Five year review committee final report reviewing the Securities Act (Ontario)

PART 6 ENFORCEMENT

Recommendation:

We considered whether the Commission should have any enforcement powers in addition to those currently in the Act. In particular, we asked whether the Commission should have the power to levy administrative fines and whether the range of public interest orders that the Commission can make should be expanded to include some of the orders that a court can make under section 128 of the Act. We considered these issues in the context of the following framework:
  • What New Powers Should the Commission Have?

  • Which Existing Powers of the Commission Should Be Expanded?

  • Which Existing Powers of the Court Should Be Expanded?

  • Freeze Orders, Investigation Costs, and Whistle-Blower Protection
Other Enforcement Matters: Confidentiality of Investigations, Fraud and Market Manipulation, Insider Trading, In the Draft Report, we made a number of recommendations for increased enforcement powers and related amendments to the Act, several of which have since been adopted in the 2002 Amendments.

Chapter 20 Overview

20.1 Introduction

There are a variety of enforcement methods in the Act to assist the Commission in carrying out its statutory mandate. The Commission may:

  • prosecute offences under section 122 of the Act;

  • exercise its public interest jurisdiction under section 127 of the Act; and

  • apply to the court for a declaration of non-compliance and a further order (or orders) of the court under section 128 of the Act.

Section 127 provides the Commission with a 'very wide' discretion to intervene in activities related to the Ontario capital markets when it is in the public interest to do so and is the most common method by which the Commission exercises its enforcement powers.441

In considering the enforcement-related matters raised in our Issues List and making our recommendations, the Committee has been guided by the following basic principles:

  • Primary Purpose of Enforcement Powers: As a regulator with a public interest jurisdiction, the Commission exercises its enforcement powers for the primary purposes of providing protection to investors and ensuring fair and efficient capital markets and confidence in their integrity.

  • Meaningful Powers: It is critical to the fulfilment of its mandate that the Commission be perceived as having meaningful powers that it is prepared to exercise in appropriate cases.

  • Deterrence: The purpose of an order under section 127 of the Act is 'to restrain future conduct that is likely to be prejudicial to the public interest in fair and efficient capital markets.442

  • Flexibility: The Commission should have available to it a sufficiently broad range of remedies so that it has the flexibility to design the appropriate remedy to address the particular circumstances of each case.

  • Inter-Jurisdictional Co-operation: The increasing globalization of the capital markets and rapid development of technology have resulted in a borderless marketplace. It is essential for securities and other regulatory authorities to co-operate in their information gathering, investigations and enforcement efforts.443 Such co-operation is facilitated where the Commission has effective and meaningful enforcement powers, having regard to national and international standards.

The Committee has also considered the enforcement powers of securities regulators in other provinces and in certain jurisdictions outside of Canada.444

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20.2 Background: The 1990 Proposals

In 1988, practical and legal deficiencies in the enforcement provisions of the Act prompted a full review of those provisions by the Commission. The proposed amendments to the Act resulting from this review were published for comment in 1990 (the '1990 Proposals').445 This was the first set of proposed revisions to the Commission's enforcement powers in 20 years, and was a response to considerable changes in the capital markets that had taken place in that intervening period. The 1990 Proposals also reflected a move to greater harmonization with investigation and enforcement powers of regulators in other jurisdictions, including British Columbia, Alberta and the U.S.446

Although work on the 1990 Proposals began in 1988, amendments to the legislation arising out of the 1990 Proposals were not incorporated into the Act until 1994. Since that time there has been a significant increase in retail investors' participation in the marketplace. The need for securities regulators to have meaningful and effective enforcement powers has never been greater.

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20.3 What Powers Do the Commission and the Court Currently Have?

The Commission's general enforcement powers are set out in Part XXII (Enforcement). The Commission may prosecute an offence by commencing quasi-criminal proceedings in the Ontario Court of Justice under section 122. In these circumstances the Commission may seek a penalty consisting of a fine or imprisonment or both. The Commission may also apply to the Superior Court of Justice for an order that may include one or more of the civil enforcement orders listed in subsection 128(3) or for the appointment of a receiver, trustee or liquidator under section 129. In addition, the Commission may commence administrative proceedings under section 127, seeking one or more of the orders provided for under subsection 127(1), which may be made in the public interest.

The provisions in Part XXII deal with:

  1. Prosecution of Offences

    Section 122 sets out what constitutes an offence under the Act and the penalties for the commission of an offence.

  2. Exercise of Public Interest Jurisdiction

    Section 127 lists the orders that may be made by the Commission, in the public interest. These are:

    • an order that a person's or company's registration or recognition under Ontario securities law be suspended, restricted, terminated or be subject to terms and conditions;

    • an order that trading in securities by or of a person or company cease;

    • an order that any exemptions in Ontario securities law do not apply to a person or company;

    • an order that a person resign as a director or officer of an issuer or be prohibited from becoming or acting as a director or officer of an issuer;

    • an order that a market participant submit to a review of his, her or its practices and institute such changes as may be ordered by the Commission;

    • if there has been non-compliance with Ontario securities law, an order that a release, report, preliminary prospectus, prospectus, return, financial statement, information circular, take-over bid circular, issuer bid circular, offering memorandum, proxy solicitation or any other document be provided or not be provided to a person or company or be amended; and

    • an order that a person or company be reprimanded.

    When the relevant sections of the 2002 Amendments are proclaimed into force, the Commission will also have the power, if it is in the public interest and if it determines that a person or company has contravened Ontario securities law, to:

    • order the person or company to pay an administrative fine, to a maximum of $1,000,000 per contravention; and

    • order a person or company to disgorge any profits made as a result of the contravention.

  3. Interim Preservation of Property

    Under section 126, the Commission has the authority to make an order for the interim preservation of property (a 'freeze' order).

  4. Payment of Costs

    Under section 127.1, the Commission may order a person or company to pay the costs of an investigation, or costs of or related to a hearing.

  5. Application to Court

    Under section 128, the Commission may apply to the court for a declaration that a person or company has not complied with Ontario securities law. If the court makes such a declaration, it may also make any order it considers appropriate. Subsection 128(3) contains a non-exhaustive list of orders that a court may make.447

  6. Appointment of Receiver

    Under section 129, the Commission may also apply to the court for the appointment of a receiver, receiver and manager, trustee or liquidator of all or any part of the property of any person or company.

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20.4 Constitutional and Policy Considerations with Respect to Powers of the Commission

The Committee has considered which of the court powers under subsection 128(3) of the Act, if any, may properly be conferred upon the Commission. In this regard, we have considered whether there may be any constitutional constraints on the extent to which the Commission's powers might be expanded.448

Under the Constitution Act, 1867, the provinces have the power to make laws in relation to the administration of justice in the province, including the creation of courts in the province.449 On the other hand, the judges of the superior, district and county courts in each province are appointed by the Governor General and their salaries are fixed and paid by the federal government.450 These provisions of the Constitution Act, 1867 have traditionally been interpreted to prevent provincial governments from conferring 'judicial' powers on provincial tribunals on the basis that such powers could only be exercised by federally appointed judges on the superior, district and county courts.451 This view with respect to powers of provincial tribunals has been liberalized over the years. In particular, courts have recognized the different functions of such tribunals in the context of their respective legislative schemes and developed a broader approach to the analysis of the validity of their powers. The Supreme Court of Canada has articulated a three-step test to determine whether a power conferred on a provincial tribunal violates the division of powers under the Constitution Act:452

  1. Does the challenged power broadly conform to the power or jurisdiction exercised by superior, district or county courts at the time of Confederation?

    • If not, then the power may be validly conferred on a tribunal.
    • If it does, then consider question number two.

  2. Is the function of the tribunal a judicial function (i.e., is the tribunal concerned with a private dispute that it is asked to adjudicate through the application of a recognized body of rules, in a fair and impartial manner)?

    • If much of the tribunal's activity does not involve settling private disputes between opposing parties, then the answer to this question may be 'no.' However, if the tribunal is primarily deciding questions of law or adjudicating private disputes, it may be regarded as exercising judicial powers.
    • If the tribunal does exercise such powers, then consider the third question.

  3. If the power of the tribunal is exercised in a judicial manner, does its function as a whole, in its entire institutional context, violate section 96?

    • Consider all of the powers of the tribunal. If the judicial power is incidental to the tribunal's administrative powers, then section 96 is not violated. If the judicial or adjudicative function is the sole or central function of the tribunal, the power is invalid.

The Commission's mandate is to regulate the securities industry in a manner that provides effective protection to investors while fostering fair and efficient capital markets and confidence in those markets. The Supreme Court of Canada has recognized the importance of this mandate, as well as the broad discretion of a securities regulator to determine what is in the public interest.453 It therefore appears likely that the courts would view the exercise by the Commission of one or more of the powers of the court under subsection 128(3) as being incidental to the Commission's administrative powers. However, this issue should be analyzed in the consideration of any proposed new powers for the Commission.

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Chapter 21 What New Powers Should the Commission Have?

We approached our analysis based on the principle that the Commission must have flexibility in the range of remedial sanctions it can impose. For example, there may be situations in which the removal of exemptions or a reprimand may not send a sufficiently strong deterrent message. In other cases, the imposition of a cease trade order may not be appropriate, as it may harm innocent shareholders of the issuer. There may be some circumstances where the imposition of an administrative fine would be the most appropriate sanction.

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21.1 Administrative Fine

At the time we issued the Draft Report, the Commission did not have the power to order payment of an administrative fine. We recommended that section 127 of the Act be amended to add a new provision authorizing the Commission, if in its opinion it is in the public interest and if it determines that a person or company has contravened Ontario securities law, to make an order requiring the person or company to pay an administrative fine of up to $1,000,000 per contravention. The Government of Ontario adopted this recommendation in the 2002 Amendments. Below, we explain why we made this recommendation.

  1. Other Jurisdictions

    The proposed new power of the Commission to impose an administrative fine is consistent with the power of other administrative bodies, including securities regulators in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec and Nova Scotia as well as in the U.K. The SEC also has this power, although it is exercisable in limited situations.454 The British Columbia, Alberta, Saskatchewan, Manitoba and Nova Scotia Acts empower their respective Commissions to order payment of an administrative fine where they determine that there has been a contravention of their Act, the regulations or a decision (and a written undertaking to the Commission or the Director under the Saskatchewan and Manitoba Acts), and it is in the public interest. Under the Quebec Act, the Commission may impose an administrative fine when it becomes aware of facts establishing a failure to discharge an obligation under that Act or the regulations. Similarly, the provisions in the applicable U.S. and U.K. legislation tie the imposition of an administrative fine to a finding that there has been a contravention. In addition, the TSX (through RS Inc.) and the IDA have the power to impose fines where there has been a violation of the applicable requirements.455

  2. Scope of Administrative Fine

    Giving the Commission the power to impose an administrative fine will enable it to tailor sanctions to suit the particular circumstances of a case. The administrative fine that the Commission is able to impose should not be viewed merely as a 'cost of doing business' or a licensing fee. The more egregious the conduct being sanctioned, the more important it is for the Commission to be able to send a strong signal to the marketplace. In our view, a maximum of $1,000,000 per contravention is sufficient to allow the Commission to send an appropriate deterrent message, having regard to, among other things, the gravity and impact of the conduct under consideration and the nature of the respondents that are the subject of the proceedings.

    Different approaches may be taken with respect to the application of administrative fine provisions. For example, fines may be tiered in different ways. This means that individuals may be subject to lower fines than corporate entities and fines may increase depending on the wilfulness of the conduct and the level of harm. We do not think that the administrative fine that may be imposed by the Commission should be tiered. In our view, setting a maximum amount of $1,000,000 per contravention gives the Commission the flexibility to take into account the particular circumstances of each case, including the gravity and impact of the conduct and the nature of the respondent.

    Another approach to the application of administrative fine provisions is to specify that the fine applies on a 'per contravention' or 'per violation' basis. This is the approach taken in the Alberta Act and the one which we recommended in the Draft Report.456 In our view, where the Commission finds that there have been separate and distinct contraventions of Ontario securities law, the ability to impose a fine with respect to each contravention allows it to match the sanction to the conduct and gives it the flexibility to sanction conduct which may be more egregious, particularly as evidenced by the number of contraventions. The Government of Ontario has adopted this recommendation in the administrative fine provision in the 2002 Amendments.457

  3. Circumstances in Which Administrative Fines Should Be Applied

    As is the case for securities regulators in the other Canadian jurisdictions referred to above, we recommended that the Commission's ability to impose an administrative fine should be exercisable only where there has been a contravention of Ontario securities law and it is in the public interest to impose such a fine. We are aware that there are other remedies available to the Commission which do not require there to have been a contravention of securities legislation but rather, simply a finding that the conduct is contrary to the public interest (for example, the revocation of registration). However, we recognize that the imposition of an administrative fine may be viewed as a different kind of remedy from the others currently listed in section 127 of the Act and that principles of natural justice are better served by tying the imposition of an administrative fine to a demonstrated breach of Ontario securities law. The Government of Ontario adopted this recommendation in the 2002 Amendments.458

    In the Draft Report, we strongly urged the Commission, in any reasons it gives when imposing an administrative fine, to give explicit guidance as to the matters it considered in determining that a fine should be imposed and the quantum of the fine. One commenter suggested that it would be of more assistance to the Commission and those counsel advising clients about sanctions, to have such principles set out in the Act, or at least in the Regulations.459 We understand that, outside of the comment process, others have also expressed concerns about consistency with respect to sanctions imposed by the Commission. Clearly, the Commission has the discretion to determine what is an appropriate sanction and would have to consider all the relevant circumstances of a case in determining this. However, it would be useful for the Commission to provide some form of guidance, such as a set of principles or guidelines, setting out the considerations that may be taken into account in determining the appropriate sanction to be applied in the context of administrative proceeding.460 We do not think that this should be limited to considerations that apply in ordering administrative fines, but rather such guidance should cover all sanctions available under section 127.

  4. Constitutional Issues

    While a number of administrative bodies, including securities regulators, have the power to impose an administrative fine, there may be some risk that an administrative fine of the magnitude recommended by this Committee may be challenged as being penal in nature, thereby having the effect of transforming the administrative nature of Commission proceedings, and possibly triggering constitutional, or even Charter concerns.461

    We are not aware of any decisions in which an administrative fine provided for in securities laws of other jurisdictions in Canada has been found to invoke Charter rights. In fact, in two cases in British Columbia, the administrative fine power has withstood challenge.462 In a British Columbia Supreme Court decision, the court stated that the introduction of administrative fines to the British Columbia Act did not change the whole character of that Act and that it remained a regulatory scheme and was not thereby transformed into a penal statute.463 In a more recent decision, the British Columbia Court of Appeal also found that the administrative fine provision in the British Columbia Act did not alter the basic character of that Act as regulatory legislation.464 In its decision, the Court of Appeal referred to the decision of the Supreme Court of Canada in the Asbestos case (which addressed the public interest jurisdiction of the Commission under section 127 of the Act). In considering the Asbestos decision, the British Columbia Court of Appeal noted that, while there was no administrative fine provision in the Act (in Ontario), such a fine fits within the class of sanctions discussed by Mr. Justice Iacobucci in Asbestos, where he stated:

    The enforcement techniques in the Act span a broad spectrum from purely regulatory or administrative sanctions to serious criminal penalties. The administrative sanctions are the most frequently used sanction and are grouped together in subsection 127 as 'Orders in the public interest.' Such orders are not punitive: Re Albino (1991), 14 O.S.C.B. 365. Rather, the purpose of an order under subsection 127 is to restrain future conduct that is likely to be prejudicial to the public interest in fair and efficient capital markets. The role of the OSC under subsection 127 is to protect the public interest by removing from the capital markets those whose past conduct is so abusive as to warrant apprehension of future conduct detrimental to the integrity of the capital markets: Re Mithras Management Ltd. (1990), 13 O.S.C.B. 1600. In contradistinction, it is for the courts to punish or remedy past conduct under subsections 122 and 128 of the Act respectively: see D. Johnston and K. Doyle Rockwell, Canadian Securities Regulation (2nd ed. 1998), at pp. 209-11.465

    We find support in the comments of the British Columbia Court of Appeal for our view that the power in securities legislation to impose an administrative fine is an appropriate administrative sanction.

    The majority of the comments that we received on this recommendation in the Draft Report were generally supportive. One commenter thought that the maximum fine should be higher.466 Some commenters made suggestions as to the structure and application of the administrative fine provision.467 There were also some commenters who disagreed with our recommendation.468 The concerns raised by these commenters included that such fines should be imposed by a judge, and that this power may not be constitutionally appropriate for provincial implementation. For the reasons discussed above and in Chapter 20 of this Report, we do not agree.

Recommendation:

We recommend that the Commission provide guidance, in the form of a set of principles or guidelines, setting out the considerations that may be taken into account in determining the appropriate sanction to be applied in the context of administrative proceedings under section 127 of the Act.


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21.2 Disgorgement of Profits

There may be cases in which the conduct in question has resulted in a financial gain to the person or company who has contravened Ontario securities law. In such cases, while other sanctions may also be appropriate, it seems inappropriate that such person or company should be able to retain any illegally obtained profits. An order for the disgorgement of such profits would serve to maximize the deterrent effect of the overall sanction.

The SEC has the power to order disgorgement and an accounting, both in the context of a cease and desist proceeding and in the context of an order for the payment of an administrative fine, and has adopted special rules to deal with this.469 As the primary purpose of such an order is to deprive a wrongdoer of ill-gotten gains, the amount of disgorgement that may be ordered is limited to the amount of the illegal profits.470 In the Draft Report we recommended that section 127 of the Act be amended to add a new provision authorizing the Commission, if in its opinion it is in the public interest and if it determines that a person or company has contravened Ontario securities law, to make an order requiring the person or company to disgorge any profits made as a result of the contravention. The Government of Ontario adopted our recommendation and included this power in the 2002 Amendments.471

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21.3 Application of Money Paid as Administrative Fine or Disgorged Profits

We considered how money paid to the Commission as an administrative fine or pursuant to a disgorgement order should be applied. In examining this issue in the Draft Report, we reviewed how the Act deals with monies paid pursuant to a settlement agreement.472 We also examined on a comparative basis how other provinces treat administrative fines. For this purpose, we would treat monies paid under a negotiated settlement agreement, paid as an administrative fine, or paid pursuant to a disgorgement order in an analogous fashion.

The Commission has the authority under the Act to retain for its own use the fees it charges and revenue generated from the exercise of a power or duty.473 The Minister of Finance can require the Commission to pay surplus funds that it accumulates into the Consolidated Revenue Fund, if doing so will not impair the capacity of the Commission to meet its financial and contractual commitments. Money received by the Commission as a payment to settle enforcement proceedings must be paid into the Consolidated Revenue Fund unless it is (a) to reimburse the Commission for costs incurred or to be incurred or (b) designated under the terms of the settlement for allocation to or for the benefit of third parties.474 Designated settlement payments received by the Commission are paid into a separate account and held in trust for the benefit of third parties.

The provinces take different approaches with respect to the application of administrative fines imposed by securities commissions. Alberta requires that the money received from administrative fines be used for 'endeavours or activities that ... enhance or may enhance the capital market in Alberta.475 British Columbia, Quebec and Saskatchewan generally direct that money received from administrative fines be used for the purpose of promoting knowledge of capital market participants (or, specifically, investor education).476

As we indicated in the Draft Report, we endorse the approach in the Act for dealing with money received from a negotiated settlement. We support taking the same approach with respect to money received pursuant to an administrative fine or a disgorgement order. It seems sensible to us that where harm has been done to the capital markets or investors have suffered losses, the Commission should have the flexibility to designate that monies paid by a respondent in the context of an enforcement proceeding be allocated for the benefit of third parties. This approach is also consistent with the legislative scheme of several of the other provinces. We are pleased that the Government of Ontario has adopted this recommendation in the 2002 Amendments, with its amended subsection 3.4(2) of the Act.477

We understand that settlement payments received by the Commission that are allocated to or for the benefit of third parties have historically been used for investor education purposes. While this is an appropriate use for such funds, there are other possible uses, including assisting investors who have been harmed by the contraventions that resulted in a payment to the Commission. We encourage the Commission to consider various ways in which third parties may be benefited, in light of the particular circumstances which gave rise to the settlement payment, administrative fine or disgorged profits. If the Commission determines that it would be appropriate to direct that money allocated to or for the benefit of third parties be used to compensate them for losses incurred by them, the Commission should adopt the SEC model of using a trustee to administer the disgorged funds.478

The majority of commenters were supportive of our recommendation to permit the Commission to order disgorgement. However, some commenters disagreed that the Commission should have the power to order disgorgement. One of the concerns identified was that the power gives rise to complex substantive and procedural issues relating to determinations of entitlement and quantum, including rights to participate in proceedings and to appeal determinations.479 We acknowledged, in the Draft Report, that there may be procedural concerns in connection with the power to order disgorgement of profits, including matters relating to the determination of entitlement to disgorged monies and the extent of such entitlement. We believe these concerns can be overcome and envisage that there will be a need for some mechanism to deal with them. For example, the SEC rules dealing with disgorgement payments include rules dealing with interest on amounts disgorged, the submission of a proposed plan of distribution, the contents of such a plan, giving notice of the plan and opportunity for comment, approving the plan, the administration of the plan, and rights to challenge an order of disgorgement.480 The Government of Ontario has provided, in the 2002 Amendments, that the Lieutenant Governor in Council have the power to make regulations in respect of the administration and distribution of amounts disgorged pursuant to a disgorgement order made by the Commission.481 We suggest that consideration be given to whether it would be appropriate for the Commission to have concurrent rule-making authority in this regard. Alternatively, the Commission could rely on its power under the Statutory Powers Procedure Act to make rules governing the practice and procedure before it.482 We note that the 2002 Amendments also include a provision that addresses participation in proceedings in which a disgorgement order may be made, by clarifying that there is no right to participate solely on the basis of having a claim against the respondent or an entitlement to receive any amount disgorged under the order.483

Recommendation:

We suggest that consideration be given to whether it would be appropriate for the Commission to have rule-making authority to deal with issues relating to the administration and distribution of money ordered by the Commission to be disgorged.


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21.4 Attribution Provision

Prior to the passage of the 2002 Amendments, the Act did not contain a general attribution provision that would make officers, directors and certain other persons liable for a corporation's breach of Ontario securities law if they authorized, permitted or acquiesced in the violation.484 However, under subsection 122(3) of the Act, every director and officer of a company or of a person other than an individual who authorizes, permits or acquiesces in the commission of an offence under the Act by the company or the person, is guilty of an offence and on conviction is liable to the same maximum fine and imprisonment term as under the general offence provision in subsection 122(1). This applies whether or not a charge has been laid or a finding of guilt has been made against the company or person in respect of the offence.

It is certainly possible that the attribution provision in subsection 122(3) is sufficiently broad to apply to any proceeding brought in connection with an alleged contravention of Ontario securities law. However, it may also be argued that, in light of the reference to the consequences on a conviction in such circumstances, this attribution section is applicable only in the context of a proceeding under section 122 of the Act. One of the commenters on the Committee's recommendation that the Commission have the power to order an administrative fine, expressed the concern that it is not clear, where a corporation has breached Ontario securities law, whether the administrative fine would also apply to officers and directors.485 We think that it is appropriate for the Act to contain a general attribution section, in order to clarify that the principle expressed in subsection 122(3) should apply in the context of any proceeding dealing with a breach of Ontario securities law and not just those under section 122. The 2002 Amendments include such a provision.486

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21.5 Breach of Undertaking

In many situations, persons or companies dealing with the Commission 'undertake' to the Commission to take certain action. Undertakings may be given in the ordinary course of dealings with the Commission and may be given to the Executive Director, a director or staff, depending on the circumstances. In a prospectus context, for example, undertakings may be given in connection with the filing of documents. In the enforcement context, an undertaking may be used as a term of settlement with respect to a matter that is the subject of an investigation or examination or an enforcement proceeding.

The Commission currently has no specific authority to enforce undertakings. The absence of clear authority in this regard might have an effect on the way in which certain persons view compliance with their undertakings.

The Committee is of the view that undertakings play a meaningful role in the enforcement process by giving the Commission the flexibility to accommodate particular circumstances and to achieve an outcome which may not otherwise be available through administrative proceedings. We also believe it is important that this flexibility be preserved, to the extent possible, in a manner that recognizes the gravity of the circumstances and ensures that an undertaking will be taken seriously. One way of accomplishing this is to make it an offence, under the Act, to breach an undertaking.

The Committee considered provisions under other securities legislation in Canada, which provide that it is an offence to breach an undertaking.487 Under the Quebec Act, the offence relates to undertakings given to the Quebec Securities Commission, while under the Alberta Act, it relates to written undertakings given to the Commission or the Executive Director, and under the Saskatchewan Act, it relates to written undertakings given to the Commission or the Director. There is no similar provision in the Act. The Committee recommends that the Act be amended to provide that the breach of a written undertaking to the Commission or the Executive Director is an offence. As a result, if such a breach were to occur, the Commission would then be in a position to make an order under section 127, prosecute with respect to the offence under section 122, or seek an order of the court under section 128 of the Act. The avenue chosen, if any, would depend on the nature and severity of the breach.

One commenter on this recommendation suggested that an undertaking that is subject to the proposed new offence provision should be expressly stated to be such an undertaking.488 We understand the concern to be that it should be clear that a particular statement is an undertaking and that a breach of that undertaking may be subject to enforcement and sanction. In order to avoid potential misunderstandings in this area, it might be helpful for the Commission to ensure that persons giving written undertakings to the Commission or the Executive Director are made aware that contravening or failing to fulfil such undertakings is an offence.

Recommendation:

We recommend that a new offence be created under section 122 of the Act, for failing to fulfil, or contravening, a written undertaking to the Commission or the Executive Director. We also recommend that the Commission ensure that persons giving written undertakings to the Commission or the Executive Director are made aware that contravening or failing to fulfil such undertakings is an offence.


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21.6 Restitution or Compensation Order

The Committee considered whether the Commission should have the power to order that a registrant repay to its clients all or any of the money paid by clients for securities purchased through the registrant where the registrant has engaged in misconduct vis-à-vis such clients.

  1. Commission's Authority

    The Commission has no authority under the Act to make a restitution or compensation order.489 This is consistent with the objective of regulatory legislation in general and the Commission's public interest jurisdiction, which is protective, not remedial.490 This is also consistent with the powers of securities commissions and regulatory authorities in all but one of the other provinces and territories in Canada and in the U.S. and Australia, none of which currently has the direct power to order restitution or compensation.

    We note, however, that there are two recent examples of regulatory authorities obtaining the power to order restitution:

    • The Manitoba Securities Commission has the power, in the course of an administrative hearing, to make an order of compensation for financial loss, up to a maximum of $100,000. The Commission must be able to determine the amount of the financial loss on the evidence and find that the contravention or failure to comply caused the loss in whole or in part. Duplication of proceedings (i.e., a civil claim) is prohibited.491

    • Under the Financial Services and Markets Act 2000 in the U.K. the FSA has the direct power to order restitution, in addition to the power to obtain a restitution order from the court.492

    These developments suggest a shift in the traditional notions that regulatory powers are not remedial. This is an evolving area and while we are of the view that it may not be necessary or appropriate for the Commission to have the power to order restitution at this time, particularly as it will have the power to order disgorgement, we realize that this may change. We recommend that the Commission monitor the exercise of these newly acquired powers in both Manitoba and the U.K., and consider the practical implications of the exercise of this power, before making a determination as to whether the Commission should seek the power to order restitution.

    Recommendation:

    We recommend that the Commission monitor the exercise by the Manitoba Securities Commission and the FSA of their respective new restitution powers and consider the practical implications of the exercise of this power, with a view to revisiting in the future whether a power to order restitution would be an appropriate remedy for the Commission.


  2. Authority of the Court under Section 128

    The Commission has the discretion under section 128 of the Act to apply to the court for a declaration that a person has not complied with or is not complying with Ontario securities law. In making such an order, the court may also order a wide range of remedies, including an order for compensation or restitution. We understand that the Commission has only once applied to the court for a restitution or compensation order.493 We encourage the Commission to consider exercising its discretion under that section to seek an order of the court for restitution or compensation in appropriate cases.

    We also suggest that consideration be given to another possible approach. One commenter on the Draft Report proposed as an alternative to a Commission power to order disgorgement, that section 128 of the Act be amended to permit any interested party to bring an application before the court for a restitution order.494 We think that this suggestion may have merit, but do not believe that the two remedies are mutually exclusive. We recommend that consideration be given to amending section 128 of the Act to permit investors, in certain circumstances, to apply to the court directly for an order for restitution or compensation, not as an alternative, but rather in addition to the disgorgement power under section 127. Of course, where both remedies are used, or potentially available, it will be important to ensure that there is no double recovery.

Recommendation:
  1. We encourage the Commission to consider exercising its discretion, in appropriate cases, to apply to the court under section 128 of the Act for a restitution or compensation order.

  2. We recommend that consideration be given to the desirability and implications of amending section 128 of the Act to permit investors, in certain circumstances, to apply to the court directly for an order for restitution or compensation.


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21.7 Complaint-Handling and Dispute Resolution

In our Issues List, we asked whether financial services regulators, including SROs, should have the ability to handle consumer complaints through ombudsman or arbitration programs. In the Draft Report, we looked at two systems: complaint-handling, which is a process that results in a non-binding recommendation for the resolution of a dispute; and dispute resolution, which is a process, such as arbitration, that results in a decision that is binding on both parties.

  1. National Complaint-Handling System

    In the Draft Report, we discussed the 'Financial Services OmbudSystem,' (now referred to as the 'Financial Services OmbudsNetwork'), which had been recently announced. As the OmbudsNetwork was not operational at the time we released the Draft Report, the Committee included recommendations as to essential characteristics for a complaint-handling system for the financial services industry. The financial services industry has now launched the OmbudsNetwork as a national complaint-handling system. The OmbudsNetwork consists of three components which together are consistent with the Committee's recommendations in the Draft Report.

    1. The Centre for Financial Services OmbudsNetwork (CFSO) - The CFSO provides a single contact point for access to the complaint-handling systems of financial services providers and ensures that complaints are channelled to the appropriate point.495 The CFSO will identify and promote industry best practices and develop standards relating to consumer services and complaint handling. The CFSO will also publish an annual report on the activities of the OmbudsNetwork. This report will include information about the nature and volume of incoming inquiries, referrals, the disposition of inquiries and other indicators of the OmbudsNetwork's performance.

    2. The complaint management procedures at the level of each financial services provider - All member firms have complaint-handling systems at the firm level. This is the first level of recourse for any consumer complaint or concern. If the consumer is not satisfied with the outcome at this level, they can take the complaint to the appropriate industry-level OmbudService.

    3. The industry-level OmbudServices - There are three industry level OmbudServices:

      1. the Ombudsman for Banking Services and Investments (OBSI) (sponsored by the Canadian Bankers Association, IDA, MFDA and IFIC);496

      2. the Canadian Life and Health Insurance OmbudService (CLHIO); and

      3. the General Insurance OmbudService (GIO).

      Each of these services is run by an independent board composed of a majority of directors who are independent of industry. The industry-level OmbudServices work with the consumer and the financial services provider to produce a report and non-binding recommendations. If appropriate, the OmbudService may recommend restitution or compensation.497 Names of the financial services providers that do not comply with the recommendations will be published. There is no charge for consumers to use the OmbudService. If a consumer is not satisfied with the outcome at the OmbudService level, they can go to a dispute resolution process such as arbitration or court.

    As we indicated in the Draft Report, it is important that this complaint-handling system be transparent, i.e., that the OmbudServices publish statistics relating to the use of their programs and particulars as to the resolution of complaints. We would expect that all of the OmbudServices will function similarly to the OBSI model and, at a minimum, publish statistics relating to the number and nature of complaints against each member, as well as descriptions of the complaints dealt with by the OmbudService.

    The Committee commends the industry for the progress it has made in establishing a national complaint-handling system for the financial services industry. We encourage the industry to rigorously monitor the system to ensure that it is working as intended. Following the first year of the system's operation, an independent evaluation should be conducted to assess its success. If the results are positive, the next step should be for the industry to consider establishing a dispute resolution system for the financial services industry on a similar, national basis.

    In the Draft Report, we also included a recommendation that the Commission make it a condition of recognition of an SRO that it require its members to participate in and be bound by any national complaint-handling system as well as any industry-sponsored dispute resolution program, where applicable, and that members be required to advise customers of the availability of such systems and programs. We continue to recommend this approach.

  2. IDA Arbitration Program

    In our Draft Report, we noted that the IDA had set up an arbitration program designed to assist clients in the recovery of money from dealers. The arbitration program is available, at the client's option, with respect to claims up to $100,000. Unless the parties otherwise agree, the proceedings are confidential and hearings are in private. The costs of the arbitration are generally shared equally by the parties and each party must bear its own legal and other costs. The advantages of this program are that it is less costly and formal than litigation in the courts and that it gives an investor the opportunity to recover money in a relatively quick fashion. The disadvantages are that it does involve a cost to the investor and may involve an imbalance of power, since the member firm is likely to have more resources than the investor and be in a better position to oppose the claim. In addition, we noted the absence of any statistical reporting by the IDA as to the types or number of cases that go to arbitration, or of the results of arbitration.

    In the Draft Report, we indicated our concern about the lack of transparency with respect to the IDA arbitration program and strongly encouraged the IDA and any other SROs that have or may be contemplating similar programs to, at a minimum:

    • require that their members advise customers of the availability of the arbitration or a similar program at the commencement of their relationship and at any subsequent point at which a complaint or dispute arises; and

    • publish, or otherwise make generally available, statistics relating to the use of such programs, including information as to the member involved in the arbitration, a description of the case, the outcome of the case and the amount of any monetary award made.498

    In its comments on the Draft Report, the IDA pointed out that its By-law 37.2, which has been in place since April 2000, requires that all IDA members provide the IDA alternative dispute resolution brochure to all new clients or whenever a written complaint has been received from a client. IDA By-law 37 was recently amended to reflect the appointment of the OBSI. The amendments mandate IDA members to participate in, co-operate with, and provide their clients with information on, the OBSI.499

    In response to our recommendation for enhanced transparency in relation to its arbitration program, the IDA undertook, in its comment letter, to develop a reporting format that does not create a disincentive to clients to seek arbitration, and that complies with all federal, provincial and territorial privacy laws. The Committee looks forward to the IDA's implementation of this commitment to enhanced transparency in this important area.

Recommendation:
  1. We recommend that, as a condition of its recognition of an SRO, the Commission should require the SRO to require its members to participate in and agree to be bound by any national complaint-handling system that is in place, as well as any industry-sponsored dispute resolution program that may be applicable. We favour transparency in connection with such programs and strongly encourage the publication of statistics relating to the use of the programs as well as particulars concerning the outcomes of cases or the resolution of complaints.

  2. We encourage the financial services industry to monitor the national complaint-handling system, in particular in the first year of its operation, to ensure that it is working as intended. Assuming that the system is successfully implemented, we recommend that the financial services industry then consider establishing a dispute resolution system on a similar, national basis.

  3. We strongly encourage SROs that have or may be contemplating alternative dispute resolution programs to, at a minimum, require their members to advise customers of the availability of such programs


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Chapter 22 Which Existing Powers of the Commission should be Expanded?

22.1 Order Resignation as Director or Officer; Prohibit from Becoming or Acting as Director, Officer, Mutual Fund Manager or Promoter

The Commission currently has the power, under paragraph 127(1)7, to order that a person resign one or more positions that he or she holds as director or officer of an issuer. Under paragraph 127(1)8, the Commission has the power to prohibit a person from becoming or acting as a director or officer of an issuer. The Committee considered:

  • whether these powers should remain limited in their application to directors or officers of issuers, or whether they should be expanded to include directors or officers of other market participants, such as registrants and mutual fund managers; and

  • whether the power to prohibit a person from becoming or acting as an officer or director should be expanded to include the power to prohibit a person or company from becoming or acting as a promoter or engaging in promotional activities in connection with the purchase or sale of securities of an issuer, and the power to prohibit a person or company from acting as a mutual fund manager.

In the Draft Report, we recommended that the power to order a person to resign or to prohibit a person from becoming or acting as an officer or director of an issuer should be expanded to permit the Commission to order a person to resign or to prohibit a person from becoming or acting as an officer or director of a registrant or as an officer or director of a manager of a mutual fund. Managers of mutual funds are not currently required to be registered and the Commission has no authority to prohibit a person or company from becoming or acting as a mutual fund manager. We also recommended that the Commission have this authority.

The Committee also considered whether the Commission should have the power to make an order prohibiting a person from becoming or acting as a promoter. While this is included as a power of the court, under paragraph 128(3)7 of the Act,500 we recommended that the Commission should also have this power, just as it has the power to prohibit a person from becoming or acting as a director or officer of an issuer.

In considering this issue we focused on the narrow definition of 'promoter' in the Act,501 which is directed mainly at the acts of founding, organizing or substantially reorganizing the business of an issuer. This definition focuses on the promoter's involvement in the formative stage of an issuer's development. Today, however, many issuers engage persons or companies to promote the purchase or sale of the issuer's securities. Where such activity is not related to the founding, organization or substantial reorganization of the business of an issuer, the Commission would have no authority to prohibit someone from carrying out such activity where it is found to be contrary to the public interest. In the Draft Report, we noted that the BCSC has the power to prohibit a person from engaging in this type of activity, which is captured in the definition of 'investor relations activities' in the British Columbia Act.502 The definition of 'investor relations activities' in the British Columbia Act does not include providing information in the ordinary course of business to promote the products or services of the issuer or to raise public awareness of the issuer, communications necessary for regulatory compliance, or communications in newspapers, magazines or business publications that are in general circulation. Further, it does not purport to deal with interactions with investors or the public that do not promote or could not be reasonably expected to promote the purchase or sale of securities of the issuer. We considered whether the existing definition of promoter under the Act should be expanded to include securities-related promotional activities. However, we concluded that this would not be appropriate, because we do not think that all of the responsibilities and potential liabilities associated with promoters should necessarily attach to persons or companies engaged in such activities.503 We went on to recommend that the Act include a definition of touting of securities or promotional activities, similar to the concept captured by the definition of 'investor relations activities' in the British Columbia Act, and the Commission have the power to prohibit a person or company from engaging in such activities where conduct contrary to the public interest can be demonstrated.504

We have considered our recommendation, in particular in light of the fact that on proclamation of the 2002 Amendments, the Act will include an anti-fraud and market manipulation provision.505 In our view, this new provision should be sufficiently broad to capture these types of promotional activities that are not in the public interest, and give the Commission the power to sanction such conduct appropriately.

Recommendation:

  1. We recommend that paragraph 127(1)7 of the Act be amended to authorize the Commission to order that a person resign one or more positions that the person holds as a director or officer of an issuer, registrant or manager of a mutual fund.

  2. We recommend that paragraph 127(1)8 of the Act be amended to authorize the Commission to order that:

    • a person be prohibited from becoming or acting as a director or officer of any issuer, registrant or manager of a mutual fund; and

    • a person or company be prohibited from becoming or acting as a manager of a mutual fund or as a promoter.506


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22.2 Compliance Order

  • Power to Enforce Compliance with Ontario Securities Law

    While the Commission currently has the power to make a number of orders that may be characterized as requiring compliance with the Act, these orders are directed to specific circumstances rather than applying more generally to situations that involve a contravention of Ontario securities law.507

    A general power to order compliance with Ontario securities law:

    • is consistent with the protective and preventative nature of the Commission's role in the exercise of its enforcement powers because it would give the Commission the authority to direct market participants to comply with or cease contravening Ontario securities law;

    • would permit the Commission to fashion a remedy that is tailored to a specific situation in circumstances where imposing a more severe sanction may not be appropriate. For example, there may be situations where the suspension of registration or a cease trade order may not be warranted, but it is still appropriate to apply a sanction, with a view to protecting investors and deterring similar conduct. In some cases, a reprimand by itself may not be sufficient or appropriate. A general power to order compliance would give the Commission the flexibility to order a person or company to take certain steps in order to comply with requirements under Ontario securities law, or to cease contravening Ontario securities law;

    • would lead to greater harmonization of the Commission's enforcement powers with those of other securities regulators. For example, the British Columbia and Saskatchewan Securities Commissions may each make an order that a person comply with or cease contravening the applicable Act, the regulations, a decision or by-law, rule or other regulatory instrument or policy.508 The Saskatchewan Securities Commission may also order that a person or company comply with or cease contravening a written undertaking made to the Commission or the Director. The SEC may order a person to cease and desist from committing or causing a violation of a provision under the applicable securities legislation, require a person to comply with applicable provisions, and require future compliance or steps to effect future compliance.509

    The Commission should have the power to make a general compliance order, similar to the power of the British Columbia and Saskatchewan Securities Commissions. In addition, we recommend that the Commission have the power, similar to that of the SEC, to order a person or company to comply in the future or to take steps to ensure future compliance. This would allow the Commission, where a compliance order is appropriate, to send a clear message as to what is expected in terms of future compliance.510

  • Power to Order Compliance with Direction, Decision, Order or Ruling of Recognized Self-Regulatory Organization or Exchange

    The provisions with respect to compliance orders in both the British Columbia and Saskatchewan Acts also authorize the respective securities commissions to order a person or company to comply with or cease contravening a direction, decision, order or ruling made pursuant to a by-law, rule or other regulatory instrument or policy of a recognized SRO or exchange.511 This extension of the power to order compliance is particularly helpful in assisting these recognized bodies to enforce their self-regulatory powers. We believe that the inclusion of a specific authority in this regard underscores the public interest aspect of compliance with such directions, decisions, orders or rulings. Such a power also reinforces the principle in the Act that the Commission should, subject to an appropriate system of supervision, use the enforcement capability and regulatory expertise of recognized SROs.512

    All of the commenters on these recommendations in the Draft Report supported them.

    Recommendation:

    We recommend that a new paragraph be created under subsection 127(1) of the Act, authorizing the Commission to order that a person or company:
    • comply with or cease contravening:

      1. Ontario securities law; or

      2. a direction, decision, order or ruling made under a by-law, rule or other regulatory Instrument or policy of a recognized SRO or exchange.

    • comply in the future or take steps to ensure future compliance with Ontario securities law, or a direction, decision, order or ruling made under a by-law, rule or other regulatory instrument or policy of a recognized SRO or exchange.
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22.3 Cease Trade

The Commission has the power under section 127 of the Act to make an order (a 'cease trade order') that trading in any securities by or of a person or company cease permanently or for a specified period.513

The scope of a Commission cease trade order is linked to the definition of 'trade,' which includes the sale or disposition of securities or acts in furtherance of a sale or disposition of securities. However, the definition of 'trade' or 'trading' in the Act specifically excludes a purchase of securities.514 This could result in a person or company subject to a cease trade order purchasing or accumulating securities during the cease trade period. Given the purpose of a cease trade order, this seems an illogical result. In our view, a cease trade order should apply to purchases of securities as well.

In order to ensure that cease trade orders serve their intended purpose, the Committee recommended, in the Draft Report, that paragraph 127(1)2 of the Act should be amended to provide that, for the purposes of a cease trade order, 'trading' in any securities includes the purchase of securities. This was generally supported by those who commented on this recommendation.515

Recommendation:

We recommend that paragraph 127(1)2 of the Act be amended to expressly provide that 'trading' in securities for purposes of that paragraph includes the purchase of securities.


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Chapter 23 Which Existing Powers of the Court Should Be Expanded?

23.1 Maximum Fine and Term of Imprisonment under Section 122 of the Act

In addition to the power under section 127 of the Act to make orders in the public interest, the Commission may also prosecute a contravention of the Act before the court under section 122. Under the general penalty provision applicable to all offences (without taking into account the changes enacted under the 2002 Amendments), on convicting a person under section 122 the court may impose a fine, imprisonment for a term of not more than two years, or both a fine and imprisonment. The maximum fine under section 122 is $1,000,000.516 In the case of a conviction for contravention of the insider trading or tipping provisions, the maximum fine increases to the greater of $1,000,000 and triple the profit made or loss avoided by the person or company by reason of the contravention.517

  1. Subsection 122(4) of the Act - 'By Reason of the Contravention'

    Subsection 122(4) of the Act sets out the applicable fine in the case of a conviction for contravention of the insider trading or tipping provisions of the Act. The meaning of the phrase 'by reason of the contravention' in subsection 122(4) has recently been called into question in a decision of the Ontario Superior Court.518 Depending on the disposition of this decision on appeal, it may be necessary to amend section 122 to clarify the language and its intent.

  2. Maximum Fine and Term of Imprisonment

    In the Draft Report, the Committee considered whether the maximum fine and imprisonment term provisions in section 122 should be increased. In doing so, we looked at similar provisions in securities legislation in other provinces and in the U.S.519 We also considered the importance of ensuring that the Commission's powers are meaningful and that the penalties sought or imposed by the court and the Commission have a sufficient deterrent effect. We were concerned that the maximum fine and term of imprisonment under section 122 were not sufficient and believed that a higher maximum in each case would be appropriate in relation to conduct that is particularly egregious.

    The last change to the general penalty provision under section 122 of the Act was made in 1987. At that time, the fine provision was increased from a maximum of $2,000 for an individual and $25,000 for a corporation, to a general maximum of $1,000,000. The maximum imprisonment term was increased from one year to two years. With the changes in the markets since that time, including the extent to which access to trading has opened up as a result of the Internet and other technological advances, there has been a corresponding increase in the opportunities for conduct that contravenes Ontario securities laws, as well as the number of investors (in particular, retail investors) who may be potential victims of such conduct. The Committee considered these developments in conjunction with the types of offences that have been prosecuted under section 122 as well as the types of sentences that have been imposed in the case of convictions under section 122. We also reviewed the imprisonment terms in securities legislation in certain other jurisdictions, in which the maximum terms range from three years to twenty years.520

    In our view, the maximum fine under the general penalty provision in the Act should be sufficiently large to be viewed as more than simply a licensing fee, so as to send a clear message that the conduct in question will not be tolerated. We therefore recommended in the Draft Report that the maximum fine under section 122 of the Act be increased from $1,000,000 to $5,000,000 and that this increase also be reflected in the provision for the maximum fine on a conviction for contravention of the insider trading or tipping provisions. Commenters were supportive of these recommendations in the Draft Report and these recommendations were adopted by the Government of Ontario in the 2002 Amendments.521

    A review of sentencing decisions in Ontario in cases that have been decided from 1988 (i.e., following the increase in the maximum term of imprisonment provided under section 122 from one to two years) to 1996, indicated an increase in the number of sentences that include an imprisonment term, as compared with the 40-year period prior to 1988.522 The imprisonment terms imposed in the majority of these cases were under the maximum term of two years. As might be expected, the courts reserve imposition of the maximum term for what would be considered to be the worst conduct in the circumstances.523 A recent example of a significant imprisonment term imposed under section 122 is the Wall case,524 which involved a husband and wife who were charged with the distribution of and trading in securities contrary to Ontario securities law. In that case, the judge referred to the Reasons for Sentence in the Sisto Finance case525 for the authority that the maximum sentence ought to be reserved for the worst sort of offence by the worst sort of offender.526

    In view of developments in the marketplace over the past decade, we believe that where the conduct resulting in a conviction under section 122 is deliberate, egregious conduct that has caused serious harm to a significant number of investors, a court should have the flexibility to impose a monetary penalty and a term of imprisonment that adequately reflect the serious nature of the violations and the magnitude of the harm caused.

    Having considered the background and principles discussed above, we recommended in the Draft Report that the maximum imprisonment term which may be imposed on conviction for an offence under section 122 of the Act should be increased to a term of five years less one day. This would provide the court with sufficient flexibility to fashion appropriate sentences in serious cases, and to send a significant message of deterrence in such cases. The Government of Ontario adopted this recommendation in the 2002 Amendments.527

    Commenters on the Draft Report were generally supportive of this recommendation. However, one commenter was concerned that a sentence as significant as five years should carry with it the procedural protections that are afforded an accused charged with an indictable offence under the Criminal Code, and that such matters should be heard by the Superior Court of Justice, rather than the Ontario Court of Justice.528 This commenter also raised an issue relating to the significance of five years 'less a day.'

    The Committee recommended a maximum prison term of five years less a day, as this is the maximum that can be imposed without triggering the right to a jury trial under the Charter.529 We do not believe that a jury trial is appropriate for prosecutions under the Securities Act. Securities regulatory proceedings can be technical and complex and do not lend themselves well to jury trials.530 Currently, there is no right to a jury trial in the case of a prosecution under section 122; our recommendation to increase the maximum sentence does not take away any existing right. We also disagree that the right to have a preliminary inquiry should be included in the Act. We have no evidence that the current system is deficient in ensuring fair treatment of a person charged under section 122.

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23.2 Proposed Authority to Order Restitution

The Committee is aware that it may be difficult, for many reasons, including time and resource issues, for investors to recover financial losses incurred as a result of the commission of an offence under section 122 of the Act. This concern was raised in a recent decision of the court in connection with a prosecution under section 122. In that case the judge, in sentencing the respondents on their convictions for offences under the Act, noted with regret that the investors who were victims of the improper conduct in that case would have to pursue costly and complex litigation to recover their funds. In his reasons for sentence the judge recommended that the Act or the Provincial Offences Act be amended to permit the court hearing a matter under section 122 to order restitution.531 We agree, and recommended in the Draft Report that section 122 of the Act contain a power for the court to order restitution or compensation. We note that such a provision is found in the Alberta Act.532 This would serve the important objectives of facilitating reparation for harm done to investors by providing an inexpensive manner of recovering their losses and making the wrongdoer directly responsible for the harm that he or she caused.

We understand that there may be procedural issues in connection with the power to make an order for restitution or compensation. These issues may include such matters as the identification of victims, the determination and proof of victims' losses and the collection of the amounts ordered to be paid. However, these are matters that can be dealt with by the court, in its discretion. The legislation may also deal with the collection of amounts ordered to be paid, for example, by providing that a restitution or compensation order may be enforced in the same manner as a judgment of the superior court.

Several commenters on the Draft Report agreed with our recommendation. One commenter disagreed, stating that this type of order is best left for a subsequent civil proceeding.533

Recommendation:

We recommend that section 122 of the Act be amended to include a provision permitting the Ontario Court of Justice to make an order, where appropriate, that the defendant compensate or make restitution to persons who have suffered a loss of property as a result of the commission of an offence by the defendant.


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Chapter 24 Other Enforcement Matters

24.1 Confidentiality under Section 16 of the Act

Section 16 of the Act prohibits a person or company from disclosing the nature or content of an order for an investigation or financial examination except to his or her or its own counsel or pursuant to an order of the Commission authorizing such disclosure.534 Under section 17, the Commission may make an order for disclosure of information referred to in section 16 where it considers that it would be in the public interest to do so. In response to the request for comments on the Issues List, one commenter suggested that the Committee should review the scope, constitutionality and appropriateness of section 16.535 We understood the concern to be that this provision in the Act is too restrictive and that, for example, a person could not discuss the existence of an investigation or examination or any other knowledge or involvement he or she may have with respect thereto, with his or her employer, an officer or director of the employer or any other person who is not the person's own counsel. In the Draft Report, we recommended that the Commission issue a policy statement providing some guidance on the scope of section 16. We also invited other suggestions in response to this issue. Two commenters echoed the concerns raised regarding section 16.536 One of these commenters also suggested that section 17 should be amended to address standing to bring an application for a disclosure order, and to provide an opportunity to be heard if an application is denied.537

The Committee considered these concerns and, in particular, whether the provision for confidentiality contained in section 16 is appropriate.

The purpose of section 16 is two fold:

  1. It protects the integrity of the investigation process. In the absence of such a provision, the Commission would have no control over the information that may be passed on regarding the investigation, including the fact that an investigation is being conducted. Public knowledge of such a fact or of particulars with respect to an investigation could, among other things:

    • prejudice the reputation of the person or company involved, before a decision is made to proceed with an enforcement proceeding; and

    • result in collusion among witnesses who may discuss their evidence and/or assert blanket defences.

  2. It provides statutory protections to a witness who provides information or documents pursuant to a summons under section 13 of the Act.538

    In this latter case, for example, an employee may be reluctant to provide information to staff of the Commission on a voluntary basis in the context of an investigation of potential securities violations committed by his or her employer. The employee may only be willing to provide such information pursuant to a summons under section 13. The confidentiality requirements in section 16 and the provisions of section 17 with respect to when disclosure may be authorized provide some comfort to persons who are compelled to provide information in such circumstances.

In our view, the confidentiality provision in section 16 is an important element of the investigation provisions in the Act and serves the above-noted objectives of ensuring the integrity of the investigation process and protecting persons who provide information to the Commission in the course of an investigation. It is therefore important that the Commission be aware of the particular circumstances in which disclosure is sought, in order to be in a position to properly weigh the relevant interests involved, i.e., the public interest in disclosure, against the interest in preserving the confidentiality of the investigatory process. This balancing is contemplated by section 17.

While we are sympathetic to the issues raised in this regard, we are concerned that taking away these important protections under section 16 may not be the appropriate response. We note that parties can make an application under section 17 for an order authorizing the disclosure of the information requested.539 As we recommended in the Draft Report, it might be helpful for the Commission to issue a policy statement providing interpretive guidance on the scope of the confidentiality provision in section 16 and clarifying the process for making an application under section 17. We believe that such a policy statement should be sufficient to provide the guidance necessary to clarify the process and address the issues raised, including the issue of standing to bring such an application.

Recommendation:

We recommend that the Commission issue a policy statement providing interpretive guidance on the scope of the confidentiality provision in section 16 of the Act and clarifying the process for making an application for disclosure under section 17 of the Act, including the issue of standing to bring such an application.


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24.2 The Need for an Anti-Fraud and Market Manipulation Provision

  1. Fraud and Market Manipulation

    In the Draft Report, we recommended that the Act be amended to expressly prohibit fraud and market manipulation. We noted that the Act did not contain an express prohibition against fraudulent activity or market manipulation, although securities legislation in many other jurisdictions includes fraud and market manipulation as specific contraventions against which securities regulators have the power to act.540

    Since the Commission does have the authority to deal with such conduct pursuant to its public interest jurisdiction under section 127, we considered in the Draft Report whether it was necessary to have a specific provision addressing such conduct. We concluded that (i) it should not be necessary for the Commission to rely on its public interest jurisdiction with respect to conduct that constitutes a fundamental abuse of the capital markets; and (ii) the prohibition of fraud and market manipulation is so fundamental that it should be enshrined in the Act.541 This would complement rather than detract from the broad authority of the Commission under section 127 to exercise its enforcement powers in the public interest. The Government of Ontario adopted our recommendation in the 2002 Amendments.542

    In connection with the adoption of rules on December 1, 2001, which create a framework for ATSs to operate in Canada, the CSA has created a set of basic common trading rules that would apply across all marketplaces.543 Part 3 of the Trading Rules contains a provision that prohibits market manipulation and fraudulent activity. 544In our view, such a provision properly belongs in the Act.545 When proclaimed in force, the 2002 Amendments will introduce an anti-fraud and market manipulation provision into the Act. Consequently, the Trading Rules will then need to be amended to provide that the anti-fraud and market manipulation rules in the Trading Rules will not apply in Ontario; the provision in the Act will instead apply. This will ensure that in those provinces that have these provisions in their Acts, including Ontario, the anti-fraud and market manipulation rules in the relevant Acts will apply, rather than those set out in the Trading Rules.

    We note that the Criminal Code contains prohibitions on certain manipulative and fraudulent practices affecting the public market generally or transactions on stock exchanges.546 We do not think this prevents including a prohibition on market manipulation and fraud in the Act.547 The Supreme Court of Canada has upheld duplicative provisions in federal and provincial legislation in a number of cases, including cases involving provisions of the Act, even where such provisions may potentially operate concurrently.548 Further, to the extent that a breach of the prohibition results in an offence, we do not think it is in 'pith and substance' criminal law. The courts have given broad scope to the provincial jurisdiction over securities regulation549 and have upheld provincial penal sanctions enacted for the purpose of enforcing provincial laws.550 We note that one of the express purposes of the Act is to 'provide protection to investors from unfair, improper or fraudulent practices' (emphasis added).551 In our view, the prohibition against market manipulation and fraud in the Act supports this mandate and fits properly within the overall scheme of securities regulation under the Act.

    All of those who commented on this recommendation in the Draft Report were generally supportive of it.

    Recommendation:

    We recommend that once the provisions of the 2002 Amendments are proclaimed into force, the CSA amend subsection 3.1(2) of National Instrument 23-101 Trading Rules to provide that the anti-fraud and market manipulation provisions in the Act will apply in Ontario.


  2. Misrepresentations

    Securities legislation in British Columbia, Alberta, Saskatchewan and Manitoba contains provisions that prohibit a person or company, with the intention of effecting a trade in a security or an exchange contract, from making a statement that they know or ought reasonably to know is a misrepresentation552 or is false, misleading or deceptive in a material manner.553 In the Draft Report,552 we recommended that the Act contain a similar prohibition. The Government of Ontario adopted this recommendation in the 2002 Amendments.554 We also recommended that this provision apply to any statements, whether written or oral. However, we noted that the provisions in the securities legislation in British Columbia, Alberta, Saskatchewan and Manitoba are directed at misrepresentations made 'with the intent of effecting a trade' in a security or contract, which qualification circumscribes the ambit of the prohibition. We therefore questioned the appropriateness of this qualification in the Draft Report. The majority of the commenters who addressed this issue agreed that the prohibition should not be limited to statements made 'with the intent of effecting a trade.555 We note that the new provision in the 2002 Amendments is drafted in a manner which is consistent with these views.

    The Draft Report did not contain suggested language for the recommended prohibition. In the absence of specific language, one commenter raised a concern with the potential breadth of the prohibition.556 We believe that the provision recently added to the Act in the 2002 Amendments to deal with misrepresentations addresses this concern.

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24.3 Insider Trading

The Act contains a prohibition against trading and tipping activity by persons or companies that are in a 'special relationship' with a reporting issuer, and requires insiders to report their trading activity. Specifically, the Act prohibits:

  • trading of securities of a reporting issuer by persons or companies in a special relationship with the reporting issuer who have knowledge of a material fact or material change with respect to the reporting issuer before it has been generally disclosed ('insider trading'); and

  • sharing of information with respect to a material fact or material change, where such information has not been generally disclosed ('tipping').

A person or company in a special relationship with a reporting issuer includes a person or company that is an 'insider' of the reporting issuer. Insiders (which include directors or senior officers of the reporting issuer)557 are required to file a report when they become an insider and when there is any change in their ownership or control over securities of the reporting issuer.558

In our Draft Report, we referred to comments we received on the Issues List and noted that the main concerns in connection with insider trading appear to relate to reporting and transparency of reporting and the amount of emphasis which should be placed by the Commission on surveillance and enforcement of insider trading prohibitions.

We believe that we have addressed enforcement issues, generally, through our recommendations in the Draft Report relating to additional enforcement powers of the Commission. Several of these recommendations have been adopted in the 2002 Amendments. These, and certain other of our recommendations, if implemented, will equip the Commission and the courts to better deal with insider trading contraventions. For example:

  • Pursuant to the 2002 Amendments, the Commission would have the power, under section 127 of the Act, to impose an administrative fine of up to $1,000,000.559

  • Pursuant to the 2002 Amendments, the maximum fine provided for under section 122 of the Act would be increased from $1,000,000 to $5,000,000 (with a corresponding increase in connection with insider trading convictions) and the maximum term of imprisonment provided for under section 122 would be increased from two years to five years less one day.560 The potential for a significant fine and term of imprisonment will add to the deterrent effect of the application of the Commission's enforcement powers to insider trading contraventions.

  • We have recommended that the Commission have the power to order that a person comply with or cease contravening Ontario securities law and comply in the future or take steps to ensure future compliance. This power could be used by the Commission to supplement other orders it may make in the context of administrative hearings under section 127 of the Act in connection with insider trading contraventions.

We also note that there are several enforcement avenues available to the Commission for alleged insider trading violations. It can commence a quasi-criminal proceeding under section 122 of the Act. It can also commence administrative proceedings before the Commission in which the Commission may, under section 127, make one or more orders in the public interest. Finally, the Commission may apply to the Superior Court of Justice for one or more civil enforcement orders. Traditionally, the Commission has pursued alleged insider trading violations as quasi-criminal offences. We note, however, that a section 122 proceeding is subject to a higher standard of proof (i.e., proof beyond a reasonable doubt versus proof on a balance of probabilities) and a more onerous evidentiary burden. As a practical matter, we suggested in the Draft Report that, in appropriate cases, the Commission consider pursuing these alternative enforcement mechanisms available under sections 127 and 128 of the Act as a regulatory response to illegal insider trading.

One commenter was concerned that our recommendation implicitly suggested that Commission proceedings should be brought for the 'weaker' cases.561 This was not our intention; we do not believe that 'weak' cases should be brought. However, we encourage the Commission to take advantage of the remedial variety and flexibility in the Act in choosing the enforcement method that best achieves the objectives of the Act in the particular circumstances.562

Finally, we examined the insider trading civil liability provisions of the Act. The Act only confers a cause of action for improper insider trading on persons who purchase or sell securities from or to the offending insider trader (privity requirement).563 One practitioner has stated that:

[i]n an active secondary market, it will usually be difficult for an investor to demonstrate the direct relationship required by the statute. More importantly, even if an investor can show the necessary link, the link itself will be no more than a matter of happenstance. The investor who is entitled to recover is no different than other investors trading on the same side of the market at approximately the same time, whose shares are not fortuitously purchased or sold by the insider. The current legislative provisions thus create an unrealistic remedy that even when available, is based on arbitrary distinctions resulting from mere chance.564

In the Draft Report, we recommended that the CSA consider as part of its proposed Civil Liability Amendments whether it would be desirable to broaden existing insider trading civil liability provisions by deleting the privity requirement.565 Two commenters disagreed with this recommendation and provided well-reasoned arguments in support of their position. Among other issues, they pointed out the potential for unfair, excessive damages awards that could arise where the privity requirement is deleted.566

U.S. securities law does not contain a privity requirement in connection with the statutory right of action for insider trading. Instead it creates a right of action in favour of contemporaneous traders567 and limits the total amount of damages that may be imposed, to the profit gained or loss avoided by the insider in the subject transactions. In addition, the total damages that may be imposed against an insider must be reduced by the amount of any disgorgement order made in a proceeding relating to the same transaction or transactions. A similar, principled approach should be adopted in Ontario. In our view, the scheme for civil liability for insider trading should be based on a model of deterrence, rather than providing a compensatory scheme. An insider who trades with knowledge of undisclosed material information should be prevented from enjoying the benefits of such a trade. This can be achieved by:

  • deleting the privity requirement and thereby providing a meaningful right of action; and

  • limiting the total liability for damages to the amount of profit gained or loss avoided by the insider.

We recommend that the Government of Ontario consider amending section 134 of the Act to broaden the insider trading civil liability provisions, as discussed above.

Recommendation:
  1. We recommend that, in appropriate cases, the Commission consider pursuing alternative enforcement mechanisms available under sections 127 and 128 of the Act as a regulatory response to illegal insider trading.

  2. We recommend that the Government of Ontario consider amending the Act to broaden existing insider trading civil liability provisions by deleting the privity requirement in section 134 of the Act. We further recommend that consideration be given to including a provision that limits liability under this section to the amount of profit gained or loss avoided by the insider as a result of the transaction or transactions in question. Any such liability should also be reduced by the amount required to be disgorged pursuant to an order by the court, or the Commission, if applicable, in a proceeding relating to the same transaction or transactions.


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24.4 Insider Reporting

With respect to insider reporting, we note that the CSA has developed SEDI.568 The objective of SEDI is to allow insiders of most reporting issuers to securely file insider reports in electronic format over the Internet. For the investing public, the new system will make selected data on insiders available to them through the SEDI website. It is anticipated that the implementation of SEDI will result in faster and more efficient dissemination of reported information. SEDI will also facilitate, among regulators, a co-ordinated approach to reviewing insider reports and will provide an ability to effectively monitor compliance with insider reporting requirements.569 At present, insider reports are required to be filed within 10 days of the date of the trade. Once SEDI is fully operational the CSA should consider further reducing the time period for filing insider reports from the current 10 days. Electronic filings should facilitate more current timely disclosure of insider trades.

In the Draft Report we referred to commenters on the Issues List who expressed concern with respect to transactions through which insiders effectively 'dispose' of their securities in an issuer, without triggering insider reporting obligations.570 Examples provided by these commenters include lending or derivative arrangements and the use of structured financial products, which enable insiders to trade their securities 'synthetically' or through a third party, in the context of a hedging transaction, without being required to report the transaction in all circumstances. We noted that the SEDI reporting form for insider transactions (Form 55-102F2) specifically requests information with respect to transactions in third-party derivatives. This information is not specifically identified in the existing paper form of the insider report. We are advised that this has caused some confusion in the marketplace and has been misconstrued as a new reporting requirement. We understand that the CSA's intention was to facilitate insider reporting of trades in exchange-traded or over-the-counter options or other derivatives, where reporting of such trades is already mandated by securities legislation.

The Committee is aware that issues have arisen in connection with transactions involving third-party derivatives and whether these must be reported. An example of this would be equity monetizations.571 Equity monetization transactions give rise to regulatory issues in the context of insider reporting, insider trading, escrow and hold periods. The CSA recently published for comment Multilateral Instrument 55-103 Insider Reporting for Certain Derivative Transactions (Equity Monetization), which proposes to deal with these issues.572

As we indicated in the Draft Report, we believe that insiders should be required to report these types of transactions, so that the public may be made aware of the extent of the insider's economic exposure to the issuer and any effective change in, or disposition of, this exposure. We encourage the work of the CSA and emphasize the need for transparency of insider reporting in this regard. We also stress the importance of dealing with these issues on a national basis. A number of commenters on the Draft Report agreed with our recommendation in this regard.

Recommendation:
  1. We recommend that the CSA consider further reducing the time period for filing insider reports (from the current requirement to file within 10 days of the date of the trade) once SEDI is operational.

  2. We recommend that Ontario securities law be amended to require insiders to report any effective change in, or disposition of, their economic interest in an issuer.


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24.5 Freeze Orders

The Commission's power to make a freeze order is set out in section 126 of the Act.573 This allows the Commission to direct someone who has possession or control of funds, securities or property of any person or company to retain them until the Commission or the court orders otherwise. Such an order may be made without notice. However, under subsection 126(5) the Commission is required to apply to the court for an order continuing its order. This application must be made no later than seven days after the Commission's order is issued.

Following the publication of the Draft Report, Commission staff raised with the Committee a concern relating to subsection 126(5). They pointed out that securities legislation in several of the other provinces does not contain a similar requirement for court review of a freeze order,574 and suggested that the Act should be amended to permit the Commission itself to consider whether it would be in the public interest to extend the freeze order, pursuant to an application on notice to affected parties. The Committee also reviewed a recent decision of the Superior Court of Justice that addresses the question of what is the appropriate test to be applied by the court in determining whether to continue a freeze order made by the Commission.575

We believe that this is an area that would require analysis and public input. In particular, issues to be examined would include whether the court or the Commission is the appropriate entity to continue the freeze order and whether a more appropriate test could be articulated for inclusion in the Act as the basis for continuance of a freeze order. We trust there are other issues to be debated. We recommend that these issues be considered with the benefit of public input and make no specific recommendation at this time.

Recommendation:

We recommend that the issues raised with respect to the continuation of freeze orders under section 126 of the Act be studied further with the benefit of public input. In particular, we suggest the following issues, at a minimum, would require consideration:
  • whether the Commission or the court should authorize the continuation of a freeze order; and

  • what is the appropriate test to be applied in determining whether to continue a freeze order.


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24.6 Costs Orders

One commenter on the Draft Report raised the issue of the provisions of the Act dealing with investigation costs and suggested that these should be amended (i) to clarify that an unsuccessful respondent is only accountable for actual provable costs and disbursements by Commission staff and (ii) to provide that such costs be subject to assessment by a respondent.576 The commenter also suggested that the Act should be amended to give the Commission the discretion to award costs on an appropriate scale to successful respondents.

The costs provisions in section 127.1 were added to the Act in 1999. The provisions in section 127.1 authorize the Commission to order a person or company to pay the costs of an investigation, or the costs of a hearing in certain circumstances.577 Costs paid to the Commission under this section may be retained by the Commission and are not required to be paid into the Consolidated Revenue Fund.578

We have some concerns about costs orders under the Act. Clearly, the authority to order payment of costs under the Act is discretionary. However, we believe it would be helpful for the Commission to develop policies or guidelines regarding how costs should be established and in what circumstances they may be ordered. We also think that the costs should be subject to assessment on the application of a respondent.579

We note that section 127.1 contemplates costs orders in only one direction, i.e., costs to be payable by a respondent to the Commission. There is no 'mirror' provision for costs to be payable by the Commission to a respondent. Some, including the commenter referred to above, have argued that the power to order costs should apply both ways; that is, if the Commission has the power to order costs payable by a respondent, it should also have the power to order costs payable to a respondent. We recommend that consideration be given, on any future review of the Act, to whether the Act should include a provision authorizing the Commission to order costs payable to a respondent in Commission proceedings and if so, in what circumstances it should apply.580

Recommendation:
  1. With respect to the current power to order costs under section 127.1 of the Act, we recommend that the Commission develop policies or guidelines regarding how costs should be established and in what circumstances they may be ordered. We also recommend that costs orders made under section 127.1 should be subject to assessment on the application of a respondent.

  2. We recommend that consideration be given, on any future review of the Act, to whether it would be appropriate for the Commission to have the discretion to order costs payable to a respondent in Commission proceedings, and, if so, in what circumstances.


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24.7 Whistle-Blower Protection

The need for whistle-blower protection in the Act was raised by one commenter who suggested that the Act should be amended to protect employees who inform authorities of reasonably suspected violations of the Act by their employers or persons associated with them, from retaliation, discipline or discrimination.581 This comment was raised in light of the Sarbanes-Oxley Act of 2002 amendments in the U.S. and in particular section 806 of that Act, which provides protection against employment termination or other retaliatory action for any employee, contractor, subcontractor or agent of a public company who (i) provides evidence regarding conduct that the employee reasonably believes violates federal securities or anti-fraud laws; or (ii) testifies or participates in, or files, a securities or anti-fraud proceeding.582

Recommendation:

We support whistle-blower protection in principle, but note that it does not necessarily belong in the Act. Such provisions might more appropriately be included in corporate or employment-related legislation, for example.


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24.8 Federal Enforcement Initiatives - One Further Step

This Report contains an extensive discussion of the Commission's enforcement powers, and we have made numerous recommendations for strengthening those powers. We have done so because we believe that effective enforcement powers are critical to the fulfilment of the Commission's mandate.

The Government of Ontario has already adopted a number of the recommendations in our Draft Report relating to enforcement matters. In doing so, the Government of Ontario has shown its recognition and support for the role of enforcement in protecting investors and in fostering the integrity of Ontario's capital markets.

The federal government has also recognized the importance of enforcement efforts in supporting investor confidence. In its February 18, 2003 budget the federal government unveiled plans for a national enforcement approach to strengthen the investigation and prosecution of corporate frauds and market illegalities. The federal government plans to introduce new legislation to 'modernize' these offences, to permit targeted evidence-gathering and to tailor sentencing structures to signal the seriousness of corporate fraud offences. The federal government will establish integrated teams of investigators, forensic accountants and lawyers under the joint management of the Royal Canadian Mounted Police and partner agencies, in key financial centers in Canada, to work closely with securities regulators, local and provincial police to pursue the most serious cases of corporate fraud and market illegality (including alleged violations of provincial securities legislation). In addition, the federal government indicated that it will explore with the provinces and other key stakeholders the establishment of concurrent jurisdiction to prosecute serious criminal securities and corporate fraud offences.583

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  1. Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), [2001] 2 S.C.R. 132 at para. 39 [hereinafter Asbestos].
  2. Ibid. per Iacobucci, J, at para. 43.
  3. Global Securities Corp. v. British Columbia (Securities Commission), [2000] 1 S.C.R. 494.
  4. The Commission's general enforcement powers under the Act are similar to those of the three other major securities commissions in Canada, being the Alberta, British Columbia and Quebec Securities Commissions, but at the time of our review for the Draft Report they were, in some important respects, not as extensive. In formulating the recommendations in the Draft Report, the Committee considered, on a comparative basis, those areas in which one or more of these agencies had powers which the Commission lacked. The Committee also considered the enforcement powers of securities regulators in the U.S., the U.K. and Australia.
  5. Proposals for Amendments to the Securities Act in the Areas of Investigations, Enforcement and Remedies, (1990), 13 OSCB 405. The proposals relating to the Commission's enforcement powers included the following:
    1. Add a requirement that the Commission apply forthwith to the court to continue a freeze order made by the Commission.
    2. Expand the remedial powers of the Commission to provide a wider range of disciplinary and compensatory powers, including powers to order the following: compliance with the Act, regulations and policy statements; compliance with by-laws, rules, regulations, procedures, practices and directives of a self-regulatory organization; amendment to or cessation in the distribution of a wide range of disclosure materials; private or public reprimand of a person (including professional advisers) for misconduct in the marketplace; prohibition of a person (including a professional adviser) who engages in misconduct in the marketplace from holding office in or being a director of or being employed or retained by or in any other way associated with any registrant or reporting issuer; disgorgement; payment of costs associated with an investigation or proceeding before the Commission.
    3. Give the Commission broad power to apply to the court for a declaration of non-compliance and give the court power to order compliance and a wide range of other remedies including rescission, compensation for damages, payment of punitive damages, appointment or removal of directors, issuance, cancellation, purchase, exchange or disposition of a security, and prohibition of voting or exchange of any rights attaching to a security.
    4. Extend responsibility for a breach of the Act to reach beyond officers and directors, to any person (including a professional adviser) who authorizes, counsels or participates in a breach of the Act, the regulations or the policy statements.
    Following the publication for comment of these proposals, the Commission published a draft of the specific proposed changes to the Act ((1991), 14 OSCB 1907). In addition to the matters listed above, this draft included certain additional proposed enforcement powers, including the following:
    1. Provision for the court to order a person or company found guilty of an offence under the Act to make compensation or restitution to any other person or company.
    2. Power of the Commission to order a person or company who has not complied with Ontario securities law to submit to a review of practices and procedures and institute changes.
    3. Power of the Commission to order a person or company who has not complied with Ontario securities law to make restitution to any person or company affected by the non-compliance. (continued)
    4. Power to make certain orders in respect of non-compliance with exchange or self-regulatory organization rules or by-laws, etc. (including compliance order and restitution order).
    5. Power to make certain orders in the public interest, including the suspension, restriction or termination of registration or recognition, an order that exemptions do not apply and a cease trade order.
    6. Power to make certain orders in respect of a professional person or company that has counselled a breach of securities law, assisted in conduct which constitutes a breach or provided an opinion, advice or information to the Commission or staff which is deceptive or misleading.
  6. Ibid. at pp. 405 and 407.
  7. Included among the listed orders are: an order to comply with Ontario securities law; an order prohibiting a person from acting as an officer or director or prohibiting a person or company from acting as a promoter of any market participant; an order requiring a person or company to compensate or pay restitution to an aggrieved person or company; and an order requiring rectification of any past non-compliance with Ontario securities law.
  8. The Commission, under section 127, currently has the power to make several orders that are the same as or similar to orders which the court may make under subsection 128(3). These are: an order to submit to a review of practices and procedures, an order directing that a particular document be or not be provided to a person or company, or be amended, and an order prohibiting a person from acting as an officer or director of an issuer.
  9. Constitution Act, 1867 (Canada), subsection 92(14).
  10. Constitution Act, 1867 (Canada), sections 96 and 100. The purpose of these provisions is to protect the judges' independence.
  11. For example, see the judgment of Lord Atkin in Toronto Corporation v. York Corporation, [1938] A.C. 414.
  12. Reference re Residential Tenancies Act (N.S.) (1996), 131 D.L.R. (4th) 609; Massey-Fergusson Industries Ltd. v. Sask. (1981), 127 D.L.R. (3d) 513.
  13. Pezim v. British Columbia (Superintendent of Brokers) (1994), 114 D.L.R. (4th) 385; British Columbia (Securities Commission) v. Branch (1995), 123 D.L.R. (4th) 462.
  14. The SEC may impose administrative fines that range from U.S. $5,000 to $100,000 for a natural person and from U.S. $50,000 to $500,000 for any other person, for each violation. This power is limited to the specific proceedings set out in section 21B(a) of the 1934 Act, which are proceedings instituted against persons pursuant to sections 15(b)4, 15(b)6, 15D, 15B, 15C or 17A of the 1934 Act; i.e., regulated entities and securities industry professionals, such as stockbrokers, investment advisers and transfer agents. (These provisions are found in the following sections of the 1934 Act: section 15 - Registration and Regulation of Brokers and Dealers; section 15B - Municipal Securities; section 15C - Government Securities Brokers and Dealers; section 15D - Securities Analysts and Research Reports; and section 17A - National System for Clearance and Settlement of Securities Transactions.)
  15. The Alberta Securities Commission has the power to impose a maximum administrative fine of $100,000 for an individual and $500,000 for any other person or company, for each contravention of or failure to comply with the Alberta Act. The Manitoba Securities Commission has the power to impose a maximum administrative fine of $100,000 for an individual and $500,000 for any other person or company. The maximum administrative fine that may be imposed by the BCSC was recently increased from $100,000 to $250,000 for individuals and $500,000 for corporations. The Saskatchewan and Nova Scotia Securities Commissions each can order a maximum administrative fine of $100,000. The Saskatchewan Securities Commission may also order that a person or company pay the cost of producing material specified by the Commission to promote knowledge of investment and regulatory matters, up to a maximum of $100,000. The Quebec Securities Commission may impose an administrative fine of up to $1,000,000. The FSA can also impose a fine, with no stated maximum, pursuant to the Financial Services and Markets Act 2000 (U.K.), 2000, Chapter c.8. Both the IDA and the TSX (through RS Inc.) have the power to impose fines in an amount not exceeding the greater of $1,000,000 (per offence, in the case of the IDA) and an amount equal to three times the pecuniary benefit that accrued to the person as a result of committing a violation.
  16. Alberta Act, subsection 199(1).
  17. 2002 Amendments, subsection 183(1) adds the following paragraph to subsection 127(1) of the Act: 9. If a person or company has not complied with Ontario securities law, an order requiring the person or company to pay an administrative penalty of not more than $1,000,000 for each failure to comply.
  18. Ibid.
  19. See comment letter of Gowling Lafleur Henderson LLP.
  20. Examples may be found in the FSA and the IDA. Under the Financial Services and Markets Act 2002 (supra note 455), the FSA is required to issue statements of policy about the imposition of financial penalties on firms and approved persons. The FSA is required to have regard to these statements of policy in exercising, or deciding to exercise, its powers in certain circumstances. These statements of policy are set out in the Enforcement part of the FSA Handbook. In January 2003 the IDA published its 'Disciplinary Sanction Guidelines.' This document sets out general principles and guidelines prepared by IDA staff that may be taken into account by the District Council when determining the appropriate sanction to be imposed as part of a Settlement Agreement or at the end of a disciplinary proceeding commenced under IDA By-law 20.
  21. This issue was considered by the Supreme Court of Canada, albeit in a different context, in R. v. Wigglesworth, [1987] 2 S.C.R. 541. In that case an RCMP officer was convicted of assaulting a prisoner under the Royal Canadian Mounted Police Act and fined $300 by an RCMP service tribunal. He was subsequently charged with criminal assault for the same incident. The Supreme Court of Canada found that section 11(h) Charter rights were not infringed by the dual proceedings. Section 11(h) of the Charter describes the right, if found guilty of an offence and punished, not to be tried or punished for it again. In its consideration of the issue, the Court indicated that the possibility of an administrative fine taking on a penal consequence, increases with its magnitude: 'In my opinion, a true penal consequence which would attract the application of section 11 is imprisonment or a fine which by its magnitude would appear to be imposed for the purpose of redressing the wrong done to society at large rather than to the maintenance of internal discipline within the limited sphere of activity' (per Wilson, J.).
  22. The BCSC was the first securities commission in Canada to have the authority to impose an administrative fine.
  23. British Columbia (Securities Commission) v. Simonyi-Gindele, [1992] B.C.J. No. 2893 Vancouver A 921540. (This case did not involve a Charter challenge.)
  24. Johnson v. British Columbia (Securities Commission), [2001] B.C.J. No. 2103 (B.C.C.A.).
  25. Asbestos, supra note 441, at para. 43, quoted in Johnson, ibid.
  26. See comment letter of the Ontario New Democratic Party.
  27. See comment letters of Fasken Martineau DuMoulin LLP and Gowling Lafleur Henderson LLP.
  28. See comment letters of the Securities Law Subcommittee of the Ontario Bar Association, Simon Romano and BMO Nesbitt Burns.
  29. 1933 Act, clause 8A(e); 1934 Act, clauses 21C(e) and 21B(e); and SEC Rules of Practice - Rules Regarding Disgorgement and Penalty Payments, Rules 600, 601, 610-614, 620 and 630.
  30. The funds recovered by the SEC in such circumstances are typically paid into an escrow account established for the benefit of those injured by the illegal activity. The funds are administered and distributed in accordance with a plan that is submitted by the SEC's Division of Enforcement (unless otherwise ordered). The plan must include procedures for selecting a fund administrator to oversee the fund and process claims, as well as procedures for making and approving claims. The plan must be published for comment and is subject to approval by the SEC or a hearing officer. The fees and expenses of administering the plan are generally paid first from the interest earned on the disgorged funds, and then from the funds themselves. Any undistributed funds may become the property of the U.S. Treasury.
  31. The 2002 Amendments, subsection 183(1) adds the following paragraph to subsection 127(1)of the Act: 10. If a person or company has not complied with Ontario securities law, an order requiring a person or company to disgorge to the Commission any amounts obtained as a result of the non-compliance.
  32. We reviewed section 3.4 of the Act as it existed prior to the 2002 Amendments.
  33. The Act, subsection 3.4(1). The money received must be applied to carrying out the duties and powers of the Commission.
  34. The Act, subsection 3.4(2). These provisions were added to the Act in 1997, when the Commission became self-funding. The purpose of the exception in subsection 3.4(2) is to avoid actual or perceived conflicts of interest. Without this provision, it could be argued that the Commission would be in the position to encourage settlements, not because they are in the public interest, but rather to generate additional revenue.
  35. Under subsection 19(5) of the Alberta Act, administrative fines are not to be used for normal operating expenditures of the Commission and must only be used 'for endeavours or activities that in the opinion of the Commission enhance or may enhance the capital market in Alberta.'
  36. Under subsection 15(3) of the British Columbia Act, money received from administrative fines may be used only 'for the purpose of promoting knowledge of participants in the securities markets of the legal, regulatory and ethical standards that govern the operation of the securities market in British Columbia.' Under section 273.1 of the Quebec Act, administrative fines are to be paid into a designated fund and 'allocated to the education of investors or the promotion of their general interest.' Under clause 135.1(2)(b) of the Saskatchewan Act, the Commission has the power to order that a person or company pay the cost of producing material specified by the Commission 'to promote knowledge of participants in the capital markets of investment and regulatory matters.'
  37. The 2002 Amendments, section 178 repeals subsection 3.4(2) of the Act and substitutes the following:
    1. The Commission shall pay into the Consolidated Revenue Fund money received by the Commission pursuant to an order under paragraph 9 or 10 of subsection 127(1) of this Act or paragraph 9 or 10 of subsection 60(1) of the Commodity Futures Act or as a payment to settle enforcement proceedings commenced by the Commission, other than money,
      (a) to reimburse the Commission for costs incurred or to be incurred by it; or
      (b) that is designated under the terms of the order or settlement for an allocation to or for the benefit of third parties that is approved by the Minister or that belongs to a class of allocations approved by the Minister.
  38. It is interesting to note that section 308(a) of the Sarbanes-Oxley Act of 2002 provides that where amounts are ordered to be paid by way of disgorgement and the SEC also obtains a civil penalty against a person, the SEC may make a motion or direction to add the amount of the civil penalty to the disgorgement fund.
  39. See comment letter of Fasken Martineau DuMoulin LLP.
  40. SEC Rules of Practice - Rules Regarding Disgorgement and Penalty Payments, supra note 469.
  41. The 2002 Amendments, subsection 187(4).
  42. Statutory Powers Procedure Act, R.S.O. 1990, c. S. 22, subsection 25.1(1).
  43. The 2002 Amendments, subsection 183(2) adds the following subsection to section 127 of the Act: (3.1) A person or company is not entitled to participate in a proceeding in which an order may be made under paragraph 10 of subsection (1) solely on the basis that the person or company has a right of action against the respondent to the proceeding or the person or company may be entitled to receive any amount disgorged under the order.
  44. See, for example, section 168.2 of the British Columbia Act, which provides: 'If a person, other than an individual, contravenes a provision of this Act or of the regulations, or fails to comply with a decision, an employee, officer, director or agent of the person who authorizes, permits or acquiesces in the contravention or non-compliance also contravenes the provision or fails to comply with a decision, as the case may be.'
  45. See comment letter of Gowling Lafleur Henderson LLP.
  46. The 2002 Amendments, section 184 amends Part XXII of the Act by adding the following: 129.2 For the purposes of this Act, if a company or a person other than an individual has not complied with Ontario securities law, a director or officer of the company or person who authorized, permitted or acquiesced in the non-compliance shall be deemed to also have not complied with Ontario securities law, whether or not any proceeding has been commenced against the company or person under Ontario securities law or any order has been made against the company or person under section 127.
  47. Alberta Act, clause 194(1)(e); Quebec Act, subsection 195(2); and Saskatchewan Act, clause 131(3)(e).
  48. See comment letter of Davies, Ward, Phillips & Vineberg LLP.
  49. We note that restitution is not the same as disgorgement. Restitution is a remedy that aims to restore a person to the position they would have been in if not for the improper action of another. Disgorgement is an equitable remedy that aims to deprive a wrong-doer of illegally obtained amounts. These amounts may not necessarily be paid to the person who suffered loss, and even if they are so paid, may not be sufficient to return that person to their original position.
  50. Asbestos, supra note 441. As Iacobucci, J. stated, '[t]he focus of regulatory law is on the protection of societal interests, not punishment of an individual's moral faults' (at para. 42). See also the comments of Laskin, J.A., in the decision of the Ontario Court of Appeal, in Asbestos, that '[t]he purpose of the Commission's public interest jurisdiction is neither remedial nor punitive; it is protective and preventative, intended to be exercised to prevent likely future harm to Ontario's capital markets' ((1999), 43 O.R. (3d) 257, at p. 272).
  51. The Manitoba Securities Commission's restitution power became effective February 3, 2003.
  52. Financial Services and Markets Act 2000, supra note 455, section 384.
  53. Ontario (Securities Commission) v. Sides (1996), 19 OSCB 2056 (Ontario Court of Justice (General Division)).
  54. See comment letter of Fasken Martineau DuMoulin LLP.
  55. This service was officially launched on November 29, 2002.
  56. This expands the role of the former Canadian Banking Ombudsman to include ombudservices for customers of banks, member firms of the IDA, the MFDA and IFIC, and most federally regulated trust and loan companies.
  57. The OBSI can recommend restitution or compensation up to a maximum of $350,000.
  58. We understand that this is the kind of information that is maintained in a central registration depository in the U.S., which keeps data on the firms and brokers registered with the NASD. This information is made available through NASD Regulation's 'Public Disclosure Program.'
  59. Notice of the Commission approval of these amendments may be found in (2002), 25 O.S.C.B. 7379.
  60. Pursuant to paragraph 128(3)7 of the Act, the court has the power to make an order prohibiting a person from acting as an officer or director, or prohibiting a person or company from acting as a promoter, of any market participant permanently or for such a period as is specified in the order. The equivalent power of the Commission under paragraph 127(1)8 is limited to the power to order that a person is prohibited from becoming or acting as a director or officer of any issuer and does not include a power to prohibit a person or company from becoming or acting as a promoter.
  61. 'Promoter' is defined in subsection 1(1) of the Act to mean: (a) a person or company who, acting alone or in conjunction with one or more other persons, companies or a combination thereof, directly or indirectly, takes the initiative in founding, organizing or substantially reorganizing the business of an issuer, or (b) a person or company who, in connection with the founding, organizing or substantial reorganizing of the business of an issuer, directly or indirectly, receives in consideration of services or property, or both services and property, 10 per cent or more of any class of securities of the issuer or 10 per cent or more of the proceeds from the sale of any class of securities of a particular issue, but a person or company who receives such securities or proceeds either solely as underwriting commissions or solely in consideration of property shall not be deemed a promoter within the meaning of this definition if such person or company does not otherwise take part in founding, organizing, or substantially reorganizing the business.
  62. 'Investor relations activities' is defined in subsection 1(1) of the British Columbia Act to mean: any activities or oral or written communications, by or on behalf of an issuer or security holder of the issuer, that promote or reasonably could be expected to promote the purchase or sale of securities of the issuer, but does not include: (a) the dissemination of information provided, or records prepared, in the ordinary course of the business of the issuer to promote the sale of products or services of the issuer, or to raise public awareness of the issuer, that cannot reasonably be considered to promote the purchase or sale of securities of the issuer, (b) activities or communications necessary to comply with the requirements of this Act or the regulations, or the bylaws, rules or other regulatory instruments of a self regulatory body or exchange, (c) communications by a publisher of, or writer for, a newspaper, news magazine or business or financial publication, that is of general and regular paid circulation, distributed only to subscribers to it for value or to purchasers of it, if the communication is only through the newspaper, magazine or publication, and the publisher or writer receives no commission or other consideration other than for acting in the capacity of publisher or writer, or (d) activities or communications that may be prescribed for the purpose of this definition.
  63. See, for example, sections 58, 61 and 130 of the Act.
  64. One commenter took strong exception to this recommendation. The Canadian Investor Relations Institute (CIRI) stated that the definition of investor relations activities in the British Columbia Act is misguided and that for the Commission to perpetuate this definition is 'damaging to the effectiveness of investor relations professionals, to issuers' credibility, and potentially to capital markets.' We are sympathetic to the concerns expressed by this commenter regarding the use of the term 'investor relations activities' in connection with an activity that may be considered contrary to the public interest. We recognize the role played by investor relations professionals, including through the activities of CIRI, in promoting the integrity of the capital markets and as noted in the Draft Report our recommendation should not be construed as critical of investor relations professionals.
  65. See discussion in Chapter 24.
  66. Amendments are shown in italics.
  67. See powers under the Act: section 104 (power to direct a person or company to comply with or cease contravening Part XX or related regulations); paragraph 127(1)4 (power to order that changes be made to the practices and procedures of a market participant); and paragraph 127(1)5 (power to order that a document or report required to be filed under the Act be provided to a person or company, not be provided to a person or company, or be amended).
  68. British Columbia Act, clause 161(1)(a); and Saskatchewan Act, clause 134(1)(f).
  69. 1933 Act, section 8A; and 1934 Act, section 21C.
  70. The Commission has a similarly future-oriented authority under paragraph 127(1)4 of the Act, which is the power to order that a market participant submit to a review of their practices and procedures and institute any changes that may be ordered by the Commission.
  71. Supra note 508.
  72. The Act, section 2.1.
  73. The Act, paragraph 127(1)2.
  74. Subsection 1(1) of the Act provides that 'trade' or 'trading' includes: (a) any sale or disposition of a security for valuable consideration, whether the terms of payment be on margin, instalment or otherwise, but does not include a purchase of a security or, except as provided in clause (d), a transfer, pledge or encumbrance of securities for the purpose of giving collateral for a debt made in good faith; (b) any participation as a trader in any transaction in a security through the facilities of any stock exchange or quotation and trade reporting system; (c) any receipt by a registrant of an order to buy or sell a security; (d) any transfer, pledge or encumbrancing of securities of an issuer from the holdings of any person or company or combination of persons or companies described in clause (c) of the definition of 'distribution' for the purpose of giving collateral for a debt made in good faith; and (e) any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the foregoing.
  75. One commenter disagreed. See comment letter of Fasken Martineau DuMoulin LLP.
  76. The Act, subsection 122(1) (prior to the enactment of the 2002 Amendments).
  77. The Act, subsection 122(4) (prior to the enactment of the 2002 Amendments). Subsection 122(4) of the Act provides: 'Despite subsection (1) and in addition to any imprisonment imposed under subsection (1), a person or company that is convicted of contravening subsection 76(1), (2) or (3) is liable to a minimum fine equal to the profit made or the loss avoided by the person or company by reason of the contravention and a maximum fine equal to the greater of $1 million and the amount equal to triple the amount of the profit made or loss avoided by the person or company by reason of the contravention.' [Emphasis added.]
  78. R. v. Glen Harvey Harper, Reasons for Judgment of Roberts, J., released January 7, 2002; leave to appeal granted by the Ontario Court of Appeal, January 14, 2002. In his decision, Roberts, J. found that in order to determine the amount of the fine under subsection 122(4) of the Act, following a conviction for insider trading, it must be shown that the profits made or loss avoided by the respondent were made or avoided 'by reason of the contravention' of Ontario securities law. He stated that '[i]t is clear from the wording [of subsection 122(4)] that the Crown must prove more than simple profit or loss incurred in the prohibited trades', and that '[t]he contravention is not simply the result of trades carried out, but is linked to the material facts withheld. There must be evidence of the effect of such suppression of material facts on the market.' The Court of Appeal granted leave to appeal on the issue of the application of subsection 122(4), as well as subsections 122(1), (5) and (6), following a conviction for insider trading.
  79. The general maximum fine is the same ($1,000,000) in the British Columbia Act and the Alberta Act. The Quebec Act contains a range of fines with a general maximum of $1,000,000 for certain specified offences. In the U.S., under the 1934 Act there is a general maximum fine of $5,000,000 for a natural person and $25,000,000 for other than a natural person. (This reflects significant increases brought into effect as a result of the Sarbanes-Oxley Act of 2002.)
  80. In the British Columbia Act, the maximum imprisonment term is three years (subsection 155(2)). In the Alberta Act, the maximum imprisonment term is five years less one day (subsection 194(2)). Under the 1933 Act, a person who wilfully violates the provisions of that Act or who wilfully makes an untrue statement in a registration statement that is misleading may face up to five years imprisonment (section 24). Under the 1934 Act, in the case of a wilful violation of a prohibition or requirement in that Act or the making of a false or misleading statement in an application, report or other document required to be filed or in any undertaking in a registration statement, the maximum imprisonment term is 20 years (section 32). (This reflects an increase, effected by the Sarbanes-Oxley Act of 2002, from a previous maximum of 10 years.) In the U.K., under the Financial Services and Markets Act 2000, supra, note 455, the maximum imprisonment term is seven years (section 397 - misleading statements and practices offences).
  81. The 2002 Amendments, section 181.
  82. David Lang and Tim Moseley, 'Emerging Trend Toward Jail Sentences for Securities Act Violations in Ontario,' (January 1997).
  83. Consortium Financial Inc., Consortium Properties Inc. and Pia Williamson, (1992), 15 OSCB 4091. Ms. Williamson was sentenced to 21 months' imprisonment concurrent on 48 counts and in addition was fined a total of $350,000; R. v. Sisto Finance NV et al., Reasons for Sentence - Jasper Naude, Ontario Court (Provincial Division), September 28, 1994. Mr. Naude was sentenced to two years' imprisonment.
  84. R. v. Wall (2001), 24 OSCB 763. Mr. Wall was given consecutive sentences of 18 and 12 months, for a total of 30 months' imprisonment. Mrs. Wall received consecutive sentences of nine and 13 months, for a total of 22 months' imprisonment.
  85. Supra note 523.
  86. More recently, in R. v. 117329 Ontario Ltd. and TAC International (Reasons for Sentence, Ontario Court of Justice, January 25, 2002), the court sentenced one of the respondents, Douglas C. Walker, to 24 months in prison for nine convictions under the Act.
  87. Supra note 521.
  88. See comment letter of Gowling Lafleur Henderson LLP. These protections are: the right to have a preliminary inquiry and the right to elect a trial by judge and jury.
  89. Section 11(f) of the Charter states: 'Any person charged with an offence has the right, except in the case of an offence under military law before a military tribunal, to the benefit of a trial by jury where the maximum punishment for the offence is imprisonment for five years or a more severe punishment.'
  90. In this regard we note that in the context of a civil proceeding in Ontario, the right of a party under the Courts of Justice Act, R.S.O. 1990, c. C. 43, to require a jury trial, is not all encompassing. Under subsection 108(2), claims for certain kinds of relief cannot be tried by a jury. These include claims for an injunction or mandatory order, partition or sale of real property, dissolution of a partnership, foreclosure or redemption of a mortgage, specific performance of a contract, rectification, declaratory relief and other equitable relief. In cases where a jury trial is not excluded, a judge may nevertheless deny the right (on a motion by the other party to strike the jury notice) if it appears, for example, that the case will involve difficult and complex issues of law and large numbers of documents.
  91. R. v. Wall, supra note 524, at p. 773, where Mr. Justice Douglas stated: 'I would further recommend that the Act or the Provincial Offences Act be amended so that the issue of restitution, forfeiture and seizure of property could be dealt with by the Court who tries this matter. As I understand it now, and it is conceded as a matter of law, I have no power to order restitution to the victims. Instead, costly, complex civil litigation is going to ensue unless the position of the defendants clearly changes. It ought, in my view, to be within my purview to order their assets seized, their assets sold, and restitution made to the people - having made the findings of fact I have.'
  92. Subsection 194(7) of the Alberta Act, provides that: 'If a person or company is guilty of an offence under this section, the court may make an order requiring the person or company to compensate or make restitution to the aggrieved person or company, and may make any other order that the court considers appropriate in the circumstances.'
  93. See comment letter of Gowling Lafleur Henderson LLP.
  94. Section 16 of the Act provides:
    1. Non-disclosure - Except in accordance with section 17, no person or company shall disclose at any time, except to his, her or its counsel,
      1. the nature or content of an order under section 11 or 12; or
      2. the name of any person examined or sought to be examined under section 13, any testimony given under section 13, any information obtained under section 13, the nature or content of any questions asked under section 13, the nature or content of any demands for the production of any document or other thing under section 13, or the fact that any document or other thing was produced under section 13.
      3. Confidentiality - If the Commission issues an order under section 11 or 12, all reports provided under section 15, all testimony given under section 13 and all documents and other things obtained under section 13 relating to the investigation or examination that is the subject of the order are for the exclusive use of the Commission or of such other regulator as the Commission may specify in the order, and shall not be disclosed or produced to any other person or company or in any other proceeding except as permitted under section 17.
  95. See comment letter on the Issues List of Simon Romano.
  96. See comment letters of Simon Romano and Ogilvy Renault.
  97. See comment letter of Ogilvy Renault.
  98. Under section 13 of the Act, an investigator or examiner appointed by the Commission has the power to summon and enforce the attendance of any person and compel him to testify on oath or otherwise, and to summon and compel any person or company to produce documents or other things.
  99. Any person directly affected by a decision under section 17 may appeal the decision to the Divisional Court (the Act, section 9).
  100. Securities legislation in each of British Columbia, Alberta, and Saskatchewan contains express prohibitions against market manipulation (Alberta Act, section 93; British Columbia Act, sections 57 and 57.1; and Saskatchewan Act, section 55.1). The wording of the relevant provisions is similar and makes express reference to any conduct designed to create a false or misleading appearance of market activity or to establish an artificial price for a security. The provisions in the British Columbia and Alberta Acts also expressly prohibit fraud. Securities legislation in both the U.S. and the U.K. contains provisions which prohibit market manipulation. U.S. securities legislation prohibits fraud, the manipulation of the market price of a security, and any misleading trading activity (1933 Act, clause 17(a); and 1934 Act, clause 9(a), clause 10(b), Rule 10 b-5 and clause 15(c)). The U.K. legislation contains a regime for market abuse and makes market manipulation an offence (Financial Services and Markets Act 2002, supra note 455, Part VII (sections 118-130) and Code of Market Conduct). Prohibitions on market manipulation have also been established by RS Inc. and the IDA (Universal Market Integrity Rules, section 2.2 Manipulative or Deceptive Methods of Trading, and IDA Policy No. 5).
  101. See Chapter 6 of this Report.
  102. The 2002 Amendments, section 182 amends the Act by adding the following section:
    126.1 A person or company shall not, directly or indirectly, engage or participate in any act, practice or course of conduct relating to securities or derivatives of securities that the person or company knows or reasonably ought to know,
    (a) results in or contributes to a misleading appearance of trading activity in, or an artificial price for, a security or derivative of a security; or
    (b) perpetrates a fraud on any person or company.
  103. National Instrument 21-101 Marketplace Operation, National Instrument 23-101 Trading Rules, and OSC Rule 23-501 Designation as Market Participant (2001), 24 OSCB 665.
  104. Part 3 of the Trading Rules provides as follows:
    3.1 Manipulation and Fraud
    (1) A person or company shall not, directly or indirectly, engage in, or participate in any transaction or series of transactions, or method of trading relating to a trade in or acquisition of a security or any act, practice or course of conduct, if the person or company knows, or ought reasonably to know, that the transaction or series of transactions, or method of trading or act, practice or course of conduct
    (a) results in or contributes to a misleading appearance of trading activity in, or an artificial price for, a security or a derivative of that security; or
    (b) perpetrates a fraud on any person or company.
    (2) In Alberta, British Columbia and Saskatchewan, instead of subsection (1), the provisions of the Alberta Act, the British Columbia Act and the Saskatchewan Act, respectively, relating to manipulation and fraud apply.
  105. While the wording of new section 126.1 of the Act (as set out in section 195 of the 2002 Amendments) is similar to wording in clause 10(b) and Rule 10(b)5 under the 1934 Act, it makes reference to 'an act, practice or course of conduct relating to securities or derivatives of securities' and is not tied to 'a trade in or acquisition of a security,' as in the case in the U.S. securities legislation. The importance of having a separate reference to 'an act, practice or course of conduct' that is not connected to a trade or acquisition has been underscored by a recent decision of a federal appeals court in the U.S. which involved a broker who sold clients' securities and used the money for himself. The broker was convicted on criminal charges and served almost five years in prison. The SEC sued the broker and the court ruled that he should repay money he had taken from his clients' account. This ruling was reversed by the federal appeals court, whose decision was based on whether the fraud was committed 'in connection with the purchase or sale of any security,' as required in the U.S. securities legislation. That court ruled that there was nothing to indicate that the sales of the securities were not conducted legitimately; as such, they were incidental to the fraud, and accordingly the broker could not be sued by the SEC for a violation of U.S. securities legislation. The decision was appealed to the U.S. Supreme Court, which reversed the decision and held that the fraud was indeed 'in connection with' securities sales. (SEC v. Zandford, 238 F. 3d 559 (4th Cir. 2001), cert. granted, 70 U.S.L.W. 3091 (U.S. Nov. 9, 2001) (No. 01-147)); reversed and remanded: 535 U.S. 813).
  106. Section 380 of the Criminal Code provides that:
    (1) Every one who, by deceit, falsehood or other fraudulent means, whether or not it is a false pretence within the meaning of this Act, defrauds the public or any person, whether ascertained or not, of any property, money or valuable security or any service,
    (a) is guilty of an indictable offence and liable to a term of imprisonment not exceeding ten years, where the subject-matter of the offence is a testamentary instrument or the value of the subject-matter of the offence exceeds five thousand dollars; or
    (b) is guilty
    (i) of an indictable offence and liable to imprisonment for a term not exceeding two years, or
    (ii) of an offence punishable on summary conviction, where the value of the subject-matter of the offence does not exceed five thousand dollars.
    (2) Every one who, by deceit, falsehood or other fraudulent means, whether or not it is a false pretence within the meaning of this Act, with intent to defraud, affects the public market price of stocks, shares, merchandise or anything that is offered for sale to the public is guilty of an indictable offence and liable to imprisonment for a term not exceeding ten years.
    Section 382 of the Criminal Code provides that:
    Every one who, through the facility of a stock exchange, curb market or other market, with intent to create a false or misleading appearance of active public trading in a security or with intent to create a false or misleading appearance with respect to the market price of a security,
    (a) effects a transaction in the security that involves no change in the beneficial ownership thereof,
    (b) enters an order for the purchase of the security, knowing that an order of substantially the same size at substantially the same price for the sale of the security has been or will be entered by or for the same or different persons, or
    (c) enters an order for the sale of the security, knowing that an order of substantially the same size at substantially the same time and at substantially the same price for the purchase of the security has been or will be entered by or for the same or different persons,
    is guilty of an indictable offence and liable to imprisonment for a term not exceeding five years.
  107. But see R. v. Eurosport Auto Co. Ltd. and Hwang (2003), 219 D.L.R. (4th) 371 (B.C.S.C.) where the court declared ultra vires a provision of the British Columbia Insurance (Motor Vehicle) Act and held that 'the dominant purpose of the legislation is to create an offence of fraud based on an objective test and to punish those who commit fraud against the ICBC ... .it is in 'pith and substance' criminal legislation ... .Here the Province has created offences which are not necessary to the support of the program for which they were created' (at pp. 383-384). (This decision has been appealed to the British Columbia Court of Appeal and is set for a hearing on April 7, 2003.)
  108. See R. v. Smith, [1960] S.C.R. 776. (Even though it was similar to a provision in the Criminal Code, the court held that the Act's offence of providing false information in a prospectus was not in 'pith and substance' criminal law, but rather was incidental to the main purpose and aim of the Act, i.e., regulating the securities industry with a view to ensuring that the public is protected from being defrauded); and Multiple Access Ltd. v. McCutcheon, [1982] 2 S.C.R. 161. (The court held that mere duplication as between provincial and federal legislation, without actual conflict or contradiction, will not render otherwise valid provincial legislation inoperative.)
  109. Peter Hogg, Constitutional Law of Canada ('Hogg'), Carswell, Looseleaf edition, pp. 21-23. Constitution Act, 1867 subsection 92(13).
  110. Subsection 92(15) of the Constitution Act, 1867 give the provinces the express ancillary power to impose punishment (by fine, penalty or imprisonment) for purposes of enforcing provincial laws made in relation to any matters coming within the classes set out in section 92. This power requires the courts to 'draw a distinction between a valid provincial law with an ancillary penalty and a provincial law which is invalid as being in pith and substance a criminal law ... .The dominant tendency of the case law has been to uphold provincial penal legislation' (Hogg, at pp. 18-30).
  111. The Act, section 1.1. Section 2.1 of the Act outlines the fundamental principles the Commission should consider and balance in pursuing the purposes of the Act. Included in this list of principles is the following: 'The primary means for achieving the purposes of this Act are: (i) requirements for timely, accurate and efficient disclosure of information; (ii) restrictions on fraudulent and unfair market practices and procedures; and (iii) requirements for the maintenance of high standards of fitness and business conduct to ensure honest and responsible conduct by market participants'.
  112. Alberta Act, clause 92(3)(c); British Columbia Act, clause 50(1)(d); and Saskatchewan Act, subsection 44(3.1).
  113. The Commodity Futures Act, S.M. 1996, c. 73, clauses 49(2)(b) and (c).
  114. The 2002 Amendments, section 182 amends the Act by adding the following section:
    126.2 A person or company shall not make a statement that the person or company knows or ought reasonably to know,
    (a) in a material respect and at the time and in light of the circumstances under which it is made, is misleading or untrue or does not state a fact that is required to be stated or that is necessary to make the statement not misleading; and
    (b) significantly affects, or will reasonably be expected to have a significant effect on, the market price or value of a security.
  115. See comment letters of Ontario Teachers' Pension Plan, Ogilvy Renault and Torys LLP.
  116. See comment letter of Davies, Ward, Phillips & Vineberg LLP.
  117. The Act, subsection 1(1), definition of 'insider.'
  118. The Act, sections 107, 108 and 109.
  119. The 2002 Amendments, subsection 183(1).
  120. The 2002 Amendments, section 181.
  121. See comment letter of Davies, Ward, Phillips & Vineberg LLP.
  122. We note that the Commission recently issued a Notice of Hearing in the ATI Technologies Inc. matter, which is an insider trading case. In addition to the various orders sought under section 127 of the Act, the Notice indicates that if the Commission finds that any of the Respondents have not complied with Ontario securities law, staff will request the Commission to consider whether an application should be made to the court under section 128 of the Act for a declaration of non-compliance and a disgorgement order (Notice of Hearing, ATI Technologies Inc. et al., January 16, 2002).
  123. The Act, section 134 ('liable to compensate the seller or purchaser of the securities').
  124. See the dissenting statement of Philip Anisman, TSE Committee on Corporate Disclosure, Final Report, Responsible Corporate Disclosure - A Search for Balance (March 1997) at page 112.
  125. The Civil Liability Amendments will be added to the Act (under the 2002 Amendments, section 185).
  126. See comment letters of Fasken Martineau DuMoulin LLP and Ogilvy Renault.
  127. 1934 Act, section 20A(a) provides: 'Any person who violates any provision of this chapter or the rules or regulations thereunder by purchasing or selling a security while in possession of material, non-public information shall be liable in an action ... to any person who, contemporaneously with the purchase or sale of securities that is the subject of such violation, has purchased ... or sold ... securities of the same class.'
  128. Notice of National Instrument 55-102, Forms 55-102F1, 55-102F2, 55-102F3, 55-102F4, 55-102F5 and 55-106 F6, Companion Policy 55-102CP - System for Electronic Data on Insiders (SEDI) (2001), 24 OSCB 4414. The SEDI system is currently unavailable due to technical difficulties.
  129. Ibid.
  130. See comment letters on the Issues List of the IDA, Simon Romano, and Ontario Teachers' Pension Plan.
  131. An equity monetization is a transaction through which a security holder is put into an economic position which is similar to that of having sold the subject securities, without actually selling them, or triggering an obligation to report a trade.
  132. (2003), 26 OSCB 1805.
  133. The Act, subsection 126(1) provides:
    If the Commission considers it expedient,
    (a) for the due administration of Ontario securities law or the regulation of the capital markets in Ontario; or
    (b) to assist in the due administration of the securities laws or the regulation of the capital markets in another jurisdiction, the Commission may direct a person or company having on deposit or under its control or for safekeeping any funds, securities or property of any person or company to retain those funds, securities or property and to hold them until the Commission in writing revokes the direction or consents to release a particular fund, security or property from the direction, or until the Ontario Court (General Division) orders otherwise.
  134. The British Columbia, Alberta and Quebec Acts do not require their respective Commissions to seek court review of a freeze order. However, they do require, at a minimum, that an investigation be proposed or ongoing as the basis for making a freeze order. The British Columbia and Alberta Acts also contain alternative bases for making a freeze order, including the proposed or actual institution of Commission or criminal proceedings, the making of certain orders by the Commission, and a failure to comply with (British Columbia) or evidence of a contravention of (Alberta) the securities laws. In the U.S., the SEC may make a temporary cease and desist order (which may include an order to take action to prevent dissipation or conversion of assets) if it determines that an alleged or threatened violation is likely to result in a significant dissipation or conversion of assets, significant harm to investors, or substantial harm to the public interest prior to the completion of the proceedings. A respondent may apply to the SEC or the court to have such an order set aside, limited or suspended. The SEC may also apply to the court for an injunction or a temporary freeze order in certain circumstances. In Ontario, in contrast, subsection 126(1) of the Act (supra note 573) is much broader and does not specifically require that an investigation or proceeding be proposed or ongoing, that there be a contravention or evidence of a contravention of Ontario securities law, or that there be a likelihood of dissipation of assets or harm to investors or the public interest, as a basis for making a freeze order.
  135. Ontario Securities Commission v. RBC Dominion Securities Inc. (2001), 54 O.R. (3d) 767. The court commented on the fact that the Act does not set out a test for these purposes, considered a number of different possible approaches, and ultimately applied a modified form of the test used for a common law Mareva injunction.
  136. See comment letter of Fasken Martineau DuMoulin LLP.
  137. The Commission must be satisfied that the person or company has not complied with Ontario securities law or that they have not acted in the public interest. In addition, where a person or company is guilty of an offence under the Act, the Commission may order the person or company to pay the costs of any investigation carried out in respect of that offence.
  138. The Act, subsection 3.4(2).
  139. A similar approach may be found in the British Columbia and Quebec Acts. Under the British Columbia Act, if a person is ordered to pay costs (as provided under that Act) they may apply to a master or registrar of the Supreme Court to review the order (section 179). The master or registrar may vary the total amount of the fees and charges, within any limits that may be set out in the regulations, after considering all the circumstances, including (a) the complexity, difficulty or novelty of the issues involved; (b) the skill, specialized knowledge and responsibility required of the person or persons who conducted the examination, review, investigation, inspection or hearing; (c) the total amount of fees and charges set out in the order; and (d) the time reasonably expended. The Supreme Court rules relating to taxation of costs apply to a review under section 179. In the case of a person convicted of an offence under the British Columbia Act, the Executive Director may prepare a certificate setting out the costs of the investigation of the offence and may apply to a master or registrar of the court to review the certificate, as if it were a bill of costs. After the certificate is reviewed, it may be filed in the court and enforced as if it were an order of the court (section 160). Under the Quebec Act, if a person is found guilty of an offence under that Act or the securities legislation of another authority, the Commission may recover its costs of the investigation from that person, according to the tariff established by regulation (section 212). The Commission is required to prepare a statement of costs and present it to a judge for taxation.
  140. The Statutory Powers Procedure Act, R.S.O. 1990, c. S. 22 (SPPA) contemplates that a tribunal may make rules regarding the circumstances in which it may order a party to pay all or part of another party's costs. However, it also provides that such an order may only be made in limited circumstances, i.e., where the conduct of a party has been unreasonable, frivolous or vexatious or a party has acted in bad faith (subsections 17.1(1) and (2)). Although the Commission's current power to order costs under section 127.1 of the Act is broader than subsections 17.1(1) and (2) of the SPPA, it is protected, in effect, by the operation of subsection 17.1(4), which provides that a tribunal may order costs in circumstances other than those set out in subsections 17.1(1) and (2) if it makes the order under provisions of an Act that are in force on the day that section 17.1 of the SPPA came into force. (Section 127.1 of the Act came into force before section 17.1 of the SPPA.) However, in determining whether it is appropriate for the Commission to have the discretion to order costs payable to a respondent in Commission proceedings, it may be important to consider the framework established by the SPPA.
  141. See comment letter of Ontario Teachers' Pension Plan.
  142. The type of relief or protection which is afforded under section 806 of the Sarbanes-Oxley Act of 2002 includes reinstatement, back-pay or special damages. Relief may be awarded by the Secretary of Labour or a U.S. District Court.
  143. Canada, Department of Finance, The Budget Plan 2003 (Ottawa: Queen's Printer, February 2003) at 184-187.

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