The Ontario Securities Commission (OSC) has recently released a Staff Notice, OSC Staff Notice 15-707 Enforcement Branch Enforcement Investigation Guidance, which provides guidance on how individuals and companies involved in OSC assessments and investigations should conduct themselves 1. In the Staff Notice, the OSC provides clarity on their assessment and investigation procedure. Additionally, the OSC provides recommendations on how individuals and companies can navigate specific situations commonly encountered in assessments and investigations. In this blog post, we provide a summary of the OSC's procedure and highlight the key takeaways from the OSC's Staff Notice guidance document.
Provincial securities commissions, like the OSC, are the applicable regulatory bodies tasked with administering each of the provinces' securities laws. Their mandates generally include protecting investors from unfair, improper, or fraudulent practices, and to facilitate a fair and efficient capital market.
In order to achieve their mandate, the securities commissions conduct assessments and investigations to assist them in determining whether misconduct has occurred, and whether regulatory proceedings are warranted.
In the course of their assessments and investigations, provincial securities commissions obtain information from individuals and companies either on a voluntary basis, or through the use of any one of their information gathering tools under the applicable provincial securities law statutes.
Overview of OSC procedure
The OSC's Enforcement Branch conducts both assessments and investigations. The Staff Notice provides an overview of the Enforcement Branch's procedure with respect to both, with assessments sometimes leading to investigations.
When matters arise that warrant the attention of the OSC's Enforcement Branch, the matter is first referred to the Enforcement Branch Case Assessment Team. Typically, matters will be referred to the Case Assessment Team when the Enforcement Branch receives tips, complaints, or referrals from third parties that raise enforcement concerns. In certain cases, members of the Enforcement Branch Staff may also identify matters for referral to the Case Assessment Team.
Once a matter is referred to the Case Assessment Team, Case Assessment Staff make inquiries and conduct analyses to identify cases that involve possible violations of securities law, and/or conduct that may be contrary to the public interest. Cases that do not meet these threshold requirements are either closed, referred to other regulators or agencies, or are transferred for alternative enforcement measures such as a warning letter. Cases that do meet these requirements may be recommended by the Case Assessment Team for further investigation to Enforcement Branch management.
If a recommendation for further investigation from the Case Assessment Team is accepted by Enforcement Branch management, then an Enforcement Branch investigation team will be assigned to investigate the matter. During the investigation, the investigation team will utilize the fact gathering powers granted to it under the Ontario Securities Act (OSA) (discussed further below)to determine whether the commencement of regulatory proceedings, or other disciplinary action is required.
Fact-gathering powers
During the assessment stage, the Case Assessment Team will first try to obtain information and documents from individuals and companies on a voluntary basis. When information and documents are requested by Enforcement Branch Staff at the assessment stage, the OSC encourages voluntary and timely cooperation so that assessments can be completed in a timely manner. However, if the OSC considers it expedient for the proper administration of securities law, or the regulation of capital markets, it may issue an investigation order under section 11 of the OSA, at which point an investigation is commenced, and the appointed investigation team 2 is granted broad authority to investigate and inquire into the matters set out in the investigation order.
Under section 13 of the OSA, the investigation team may issue a summons to compel a witness to attend questioning, and/or to compel a witness to produce documents in their possession or control. A failure to comply with a summons could result in contempt proceedings.
OSC Staff investigations are confidential pursuant to section 16 of the OSA. When OSC Staff contacts a summons recipient regarding an ongoing investigation, the individual or company is prohibited from disclosing any information associated with the investigation except to its legal counsel, and in some cases, its insurer. In some cases, an individual or company may need to disclose information to third parties to assist with the OSC's investigation. In those cases, under section 17 of the OSA, the OSC may issue an authorization to the individual or company, allowing it to disclose information associated with an investigation.
Key takeaways
The OSC's Staff Notice contains guidance on a number aspects of assessments and investigations, including timelines, formatting of questioning, and preferred formatting of electronic disclosure 3. However, three main takeaways arise from the guidance document:
- At every step of an assessment or investigation, the OSC encourages open, honest, and timely communication with Staff. In particular, the OSC encourages open communication with Staff regarding issues related to compliance with Staff requests. For example, where the timelines set out in a Staff request are unworkable, the summons recipient or their counsel is encouraged to contact Staff to resolve the issue in a timely manner.
- Cooperation and open communication with Staff may lead to a
more timely resolution of assessments and investigations, but it
may also lead to the summons recipient receiving credit for
cooperation under the OSC's Revised Credit for Cooperation
Program [4]. Receiving credit for cooperation may lead to Staff
recommendations, which:
- Narrow the scope of the allegations set out by Staff in connection with the commencement of an enforcement proceeding;
- Reduce the sanctions recommended by Staff in connection with an enforcement proceeding;
- Propose the resolution of the matter on the basis of a settlement agreement including, in limited circumstances, a settlement agreement in which the respondent makes no admissions of fact or liability; and
- In limited circumstances, result in Staff agreeing to take no enforcement action.
For example, the OSC has granted credit for cooperation in the past in investigations related to insider trading 5, and failure to disclose material changes 6.
3. Finally, although the OSC is given broad authority under the OSA to conduct investigations and gather facts related to its investigations, the powers conferred by the OSA do not allow the OSC to compel the disclosure of privileged information. Therefore, if a summons requests the production of privileged documents, the summons recipient is not required to produce the document. However, the summons recipient should still provide Staff with sufficient detail about the nature and scope of the privilege claim.
Footnotes
1 OSC Staff Notice 15-707: https://www.osc.ca/en/securities-law/instruments-rules-policies/1/15-707/osc-staff-notice-15-707-enforcement-investigation-guidance
2 An investigation order will set out the individuals authorized to conduct the investigation.
3 The OSC issued a parallel guidance document dedicated solely to production of documents, OSC Staff Notice 15-708: https://www.osc.ca/en/securities-law/instruments-rules-policies/1/15-708/osc-staff-notice-15-708-document-production-guidance
4 OSC Staff Notice 15-702: https://www.osc.ca/sites/default/files/pdfs/irps/sn_20140311_15-702_revised-credit-coop-program.pdf
5 See for example, Re Cheng, 41 OSCB 5128, and Re Hutchinson, 2018 ONSEC 22.
6 https://www.cbc.ca/news/business/osc-issues-warning-to-cp-ships-over-disclosure-delay-1.548059
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