The Ontario Securities Commission has narrowed the scope of a proposed new rule allowing no-contest settlements in enforcement cases, saying it will not allow them in cases where someone has engaged in “egregious, fraudulent or criminal conduct” or when the misconduct involves investor losses that have not been repaid.
The commission issued an update Wednesday to a controversial proposed new rule that would allow people accused of wrongdoing to settle their cases with the OSC without having to admit guilt.
The OSC initially proposed the rule in 2011 as a way to get cases resolved more quickly, but has not yet enacted it after receiving critical submissions saying no-contest settlements would let people get away too easily with misdeeds while claiming they had done nothing wrong. The Canadian Coalition for Good Governance, for example, which is an advocacy group for Canada’s largest institutional shareholders, warned that OSC penalties would just become “a cost of doing business” if there were no “stigma or reputational effects.”
In a notice Wednesday, the OSC said it remains committed to the proposal, but has proposed updates to clarify its intentions for a no-contest rule in advance of a public hearing on the proposal later this month.
“Staff remain committed to these initiatives as a way to increase enforcement’s effectiveness in protecting the public interest,” the OSC said in statement.
“These initiatives will allow us to resolve enforcement matters more quickly and issue more protective orders earlier, which would benefit both investors and the capital markets.”
In its update, the OSC suggested a narrower scope for using such a rule, saying it would not be allowed in serious cases involving fraud or criminal conduct or in cases of “investor harm which remains unaddressed.”
When deciding whether to allow a no-contest settlement, the commission said staff would consider how much a respondent has co-operated in the case, whether the person self-reported the offence, and what remedial steps have been taken to fix the conduct, such as paying compensation to investors or “disgorging” profits.
The OSC has backed away, however, from an initial statement that no-contest settlements would not be available for people who had previously been subject to enforcement activity by the commission or any other agency. In its update, the commission said prior enforcement activity would not preclude a no-contest settlement.
The OSC said it has been monitoring developments in the U.S., where no-contest settlements have long been allowed but have been questioned in recent years. In late 2011, U.S. Judge Jed Rakoff rejected a high-profile settlement proposed by the U.S. Securities and Exchange Commission with Citigroup Global Markets Inc. because Citigroup made no admission of guilt in a matter that involved what he called “serious securities fraud” allegations.
The OSC commissioned a report by Toronto securities lawyer Phil Anisman on the current state of no-contest settlements in the U.S. in light of Judge Rakoff’s ruling.
Mr. Anisman said SEC enforcement settlements “invariably” included no-contest language until last year, when the SEC announced it would no longer allow “neither admit nor deny” statements for someone who has already pleaded guilty in a criminal proceeding. But he said Judge Rakoff’s decision has otherwise not generally impeded the SEC’s enforcement activity.