After years of resistance, the Ontario Securities Commission has proposed the use of “no-contest settlements,” which would allow wrongdoers to agree to settlement terms without having to admit they did anything wrong. The OSC says the proposal is “aimed at resolving enforcement matters more quickly and effectively.”
We disagree. No-contest settlements are contrary to the fundamental tenets of Canadian securities regulation and to the interests of the investing public.
The U.S. Securities and Exchange Commission has long made use of no-contest settlements, but in the wake of the 2008 financial meltdown, for which there has been a breathtaking lack of accountability, the practice has been criticized severely. Indeed, the U.S. Congress will soon hold public hearings on the issue.
The OSC, which has also pledged a hearing on its proposal, argues that requiring admissions from wrongdoers impedes the resolution of enforcement actions, because of their fear that those admissions may expose them to liability in civil proceedings.
When faced with such resistance, OSC staff have to prepare their case for a public hearing, which takes time and resources. We are aware of no persuasive evidence, however, that settlements would be expedited by the use of no-contest settlements. And even if this dubious premise were correct, the use of no-contest settlements would undermine both the OSC’s goal of deterrence and the ability of investors who have been harmed to seek compensation.
Without admissions, the investing public is deprived of the truth as to who did what to whom. Without transparency, deterrence is undermined. As former U.S. Supreme Court Justice Louis Brandeis said, sunlight is the best disinfectant.
Similarly, the absence of admissions forces private litigants, who have far less investigative power than OSC enforcement staff, to build a case that the regulators have already built, often at significant expense.
Historically, the only form of assistance that victims of securities fraud have received from Canadian securities regulators has come in the form of admissions in settlement agreements. By dispensing with admissions, enforcement staff would be leaving investors completely in the cold.
Why would our regulator be inclined to assist a wrongdoer to minimize his or her exposure to civil liability? The answer may lie in remarks by OSC chairman Howard Wetston, who told the Economic Club last year that no-contest settlements “would allow us to aggressively discipline individuals and companies while retaining regulatory neutrality in parallel litigation such as class-action suits.”
The agreements, he said, “are widely used in the U.S. to encourage settlements.”
In our view, this position is inconsistent with the OSC’s mandate. The private enforcement of securities law is built into the Ontario Securities Act, with civil liability provisions that enable investors to sue for compensation.
These provisions were part of a broader public policy initiative to advance investor protection and capital markets integrity through a two-pronged approach – public enforcement through regulatory proceedings working alongside private enforcement through civil action including, where warranted, class action.
Furthermore, no-contest settlements are not “neutral.” They help wrongdoers evade accountability at the expense of investors. There is nothing wrong with a securities regulator facilitating investors’ recovery of compensation in private litigation, and everything right with it.
The integrity of the OSC’s process requires not only transparency, but a just connection between punishment and the conduct being punished. Sanctions agreed by OSC staff and wrongdoers in a settlement must be approved by a panel of independent OSC commissioners. Such approval must be based on a publicly disclosed evidence, and not merely be a “rubber stamp,” with only the OSC and the wrongdoer knowing the whole story. No-contest settlements make the required approval in the public interest impossible.
We are not alone in our criticism of no-contest settlements. Leading investor advocacy groups, including the Canadian Coalition for Good Governance, the Canadian Foundation for the Advancement of Investor Rights, and the Small Investor Protection Association, have all filed critical comments with the OSC. So has Michael Watson, the OSC’s former director of enforcement.
In an era when global capital markets have fallen into considerable disrepute, regulation should be stronger, not weaker. The OSC should abandon its proposal to import a failed U.S. policy into this jurisdiction.
Douglas Worndl and Dimitri Lascaris are partners in the securities class action group of Siskinds LLP.