Capital Markets Modernization Taskforce Recommendations – Modernizing Enforcement and Enhancing Investor Protection
Capital Markets Modernization Taskforce Recommendations – Modernizing Enforcement and Enhancing Investor Protection
The Capital Markets Modernization Taskforce (the “Taskforce”) issued its Final Report in January 2021 (the “Final Report”). McMillan LLP was one of the more than 130 stakeholders who provided submissions to the Taskforce about various proposals in the Consultation Report, July 2020. The Final Report sets out over 70 recommendations to modernize the Ontario regulatory framework for capital markets.
McMillan is authoring a number of articles to assist its clients in understanding and contextualizing the Final Report. This article focuses on recommendations in the Final Report dealing with modernizing enforcement and enhancing investor protection. McMillan’s lawyers often engage with such matters when interacting with the Ontario Securities Commission’s Enforcement Branch and other Commission branches tasked with investor protection. The Taskforce’s recommendations may or may not ultimately be adopted through legislation or regulatory change. Below, we address some of the more salient enforcement recommendations made by the Taskforce and, in some instances, point to highlights and challenges that remain.
Increased Penalties And Disgorgement
The Taskforce recommends increasing the maximum administrative monetary penalty from $1 million to $5 million for administrative offences and increasing the available fine for quasi-criminal offences in the provincial courts from $1 million to $10 million.
The $1 million maximum penalty amounts have not been increased since 2003. The Taskforce notes that it is necessary to avoid having sizeable registered firms or other very large entities treating breaches of securities law as a cost of doing business, which a low maximum penalty permits.
In recent years, the disgorgement elements of remedies imposed by the Commission have often outweighed the amount of the administrative monetary penalties imposed. The Taskforce also addressed disgorgement in the Final Report. The Taskforce the use of funds collected through the disgorgement remedy. The Taskforce has recommended that amounts collected by the Commission pursuant to disgorgement orders be distributed to harmed investors in a court supervised process in cases where there is sufficient evidence to establish that investors suffered direct financial losses.
In addition to the rationale provided by the Taskforce in its Final Report, a proposed statutory disgorgement distribution process may clarify issues concerning double recovery that may arise from the remedy. These issues may result if an investor receives monies both through a disgorgement process and a civil action, such as a class action, for the same wrong. In any event, the prospect of funds being allocated to affected parties rather than solely collected by the Commission is preferable from a public policy perspective.
Enhanced Freezing And Seizure Powers
The Taskforce has recommended providing the Commission with more effective powers to freeze, seize or otherwise preserve property, including property transferred to family members or third parties below fair market value.
The concern highlighted by the Taskforce is the historic difficulty that the Commission has had collecting payment for sanctions against non-market participants.
The Taskforce purports to make recommendations based on recent amendments to the British Columbia Securities Act. It should be noted, however, that those recent amendments in British Columbia have not yet been tested in court.
Modernizing Investigative Tools
The Taskforce has also made recommendations about information gathering. The Taskforce has proposed increased use of production orders. While it is certainly fair for regulatory and investigatory staff to seek tools that are effective in the modern digital age, we have concerns regarding the proposed amendments to the scope of production orders.
In particular, the proposed obligation to “prepare and produce” information for use by Enforcement Branch Commission staff and the imposition of a requirement to find and gather documents is very broad.
There is comparable “prepare and produce” language in recent amendments to the British Columbia Securities Act. The amendments appear to require parties to create documents or present information in a particular way. However, we have not seen any legislative debate whatsoever considering the propriety of these amendments.
If this recommendation is adopted, we would expect legislators will be careful to avoid imposing obligations on parties that could be contrary to their Charter rights or create offences where none should exist.
Data Delivery Standards To Ensure The Preservation Of Evidence And Address Assertions of Privilege
We are glad to observe that the Taskforce has expressly addressed the concept of preservation of privilege. Privilege claims over documents in Canada constitute the exercise of a quasi-constitutional right. We agree that the preservation of privilege is an important recommendation made by the Taskforce.
The Taskforce has recommended that the Commission have the power to make future rules on the process for addressing assertions of privilege in prosecutions and investigations, and resolving challenges to such assertions. The Taskforce has recommended that such proposed rules would be subject to the usual public comment and ministerial approval process, and would ensure that the process and procedures align, for example, with current (and future) requirements under the common law or Law Society of Ontario guidelines on dealing with privilege.
New Offence Regarding Misleading Statements About Public Companies
The Taskforce has recommended enacting a new prohibition on making misleading or untrue statements about public companies. The proposed prohibition would target “short and distort” campaigns and “pump and dump” schemes where unsubstantiated statements are made with misleading or false information to intentionally or recklessly affect share price.
We agree with the Taskforce that the advent of technology, including the use of on-line investor forums and social media, has changed the nature and tactics used in disinformation campaigns carried out for financial gain. However, we do not think the addition of a specific provision is either necessary or the most effective way to address the damage that may result to public companies or the capital markets by disinformation campaigns.
The Ontario Securities Act prohibits making a materially misleading or untrue statement in information submitted to the Commission or in documents required to be filed under Ontario securities laws; making a materially misleading or untrue statement reasonably expected to have a significant effect on the market price or value; and engaging or participating in any course of conduct resulting in or contributing to a misleading appearance of trading activity or an artificial security price.
It is not apparent that an additional prohibition would either increase prosecutions of those responsible for disinformation schemes or result in greater deterrence.
The greater issue public companies face during a disinformation campaign is the immediate pressure to rebut allegations in a public forum. In our view, other approaches to address the issue would improve capital markets regulation, such as a private right of action for target companies or a regulatory tool permitting real-time Commission intervention.
We support the Taskforce’s direction to limit the prohibition to intentional or reckless conduct, to avoid capturing market analysts publishing views in good faith.
The Taskforce notes that British Columbia recently enacted legislation combating disinformation schemes. In our view, the British Columbia prohibition appears to be overly broad on its face. The British Columbia prohibition captures “promotional activity”. It does not include an element of knowledge or recklessness, nor any materiality requirement. We expect future decisions of the British Columbia Securities Commission will clarify its scope and interpretation.
Investigative Tools To Block Or Remove Websites And Social Media Sites
The Taskforce has made a recommendation that the Commission be given additional tools to have statutory authority to direct a person or company to remove or block a website or its content where there is evidence of a breach of, contravention of, or non-compliance with securities law. The Consultation Report did not seek comments from the public regarding this recommendation.
The purpose of empowering the Commission to grant such an order is sensible in light of the prevalence of online scams which threaten to harm Ontario investors. Nonetheless, entities operating websites will often be located outside the province of Ontario, which raises jurisdictional and enforcement issues.
Greater Rights For Persons or Companies Directly Affected By A Commission Investigation or Examination
We are glad to see that the Taskforce recommends an increase in transparency and greater rights for persons or companies directly affected by an OSC investigation. The Taskforce has recommended the publication of guidance by Commission enforcement staff. This recommendation reflects interactions that the Enforcement Branch have had with some stakeholders, and guidance that the Commission is in the process of finalizing.
The end of an Enforcement Branch investigation is signalled by the service of an Enforcement Notice. It is a specific notice provided to parties who are likely to become the subject of an enforcement proceeding at the Commission. It provides for the submission of additional material and an opportunity for settlement. The Taskforce has recommended that an Enforcement Notice be sent at least three weeks in advance of public proceedings being initiated
We would prefer a more nuanced approach to timing of a Statement of Allegations after the delivery of an Enforcement Notice. While Enforcement Branch staff should have every ability to move with due dispatch if there has been a breach of securities law, limiting such timing to three weeks without any consideration of context presents hurdles to achieving a settlement that could benefit both private parties and the public. This is particularly the case when some investigators have historically avoided discussing settlement during their investigation at an earlier stage. There may also be instances where a three week period will obviously be unhelpful.
Confidentiality Exceptions Relating To Investigations
It is a common occurrence for a summons issued to a specific individual within an organization to lead to institutional challenges in response. The current limitations of confidentiality arising from investigations (and summonses issued in relation thereto), often result in confusion and inefficiency in responding to Enforcement Branch inquiries.
Picture, for example, a CEO receiving a summons requiring the production of information that she requires the help of her finance department to collect. Another example is where an issuer feels that it must disclose the state or existence of a Commission investigation to a financial regulatory authority. Yet another is where an issuer may need to contact its insurer.
The Taskforce has rather sensibly recommended that Enforcement Staff have the power to make decisions to allow disclosure in certain instances. We echo the Taskforce’s view that this recommendation may assist in sound corporate governance where additional disclosure would not compromise the investigation (which in our experience is often the case).
Confirm That Parties Who Comply With A Summons Will Not Be In Breach Of Contract
In another sensible recommendation, the Taskforce recommends clarifying the scope of protection provided to a person complying with a summons to confirm that compliance is not the basis for a breach of contract.
A case recently brought before the Commission highlights the ambiguity as to whether compliance with a summons can lead to contractual liability to a third party. Clarity on whether compliance with a Commission is required at law and avoids contractual liability would be welcome.
Explicit Exemption From Freedom of Information Disclosures For Whistleblowing-Identifying Information
The Taskforce has recommended a statutory amendment to provide an explicit protection from disclosure for information subject to a request under the Freedom of Information and Protection of Privacy Act that would identify a whistleblower. This is a sensible recommendation. As the Taskforce points out, the recommendation is based on similar statutory amendments recently enacted in Alberta (one of only two other whistleblower jurisdictions in Canada) and is also consistent with the protection provided under U.S. Federal Law to whistleblowers who make disclosures to the Securities and Exchange Commission.
For more insights on the Final Report, please check out our comprehensive series of bulletins here.
 The Final Report can be retrieved from the Ontario government’s website.
 The Final Report, section 2.6.
 The Final Report, recommendation 58.
 The Final Report, recommendation 72.
 The Final Report, recommendation 55.
 The Final Report, recommendation 59.
 The Final Report, recommendation 61.
 The Final Report, recommendation 57.
 Section 122 of the Ontario Securities Act.
 Section 126.2 of the Ontario Securities Act.
 Section 126.1 of the Ontario Securities Act.
 The Final Report, recommendation 64.
 The Final Report, recommendation 68.
 The Final Report, recommendation 69.
 The Final Report, recommendation 65.
 B (Re), 2020 ONSEC 21.
 The Final Report, recommendation 74.
A Cautionary Note
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2021
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