OSC Proposes New Initiatives to Facilitate Cooperation and Settlements
November 2, 2011
Rene R. Sorell
Although these initiatives are still at the comment stage, they are likely to be implemented in some form as Howard Wetston, the Chair of the OSC has highlighted these initiatives in public statements. The tools include clearer, more explicit procedures for self-reporting by market participants, No-Enforcement Action Agreements and a No-Contest Settlement program.
New Methods of Self-Reporting
The changes to the self-reporting regime recognize that the almost 10-year-old "credit for cooperation" protocol, for parties that report and remedy on their own initiative (OSC Staff Notice 15-702), has not worked. It is regarded as mysterious and as a potentially high risk way to interact with regulators, because it involves admissions of non-compliance with securities laws with no predictable enforcement outcome.
In an effort to reduce uncertainty and increase cooperation in self-reporting, the OSC is proposing a formalized "proffer" process for market participants and other parties to self-report. A proffer agreement is a written agreement that sets out protections to allow a party to make statements to an investigating body without fear that those statements will be used directly against them in a later prosecution. Though used in the United States, proffer agreements have not been available in Ontario.
The proffer agreements proposed by the Commission would provide "use immunity" to the self-reporter. This prohibits the Commission from using any statement made by the proffering party against him should the cooperation process break down. This does not prevent the use of the proffered statement in a prosecution for perjury, obstructing justice, the giving of contradictory evidence or related offences arising from the statement. The Commission has indicated that the proffer agreements will not permit "derivative use immunity." This permits the Commission to indirectly use the proffered statement to develop investigative leads which may be used against the self-reporter.
In addition to the proffer process, the OSC initiatives also provide the self-reporter with an opportunity to preserve anonymity at the initial stages of discussion, by making the initial advance to the regulator through an intermediary such as legal counsel.
Enhanced Disclosure of Credit Given
In order to enhance cooperation and self-reporting by market participants, the OSC proposes to codify the framework to disclose credit granted to cooperating persons. This will include publication of the cooperation provided by a party during a hearing, credit granted in return for cooperation in settlements, and a description of both the type of cooperation provided and the remedial steps taken by a market participant in exchange for a No-Enforcement Action Agreement.
No-Enforcement Action Agreements
No-Enforcement Action Agreements are explicit agreements between the reporter and the OSC, wherein the OSC promises not to initiate public interest proceedings, prosecutions or a court application for a special order where a breach of the Securities Act (Ontario) (Act) has occurred. The self-reporter apparently remains open to criminal prosecution by police and the agreement is apparently not binding on other securities regulators.
These agreements present issues that need to be resolved:
- the adequacy of the self-reporter’s remediation is exposed to second guessing;
- the process encourages reports about others involved in misconduct regardless of their willingness to self-report;
- a No-Enforcement Action Agreement may not be available should self-reporting occur after an investigation is started or if another party has already self-reported the misconduct; and
- unclear to what party or parties the "credit" for self-reporting will be granted (e.g., the individual reporting or the whole organization).
In order to qualify for a No-Enforcement Action Agreement the party must self-report and remediate immediately, disgorge any amount obtained as a result of the reported misconduct, provide sufficient information to allow OSC staff to confirm and test the facts reported prior to entering into an agreement and provide ongoing cooperation, including testimony, with regulators. These agreements will not be available to a reporter who has a history of prior offences or misconduct. These agreements may only be available for schemes that are hard for the securities regulator to detect or definitively prove such as insider trading or market manipulation.
No-Contest Settlement Framework
The proposed initiatives also address resistance to the inclusion of admissions in settlement agreements and covenants not to publicly dispute these admissions, as this can result in settlements that prejudice the defence of civil securities claims or lead to criminal prosecutions under the Act.
The No-Contest Settlement Agreement resembles current agreements but does not include an admission of a breach of statute or conduct contrary to the public interest, though the agreement will contain a penalty. Even though no admission is made by the respondent, the order is made under the public interest powers of the Act, giving rise to the implication that the conduct is below the public interest standard.
To enter into a No-Contest Settlement Agreement the respondent must cooperate with OSC staff during the investigation by self-reporting, remediating in a "timely manner" and by reporting third-party involvement. The respondent is also required to have no history of prior enforcement or regulatory activity by any securities regulator. The benefit of such settlements will remain uncertain until the OSC has prepared guidelines related to the inclusion of penalties.