminal courts.
While statistics traditionally used in these reports have limited utility, year-to-year comparisons do convey some aspects of the enforcement story.
Several changes in key enforcement statistics in 2016 as compared to 2015 are highlighted below:
- There were 109 proceedings concluded by CSA members in 2016, down from 145 proceedings concluded in 2015 (the CSA treats proceedings as concluded when a final decision has been issued or a settlement has been reached).
- The 109 proceedings concluded in 2016 were against 262 individual and corporate respondents, down from 350 respondents in 2015.
- There were 56 proceedings commenced by CSA members in 2016, down from 108 proceedings commenced in 2015 (the CSA classify a proceeding as “commenced” where a CSA member staff has filed a notice of hearing or statement of allegations, sworn an Information before the courts, or, in the case of Québec, served a statement of offence).
- The 56 proceedings commenced in 2016 were against 144 individual and corporate respondents, down from 266 respondents in 2015.
- Fines and administrative penalties ordered and voluntary payments made (pursuant to settlement agreements) amounted to $62.1 million in 2016, down from $138.3 million in 2015. This $62.1 million includes $13.9 million in voluntary payments made by several regulated entities pursuant to four significant no-contest settlements with the Ontario Securities Commission (“OSC”).
- Restitution and disgorgement ordered and investor compensation made (pursuant to settlement agreements) amounted to $349.7 million in 2016, up significantly from $111.7 million in 2015. This was in large part due to the $299.2 million in investor compensation that registrants undertook to return to investors pursuant to four no-contest settlements with the OSC, as compared to $8.0 million for the same number in 2015.
- Jail terms were handed down to 15 individuals under the applicable Securities Acts and 9 individuals under the Criminal Code in 2016, as compared to 15 individuals under the applicable Securities Acts and 4 individuals under the Criminal Code in 2015.
- 10 Criminal Code proceedings were commenced in 2016, up from 6 Criminal Code proceedings in 2015.
These statistics ought to be put into their proper context. The CSA’s enforcement data have shown significant variation from year to year in the past. For example, the 109 proceedings concluded against 262 respondents in 2016 is more in line with the same figure from 2014, where 105 proceedings were concluded against 255 respondents. The $62.1 million figure for fines, penalties and voluntary payments in 2016 is more in line with the same figure from 2014 – $58.2 million.
On the other hand, the number of proceedings commenced (56) and the number of respondents with proceedings commenced against them (144) were the lowest annual figures in their respective categories since the CSA published its first annual enforcement report in 2008. Further, even though the figure for restitution, disgorgement and compensation was $349.7 million in 2016, up from $111.7 million in 2015, the vast majority of this figure, being $299.2 million, were paid pursuant to four separate no-contest settlements between registrants and the OSC (the corresponding sub-set for 2015 was $8.0 million) and were therefore anomalies. Restitution, disgorgement and compensation figures for 2016 for the major types of offences – fraud, misconduct by registrants, and illegal distributions were all down from 2015.
In our view, the statistics traditionally touted by the CSA in their reports, while interesting for observing year-over-year trends, have marginal utility for measuring enforcement effectiveness and activity. The interesting story lies beyond the statistics.
Significantly, the data show that CSA members’ enforcement staff are shifting away from their traditional reliance on bringing enforcement proceedings in front of the securities commissions, to a more diversified approach involving greater use of non-traditional enforcement tools. Indicators of traditional enforcement efforts, such as proceedings brought and concluded, were down significantly in 2016, while indicators of non-traditional enforcement efforts, such as the number of no-contest settlements reached and the amount of voluntary payments and investor compensation paid pursuant to such settlements, were up significantly over the same period. At the same time, CSA members have ramped up their securities-related criminal law enforcement efforts, by both bringing and concluding more cases under the Criminal Code.
(a) Increased focus on prosecuting serious cases in the criminal courts
CSA members seem to be trying to prosecute more cases in the criminal courts. 2016 saw an increase in both the number of criminal proceedings commenced and concluded, as compared to 2015. The Report explains that this increase “follows CSA members’ efforts, in recent years, to collaborate more closely with law enforcement agencies.” Indeed, in 2016, the Alberta Securities Commission and the RCMP announced a Joint Serious Offences Team (“JSOT”) to jointly investigate and prosecute serious violations of the Securities Act (Alberta) and the Criminal Code, being the third province (after Ontario and Quebec) to do so. The Ontario JSOT has produced positive results since its inception, and continued to do so in 2016, resulting in successful prosecutions with jail time.
(b) Proactive enforcement
CSA members continue to use proactive enforcement measures, such as interim and asset freeze orders and reciprocal orders. Although the number of such orders made in 2016 (45) was roughly in line with such number in 2015 (52), 202 individuals and companies were made subject to such orders in 2016 as opposed to 122 individuals and companies in 2015. These figures are themselves up from the 35 orders made against 93 individuals and companies in 2014.
(c) Increased use of non-traditional enforcement tools
2016 also saw an increased use by CSA members of non-traditional enforcement tools, such as no-contest settlements and the introduction of whistleblowing initiatives. For example, $13.9 million in voluntary payments and $299.2 million in investor compensation were made by several regulated entities pursuant to the four no-contest settlements described above. Prior to 2016, there had been only two other no-contest settlements with the OSC since the program’s inception in 2014.
In addition, two CSA members also implemented whistleblowing initiatives in 2016 – the OSC and the Quebec Autorité des marchés financiers (“AMF”), whereby individuals may come forward with tips on possible violations of securities law in exchange for anti-reprisal protections (and in the case of Ontario, in exchange for a potential financial reward). Alberta has recently announced that it is considering implementing its own whistleblower program. While no statistics were provided in the Report, the Report does note that “[t]he whistleblower programs have already shown signs of early success, attracting several credible tips.”
Lastly, New Brunswick, Nova Scotia and Quebec implemented legislation for the automatic reciprocation of other securities regulatory authorities’ decisions, an initiative first introduced in Alberta in 2015. Such legislation provides that where any order imposing sanctions, conditions, restrictions or requirements is issued by another securities regulatory authority in Canada, the CSA member of the legislation’s jurisdiction is deemed to have made the same order, with any necessary modifications. For jurisdictions without such legislation (such as Ontario), the CSA member enforcement staff in such jurisdictions must bring a reciprocal proceeding in front of its securities regulatory tribunal to seek a reciprocal order. The passing of such legislation in these jurisdictions has at least partially led to an year-over-year decrease in the CSA’s reported statistics on the number of reciprocal orders made (63 in 2016 as opposed to 96 in 2015). Given that reciprocal orders are rarely, if ever, not made when sought, we believe the passing of such legislation to improve administrative efficiency is a positive development.
The securities enforcement environment in Canada is showing some signs of change and, perhaps, maturity. Canadian regulators are seeking increased cooperation between CSA members, the RCMP and Crown prosecutors in using the securities-related provisions of the Criminal Code to prosecute serious cases in front of the criminal courts, and are showing success with more creative approaches. As we have previously emphasized, we hope this reflects a trend away from relying on statistical sound bites or big dollar figures that make headlines. The CSA members should instead be using proactive measures such as interim and asset freeze orders to minimize and mitigate investor harm, staying engaged with the overall regulated community to make well-articulated rules that are understood and can be more easily self-enforced by the regulated community, focusing on prioritized enforcement goals, and building positive working relationships among regulators, enforcers, market participants and investors.