Recent Securities Enforcement Shows Canadian Regulators Becoming More Aggressive

In the face of continuing criticism about its enforcement capability, the Ontario Securities Commission (OSC) and other provincial securities regulators seem determined to toughen their approach by publicizing more aggressively the steps they are taking and resorting to remedies or interpretations of securities law that are likely to be perceived as more muscular than traditional approaches.

One innovation has been to be more direct about measures that are being considered to strengthen enforcement. During a speech delivered in February, the new Chair of the OSC increased the transparency of its enforcement philosophy by floating new ideas including settlements without admissions of liability and clarifying the credit for cooperation process.1

In June and July of this year, in the wake of market turbulence triggered by a short seller who published very negative research concerning a particular issuer (Sino-Forest), the OSC, in another example of increased transparency, not only publicly confirmed that it had quickly commenced an investigation of that issuer but issued an unusual follow-up notice warning other issuers that it would be extending its investigation to others with substantial assets in emerging markets.

In an even more aggressive step, late in August the OSC removed various Sino-Forest officers in connection with a temporary cease trade order. In an embarrassing development for the OSC, the action in relation to the officers had to be withdrawn the same day. Nonetheless, the issuer voluntarily took steps almost immediately to achieve the same result the OSC's defective order would have accomplished.

The OSC emerging markets investigation extends beyond Sino-Forest and similarly placed issuers to the role played by parties it describes as "gatekeepers": auditors, underwriters and authors of research in relation to such issuers. The risk assessment of certain issuers has been raised in at least one recent investment dealer research update after visiting the properties and checking for related party transactions.

Though perhaps not immediately apparent, this focus on a cross-section of similarly situated public issuers represents an extension of Commission practice in recent years to raise best practice levels by drawing public attention in compliance notices to continuous reporting practices of public companies that regulators, and the OSC in particular, consider deficient.

In an effort to demonstrate that existing provincial...