The Ontario Securities Commission should take a page from the LSO's playbook
When the Capital Markets Tribunal (CMT) started its work in April 2022, it was heralded as a promising move towards eliminating the home court advantage regulators have enjoyed in hearing rooms for the last 40 years. Financial regulators, such as the Ontario Securities Commission (OSC) and the Canadian Investment Regulatory Organization (CIRO) (formed through the recent merger of IIROC and MFDA) rarely lose in administrative hearings. For example, despite prosecuting hundreds of cases in the last six years, OSC and CIRO staff have only suffered a handful of major prosecution losses. Many of these came in a courtroom, not a hearing room.
Here is a brief description of some of those losses. In 3iQ Corp (Re), the CMT set aside an OSC decision against a cryptocurrency fund and found that a regulator should not assess the merits of securities offered to the public or shield investors from risk, emphasizing the importance of investor autonomy. In Gong (Re), the CMT found that the OSC prosecution misapprehended the law of abuse of process and failed to properly respond to the respondent’s evidence of a privilege breach. An OSC panel in Hutchinson (Re) dismissed the prosecutor’s allegations of insider trading for failing to prove that some respondents traded securities while possessing material non-public information, even on a balance of probabilities. The CMT in Odorico (Re) found flaws in a CIRO proceeding as the panel misapprehended material evidence. In CannTrust Holdings Inc., the OSC prosecution made incorrect allegations against the respondents for growing unlicensed cannabis and insider trading. At mid-trial, the charges were withdrawn. Most recently, an Ontario Court stayed the OSC’s fraud charge against Grant Sanders, the former CEO of InstaDose Pharma Corp. Justice McAleer found that Sanders’ Charter right to a timely trial had been violated, as over 25 months had passed since the OSC laid the quasi-criminal charge. This exceeded the 18-month ceiling established by the SCC in R v Jordan.
The financial and emotional toll of enforcement proceedings on respondents cannot be overstated. Respondents in these cases are usually professionals, senior employees, ambitious entrepreneurs, or public corporations vital to the Canadian economy. Defending an enforcement proceeding is expensive, both financially and reputationally. Even if the allegations are ultimately dismissed, sensationalized headlines, negative search engine histories, and regulatory records will forever tarnish a respondent’s reputation. Professional respondents will likely face termination of their employment and encounter significant obstacles in securing a new job.
While it is still too early to say what the future has in store for respondents before the CMT, I believe a critical reform of the OSC’s regulatory charging process is needed. The OSC needs new checks and balances to ensure that only truly meritorious cases proceed to prosecution. Drawing my inspiration from the Law Society of Ontario's (LSO) proceedings authorization committee (PAC), any proposed enforcement case before the CIRO or the OSC should be subject to a critical review by independent market participants before any proceedings can commence.
So, how does the PAC work? In disciplinary cases, the LSO must refer an investigation to the PAC before the start of a public prosecution. The PAC is a screening committee comprised of an independent chair, benchers, and at least one non-lawyer. The PAC does not perform an adjudicative function but can authorize: i) conduct, capacity, or competence proceedings; ii) remedial actions to divert a matter where a prosecution is not appropriate; or iii) a decision to take no action. The PAC’s remedial actions are not sanctions and do not become part of a licensee’s disciplinary history. Instead, they are designed to guide the licensee to prevent similar issues in the future. The PAC may implement other remedial actions such as issuing a private letter of advice, requesting a confidential meeting with the licensee to discuss the relevant issues or conducting a non-public regulatory meeting where the PAC educates the licensee about the impact of their actions, holds them accountable, and addresses any harm that they may have caused to the public.
After my long journey successfully fighting LSO charges for alleged incivility, I am the last person to say that the LSO process is perfect. However, I know from my eight years as an LSO bencher that its process is better than the OSC’s secret process. In addition, the LSO diverts many cases away from charges and into other less punitive outcomes; the OSC rarely does. We should all be asking why not. The OSC and CIRO should take a page from the LSO’s playbook.
Establishing the CMT was hopefully a positive step, signalling a willingness to address longstanding concerns about regulatory bias. However, this is the tail wagging the regulatory dog. By adopting independent oversight and procedural safeguards, regulators can enhance the integrity and efficiency of the regulatory framework while protecting the rights of all involved stakeholders. We have recently seen that the government does not always do what the OSC wants. We can only hope they will decide to proceed with these home improvements.
Sam Zargami, an articling student at Groia & Company PC, assisted with this article.
