James Turner is the former vice-chair of the Ontario Securities Commission.
There has been some criticism recently of the Ontario Securities Commission’s use of no-contest settlements. It has been suggested that it may be time to revisit their use as a policy matter. There is also concern that no-contest settlements are not sufficiently transparent, and may not serve as an effective deterrent to future transgressions.
As a matter of principle, I supported the OSC’s policy on no-contest settlements when I was a vice-chair of the OSC, and I still believe they are an important and effective regulatory tool that should continue to be available to the Commission and its staff.
The OSC adopted its policy on no-contest settlements in June, 2013; there have been 11 no-contest settlements entered into by OSC staff as of June, 2018.
One objective of the policy was to bring infractions to light that otherwise would have gone undetected. No-contest settlements are an important means to encourage market participants to voluntarily bring enforcement matters to the attention of regulators and then to fully co-operate with them. There should be a benefit to a market participant for having done so.
While it is a matter of judgment for OSC staff whether to enter into any particular no-contest settlement, these deals typically address situations in which there was no intention to breach securities laws or act contrary to the public interest, and where investor harm or losses are being appropriately addressed. In such circumstances, the market participant is not required to acknowledge or admit that the relevant conduct breached Ontario securities laws or was contrary to the public interest. However, a no-contest settlement will not be entered into where the market participant has engaged in egregious, fraudulent or criminal conduct.
In considering the OSC’s use of no-contest settlements, it is important to recognize that such situations differ substantially from other enforcement matters. Most no-contest settlements reflect circumstances in which the market participant has identified the problem and voluntarily brought it to the attention of securities regulators. Often, the matter involves a sin of inadvertence, error or omission with no intention to harm an investor. In addition, harm or losses to investors are invariably addressed as a term of the settlement. Amounts paid to investors pursuant to no-contest settlements have totalled approximately $368-million up to now. In many other types of enforcement matters, it can be difficult for the OSC to obtain effective compensation for investors.
Often, a no-contest settlement will require the market participant involved to appoint an independent third party (such as an auditor) to review in detail the client accounts affected. In these circumstances, OSC staff is actively involved in determining the scope and terms of reference for the independent review and is actively involved in resolving any issues that may arise during the process.
That, in my view, is an appropriate, effective and efficient use of OSC resources. While OSC staff could carry out their own detailed investigation, they are not auditors.
OSC enforcement staff should be spending their time going after bad actors who are intentionally harming and defrauding investors. They should not be conducting confirmatory audits and reviews, and holding hearings to determine facts that have already been established and, most importantly, that have been confirmed by an independent third party. Doing otherwise is the definition of inefficiency.
The suggestion has also been made that no-contest settlements are not sufficiently transparent. However, where there is a no-contest settlement, all the essential information is on the public record. What market participants need to know is the specific misconduct involved, what damage or harm investors may have suffered and what the terms of settlement are. They have access to all of that information where a no-contest settlement is entered into. Holding a contested hearing over many days or weeks would not provide any additional meaningful information or transparency.
As to the question of deterrence, no-contest settlements usually involve inadvertent conduct with no intention to harm investors. How does one deter inadvertent or unintentional conduct? When a no-contest settlement is publicly announced, the officers of responsible market participants should react by saying, “We better make sure we don’t have the same problem here.” That in itself is effective deterrence.
The question OSC staff should ask when considering a no-contest settlement is, “What would be gained from a contested hearing on the merits?” One central consideration in that respect is determining what administrative penalties staff could reasonably expect an OSC panel to impose after a contested hearing. Such a hearing is constrained by the level of sanctions imposed in previous OSC decisions and the limits of OSC administrative power. While a no-contest settlement results in a beneficial, timely and known conclusion for OSC staff, a contested hearing is a wild card as to ultimate outcome.
The one thing staff does not obtain in a no-contest settlement is an acknowledgment by the market participant that it breached securities laws or acted contrary to the public interest, but such an acknowledgment has little value. Where there is a no-contest settlement, there is no doubt what staff’s position is with respect to whether the conduct breached securities laws or was contrary to the public interest. Further, there is no doubt that the OSC has concluded that it was in the public interest to issue an order approving the settlement.
In my view, the OSC’s use of no-contest settlements has demonstrated appropriate and effective transparency and deterrence. These settlements also represent an efficient use of regulatory resources. Therefore, it makes sense that the OSC should continue to wield this regulatory tool.