OSC Introduces No-Contest Settlements

May 26, 2014 | Emily Cole, Caleb Edwards

On March 11, 2014, the Ontario Securities Commission (“OSC”) released Staff Notice 15-702 Revised Credit for Cooperation Program.  Alongside other changes that the Notice introduces is a new program permitting Staff of the OSC (“Staff”) to reach settlement agreements which do not include admissions of fact or liability.

Under the new policy, Staff will consider certain factors in deciding whether to recommend a settlement to a settlement hearing panel:

  1.  the respondent’s cooperation;
  2.  the degree and timeliness of the respondent’s self-reporting;
  3.  the degree of investor harm;
  4.  the remedial steps taken by the respondent;
  5.  any agreement by the respondent to pay some sort of costs;
  6.  any agreement to stop committing the infraction;
  7.  the deterrent effect of the settlement on the respondent and the market; and
  8.  any agreement to pay money at the time the settlement agreement is approved.

Staff will not enter into a no-contest settlement where the respondent has engaged in “abusive, fraudulent or criminal” conduct; where the investor harm has not been satisfactorily addressed; or where the respondent has “misled or obstructed” staff during the investigation. 

Any potential settlement must also go through the normal settlement agreement approval process by the OSC.

Should a respondent manage to satisfy staff that it meets the criteria for no-contest settlement and persuade a settlement hearing panel that the proposed settlement is in the public interest, the final settlement agreement will include:

  1. a set of facts based on Staff’s investigation which are not denied by the respondent;
  2. agreed sanctions; and
  3. the respondent’s acceptance of the settlement agreement.

This policy is similar to the model in the United States, where the Securities and Exchange Commission (“SEC”) has the authority to enter into settlements with a respondent who “neither admits nor denies” the allegations.[1]  The SEC defends this authority on the basis that quick settlements preserve agency resources to investigate and prosecute other potential frauds and wrongdoing.[2]

[I]f the SEC can bring a case and can get, in a settlement, basically what it would get in litigation without the risk of losing; getting to resolution much faster; and get money back to investors much more quickly; and issue a complaint that lays out all of the misconduct, so that the public and industry are on notice and are aware, then that’s a pretty good deal.[3]

The OSC Director of Enforcement, Tom Atkinson, has put forward a similar justification, stating that the new initiative “will potentially allow us to resolve enforcement matters more quickly and issue more protective orders earlier.”[4] 

However, no-contest settlements have some vocal critics, including Judge Rakoff of the United States District Court for the Southern District of New York, who rejected a proposed settlement between Citigroup and the SEC in 2011 on the grounds that Citigroup obviously continued to deny the SEC’s allegations since it was defending itself against similar allegations in a parallel proceeding.[5]

Judge Rakoff’s decision gets to the heart of the dilemma facing securities regulators, the perception that the parties most eager to settle with regulators (and willing to pay large fines) are those who know they are guilty.  When regulators enter no-contest settlements, they are perceived as taking money to permit a guilty actor to escape a public finding of liability.  “Everyone knows” the respondent is guilty, but other litigants do not have an admission (or any public findings of fact) to use in parallel proceedings. 

The SEC has taken steps to combat this perception, restricting the ability of settling parties to “neither admit nor deny” when there had been an adverse finding in a parallel proceeding, and refusing, “where there is egregious harm to investors or recidivist conduct”, to settle without admissions by the respondent.[6]

Staff’s new regulations confront this dilemma by severely limiting the circumstances in which no-contest settlements are available.  One consequence of staff’s approach, however, is that the pool of respondents who could potentially settle under the no-contest program may be very small.  As noted above, to be eligible for a no-contest settlement, staff must be satisfied that the respondent has not engaged in fraudulent or criminal conduct, that the respondent has cooperated fully and openly and has moved quickly to rectify any transgressions.

In short, the pool of respondents consists of respondents who have inadvertently breached Ontario securities law but caused little to no investor harm or respondents who received improper legal advice or were otherwise improperly educated about their responsibilities as a market participant. 

This means, however, that it’s unlikely we will see a flood of no-contest settlements.  Respondents facing lengthy and costly litigation – who may be willing and able to pay large monetary penalties to avoid admissions that could be used against them in class or parallel proceedings – may be ineligible for no-contest settlements.  Staff’s no-contest program may help streamline the process for marginal offenders, but is unlikely to help staff resolve complex matters or reduce staff’s caseload. 

[2] http://www.sec.gov/news/speech/2011/spch120111rk.htm
[3] Mary Schapiro, http://www.bennettjones.com/Publications/Articles/Interview_with_Mary_Schapiro/
[4] http://www.osc.gov.on.ca/en/NewsEvents_nr_20140311_osc-strengthen-enforcement.htm
[5]  SEC v. Citigroup Global Markets Inc., 827 F. Supp.2d 328 (S.D.N.Y. 2011)
[6] http://www.bennettjones.com/Publications/Articles/Interview_with_Mary_Schapiro/


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