In October 2011, the Ontario Securities Commission (“OSC“) raised the concept of offering no-contest settlements of the sort commonly employed by the US Securities and Exchange Commission (“SEC“). On March 11th of this year, after receiving some sharply divided feedback in months of public hearings, the OSC announced that it was moving forward with the introduction of a policy that would permit settlement of enforcement proceedings without requiring an admission by the respondent of misconduct (no-contest settlements). The OSC has emphasized that the deployment of this policy will only be available in a narrow set of circumstances. In the meantime, the debate over whether such a policy can achieve its objectives of expedience and efficient resource allocation while at the same time avoiding the risk of letting wrongdoers off the hook, has yet to be resolved.

Until the introduction of the changes, the OSC’s approach to the settlement of charges against persons accused of breaching securities laws was to require an admission of guilt or culpability. This created a significant stumbling block in settlement discussions for those willing to take responsibility for breaches, but were concerned about their exposure in further or pending litigation that could arise from an admission of guilt.

The new approach is among four new enforcement initiatives to be adopted by the commission aimed at encouraging co-operation from alleged wrongdoers to accelerate dispute resolution more efficiently.  The OSC has emphasized that the availability of a no-contest settlement will typically be available where a “responsible” regulated market participant has come forward and co-operated with the OSC after discovering a violation of securities law and has agreed to pay some sort of compensation to investors for losses.

The introduction of the program is controversial as some feel that no-contest settlements will allow wrongdoers to avoid the consequences that would otherwise flow from an admission of guilt.  In essence, it is argued, wrongdoers will be able to simply pay a premium in order to avoid the litigation risk and public backlash that would typically result from a guilty admission.  As OSC enforcement proceedings do not result in direct compensation, victims of fraud and wronged investors often rely on admissions of guilt secured by the OSC to achieve restitution through civil litigation. If no-contest deals remove any admission of misconduct aggrieved investors fear there will be little left for them to rely on in pursuing further remedies in civil courts. The fact that the SEC has come under recent fire and US courts have had to block several no-contest deals secured by the SEC (including a $235 million dollar fine against Citi Group for allegedly misleading investors before the US subprime mortgage crash) emphasizes the risk of such no-contest settlements operating as a form of “permit” to breach securities law.  

For advocates of those facing the regulatory charges, there is at the same time a concern that such programs are susceptible to becoming mechanisms for effectively coercing respondents who don’t want to make admissions of guilt to pay greater settlement amounts.

To assuage the concerns of the program’s detractors, the OSC has pledged to narrow the eligibility of such no-contest settlements by screening them through a hearing panel.  No-contest settlements will not be available:

  • to anyone who has “engaged in abusive, fraudulent or criminal conduct”;
  • to anyone who has failed to address any losses caused to investors, or who has obstructed or misled investigators;
  • to repeat offenders; or
  • for cases handled by serious offenses unit not eligible.

Proponents of no-contest settlements, including the OSC and lawyers who act for those facing allegations before the Commission, have long argued that allowing no-contest deals will resolve enforcement matters more efficiently, streamline the OSC’s case log and free up time and resources for the OSC to focus on more serious infractions such as pursuing fraudsters, cracking down on insider trading and laying more criminal charges.

* The authors wish to thank Philip Holdsworth, Summer Student, for his assistance with this posting.