Canada

As a federation dividing powers between the national and provincial (or territorial) governments, Canada does not have a national securities regulator. Securities regulation falls within the ambit of provincial and territorial power, although Canada’s federal criminal laws also address issues relating to securities enforcement.

What are the relevant statutes and which government authorities are responsible for investigating and enforcing them?

Canada’s securities regulatory landscape involves a patchwork of different organisations for both investigation and prosecution, from criminal law enforcement to provincial (or territorial) securities regulators, to individual self-regulatory organisations overseeing specific industries. Cooperation among these entities, as well as other law enforcement agencies around the globe, is common.

The majority of enforcement activity is taken by securities regulators. Although Canadian securities regulation falls primarily within the scope of the provinces and territories, enforcement is bifurcated between provincial and territorial legislation and the Criminal Code.^[2] The provincial regulators, including both securities commissions and self-regulatory organisations (SROs), are responsible for sanctioning administrative and quasi-criminal violations falling within the scope of the provincial and territorial legislation.^[3] In contrast, Crown prosecutors are responsible for prosecuting and sanctioning criminal violations falling under the scope of the Criminal Code.^[4] The result of this bifurcation is that an individual or company can be the subject of both regulatory and criminal sanctions.

Securities regulators

Each province and territory has a separate securities regulator and securities legislation,^[5] though the legislation is similar across jurisdictions.

Some harmonisation across provinces and territories exists. The Canadian Securities Administrators (CSA), a pan-Canadian association consisting of representatives from each provincial and territorial regulator, serves to harmonise legislation through the use of national and multilateral instruments. A national instrument refers to an instrument implemented by the CSA that has been adopted as law by the securities regulators in each of the provinces and territories, while a multilateral instrument has only been adopted by some regulators. These instruments carry the force of law in the provinces and territories in which they are adopted.^[6]

Each provincial or territorial securities regulator is conferred the power to investigate and enforce the provisions of that jurisdiction’s securities laws. Regulators have a broad range of powers that enable them to pursue claims using civil, criminal, quasi-criminal or administrative proceedings.^[7] These regulators may impose a range of penalties, such as administrative sanctions imposed by regulators, and civil or quasi-criminal liability under the various securities acts. Administrative penalties may also include cease trade orders and trading bans. Such orders may be imposed upon various market participants, including corporations, their directors, officers and others.

Criminal Code

Though less common, breaches of securities laws may also be pursued under the Criminal Code, and are investigated by the Royal Canadian Mounted Police (RCMP) and prosecuted by government prosecutors, referred to as Crown counsel (distinct from securities commission prosecutors) before a provincial or territorial court.^[8] Sections 380 to 384 and 400 of the Criminal Code prohibit securities fraud of over C$5,000, various forms of fraudulent market manipulation and publishing a prospectus with false or misleading information.^[9]

As set out above, the bulk of securities enforcement falls to provincial and territorial regulators. For instance, the Ontario Securities Commission did not have a single Criminal Code proceeding in 2020–2021, and only two in 2019–2020, compared with 25 and 34 administrative proceedings in 2020–2021 and 2019–2020, respectively.^[10]

There is, however, considerable coordination between criminal law enforcement and regulatory bodies as set out further below.

Criminal, regulatory and inter-jurisdictional cooperation

Cooperation among provincial and territorial regulators is also common, and such cooperation extends past Canadian borders.

Within Canada, the CSA Enforcement Committee helps coordinate multi-jurisdictional investigations.^[11] The Cooperative Capital Markets Regulatory System was also implemented by the federal government and several provinces, including British Columbia, Ontario, Saskatchewan, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island and the Yukon. It aims to streamline the capital markets regulatory framework.^[12]

The various jurisdictions also use reciprocal orders to impose sanctions, conditions, restrictions and requirements across Canada, rather than only in the jurisdiction in which the person or company was investigated. While some provinces have legislated that sanctions imposed in another Canadian jurisdiction will automatically apply in their jurisdiction,^[13] others have legislated the ability for their securities regulators to order that the extra-provincial sanctions apply.^[14]

The enforcement branch of a given securities commission may also work in tandem with other partnerships. For example, the Alberta and Ontario Joint Securities Offence Teams (JSOTs) each investigate quasi-criminal cases under their respective securities legislation and securities-related criminal offences under the Criminal Code. The Alberta JSOT is an enforcement partnership between the Alberta Securities Commission, the RCMP Federal Policing Financial Integrity Program and Alberta Crown Prosecution Service.^[15] The Ontario JSOT is an enforcement partnership between the Ontario Securities Commission, the RCMP Financial Crime Program and the Ontario Provincial Anti-Rackets Branch.^[16]

The RCMP also leads units of integrated market enforcement teams (IMET) that investigate and work to deter capital markets fraud. IMET operates as a joint-managed team with Justice Canada’s Federal Prosecution Service, and partner departments and agencies in the major markets of Toronto, Vancouver, Montreal and Calgary. IMET works with securities regulators and other federal and provincial authorities.^[17]

Finally, provincial securities regulators routinely enter into memoranda of understanding with other regulatory authorities in other countries to facilitate cooperation, coordination and information sharing. For instance, several provinces have entered innovation functions cooperation agreements with securities regulators in other countries, including the US Securities and Exchange Commission and the Financial Industry Regulatory Authority, the Australian Securities and Investment Commission, and the Securities and Futures Commission of Hong Kong, among others.^[18]

Self-regulatory organisations

The various provincial and territorial securities acts across Canada allow for the formal recognition of SROs, such as the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association (MFDA) (which have announced an intention to merge into an enhanced SRO). These SROs regulate the operations and conduct of their members through their own by-laws, rules, regulations, policies, procedures and practices.

IIROC’s Enforcement Department is responsible for the oversight of Canada’s investment dealers and the enforcement of their Dealer Member Rules. These rules regulate sales, business and financial conduct of its dealer members and their employees. IIROC also imposes Universal Market Integrity Rules, which regulate trading conduct on equity and debt marketplaces.^[19]

The MFDA Enforcement Department investigates and prosecutes members and their approved persons that may have breached MFDA by-laws, rules, policies or applicable securities legislation. The MFDA may commence disciplinary proceedings against its members or approved persons who have been engaged in misconduct.^[20]

Both IIROC and the MFDA enforce their respective rules through various measures, such as the imposition of fines, suspensions and bans.^[21]

Stock exchanges

Finally, there are numerous stock exchanges in Canada that play a role in the regulation of Canada’s publicly traded companies by setting rules and policies for their listed companies. Stock exchanges do not have the power to levy administrative penalties in the way that securities regulators or SROs do, but they can enforce their rules and policies through corrective disclosure, trading halts and delisting. Such penalties can have serious financial implications on listed companies and, in this way, contribute to the promotion of fair and competitive capital markets.^[22]

What conduct is most commonly the subject of securities enforcement?

The most common conduct subject to securities enforcement varies by the regulator or the rule-making authority under which a violation occurs.

Securities regulators

In 2020–2021, the CSA reported that provincial and territorial securities regulators commenced 52 different matters involving 133 different respondents, comprising both individuals and firms. Illegal distributions violations involved the greatest number of respondents (49), followed by misconduct by registrants (27), fraud (23) and illegal insider trading (13).^[23] In that same year, CSA members concluded 43 matters involving 93 respondents, with illegal distributions violations again involving the greatest number of respondents (53), followed by public interest violations, such as breaching orders, misrepresentations, auditor misconduct and investigation obstruction, and other misconduct (13) and fraud (eight).^[24] Similarly, 38 proceedings were commenced in 2019–2020, involving 86 respondents, with the most respondents in illegal distributions (70), followed by fraud (23) and public interest violations (28).^[25]

It should be noted parenthetically that securities regulators are given broad powers to sanction a person or company on the basis of a violation of the public interest, which can be the subject of regulatory sanction even absent any breach of prevailing legislation and policies.^[26]

Criminal proceedings

While criminal prosecutions in connection with securities enforcement are relatively rare, there have been a few notable recent criminal prosecutions in Canada. These have primarily been in connection with charges of fraud over C$5,000. For example, in 2020, an Alberta man was convicted on 22 counts of fraud over C$5,000 for inducing 22 investors to participate in a Ponzi scheme that exceeded C$5 million. He pled guilty and was sentenced to six years’ imprisonment.^[27] The same year, a British Columbia man was convicted on two counts of fraud over C$5,000 after he convinced a Vancouver resident to invest C$500,000 in a fraudulent investment group. He was sentenced to three years’ imprisonment and ordered to pay C$500,000 in restitution.^[28] In 2019, an Ontario man purporting to be a certified general accountant was convicted of one count of fraud over C$5,000 as a member of a group that defrauded at least 14 individuals out of approximately C$155,000. He was sentenced to eight months’ imprisonment and three years’ probation.^[29]

SROs

In the five years since 2017, IIROC completed 213 prosecutions consisting of 41 firms in the business of advising on or trading in securities in Canada and 172 individuals.^[30] For individuals, the most common violations included: (1) failing to make investment recommendations that are suitable for the client, due diligence and handling of client accounts (i.e., failure to use due diligence to ensure recommendations are suitable, excessive trading in the account of a client); (2) inappropriate personal financial dealings; (3) discretionary trading; and (4) supervision (i.e., failure to establish and maintain adequate controls relating to options trading and failure to comply with trading supervision obligations). For prosecutions involving firms, the most common were offences relating to the supervision of account activity by employees of the firm and account holders to ensure compliance with IIROC requirements, protective orders and internal controls.^[31]

In the first half of 2021, the most common violations for the MFDA were breaching business standards (16 per cent), failing to make investment recommendations that are suitable for the client (14 per cent), unauthorised or improper transfer of a client’s account (12 per cent) and unauthorised trading of a client’s investments (6 per cent).^[32]

What legal issues commonly arise in enforcement investigations?

As noted, each Canadian jurisdiction has authority under their securities acts to conduct enforcement investigations.^[33] The individual appointed to conduct an investigation has the same power as that vested in a court of superior jurisdiction to: (1) summon and enforce the attendance of witnesses; (2) compel witnesses to give evidence under oath or otherwise; and (3) compel witnesses to produce records.^[34] If a witness fails to attend or answer questions, or if a witness or company fails to produce documents in their custody or possession, they can be held in contempt by a court of superior jurisdiction.^[35]

Key issues in enforcement investigations include confidentiality of proceedings, the right to counsel, whistleblower protections, credit for cooperation and the process for informing a targeted individual or company about an investigation.

Confidentiality and the right to counsel

Generally, investigations commenced by the provincial and territorial securities regulators are confidential, with exceptions for a person or company to divulge information to their counsel, where authorised by the executive director of the securities commission or as permitted by the jurisdiction’s securities laws.^[36] British Columbia previously had a similar provision that was declared unconstitutional in 2010, after which the legislature amended the provision.^[37] The provision has not been declared unconstitutional in other jurisdictions. Now in British Columbia confidentiality is not presumed but the British Columbia Securities Commission can make an order for confidentiality in the investigation.^[38]

Any person or company giving evidence at an investigation may be represented by legal counsel.^[39] Only some jurisdictions have codified a right to representation by legal counsel at a hearing; however, in practice, this is routinely permitted.^[40]

In any event, any person or company is entitled to procedural fairness and has recourse through the courts if they believe that their constitutional rights have been violated during an investigation or hearing.^[41]

Ambit of privilege

While securities commissions in each jurisdiction have the statutory power to compel document production, that authority in and of itself does not do away with a respondent’s right to assert solicitor–client and litigation privilege over certain records.^[42] Some jurisdictions have specifically codified this right to claim privilege.^[43]

In Canada, any communication for the purpose of seeking or giving legal advice between a person or company and their legal counsel is protected by solicitor–client privilege. Solicitor–client privilege does not extend to a person or company’s dealings with other professionals, such as accountants. In contrast, litigation privilege allows a party not to disclose documents created for the dominant purpose of litigation (which, if the requisite test is met, could encompass documents created by other professionals). This privilege only lasts for the duration of the litigation.^[44]

Credit for cooperation

Several jurisdictions have policies and programmes outlining factors that regulator staff will consider in exercising discretion to grant credit for a party’s cooperation beyond what must be done under securities laws.^[45] While the options for credit vary by jurisdiction, they can include: narrowing the scope of allegations in a notice of hearing; issuing a notice of hearing and proceeding to a hearing on the basis of an agreed statement of facts and a joint recommendation on sanction; recommending a settlement agreement; recommending that no enforcement action be taken against the person; and reducing costs ordinarily requested in an enforcement proceeding.^[46]

Protection for whistleblowers

Several of the provinces have legislated whistleblower protections,^[47] while jurisdictions including Alberta, Ontario and Quebec have launched whistleblower programmes.^[48] The specific programmes are designed to encourage reporting to prevent or limit the harm to investors from misconduct.

An individual looking to legitimately benefit from whistleblower protections must act in good faith and proceed only where they have a serious and objective reason to report misconduct.

Ontario’s programme pays whistleblowers between 5 per cent and 15 per cent of monetary sanctions imposed or voluntary payments made (or both) in the relevant proceedings that in aggregate exceed C$1 million, to a maximum of a C$1.5 million award for sanctions or payments equal to or greater than C$10 million.^[49] The Quebec programme does not pay whistleblowers for tips; however, it offers protections including confidentiality, anti-reprisal measures (including immunity from civil prosecution) and anonymity.^[50] The Alberta programme integrates its whistleblower protections with its policy on cooperation, affording whistleblowers the types of credit outlined in ‘Credit for cooperation’ above.^[51]

The federal government also codified whistleblower protection in Section 425.1 of the Criminal Code, allowing criminal courts to impose sanctions on employers that take disciplinary measures against, or demote, terminate or adversely affect, the employment of a whistleblower who will, or has, provided information to the securities commission. If found guilty, it is a hybrid offence with a maximum penalty of five years if it proceeds by indictment.^[52]

Wells process

Canadian jurisdictions have not adopted the Wells process or enacted acts or regulations comparable to the Wells process, nor have the commissions issued guidelines for the process.^[53] Staff retain the discretion to determine when a potential respondent is advised of their involvement, and if and when an enforcement notice should be issued.^[54] The Ontario Securities Commission has confirmed that ‘the formalities of the U.S. “Wells Process” and its requirements do not apply to the investigative stage of OSC administrative proceedings.’^[55]

What remedies and sanctions are available to government authorities?

Sanctions by securities commissions

Securities commissions can impose a variety of sanctions or conduct orders. These include enforcement and disgorgement fines,^[56] administrative penalties and fines,^[57] cease trading orders,^[58] extra-provincial orders,^[59] compliance orders,^[60] suspension or termination of registration^[61] and imprisonment.^[62] Sanctions are typically imposed following a hearing. Accordingly, and because these hearings are administrative proceedings, if imprisonment is being sought it must be sought in court.

Enforcement fines are imposed to penalise specific violations. For instance, in Ontario if a person or company is found to have made a misleading or untrue statement to the Commission, they may be liable for a fine of up to C$5 million or imprisonment for up to five years, or both.^[63]

Disgorgement fines penalise both the violation in addition to any profit gained or losses avoided in the course of the violation. For example, in accordance with Sections 146 and 194(4) of the Alberta Securities Act, where an issuer, person or company in a special relationship with an issuer is found to disclose material facts or changes before they are generally available, they are liable for both a fine up to C$5 million in addition to a fine of triple the profit made or loss avoided.

Administrative penalties and fines can also be imposed in addition to any other sanction where the commission determines that it is in the public interest to do so. The amount of the fines and the specific penalties available differ between jurisdictions. Many provinces contemplate administrative penalties of up to C$1 million per contravention of securities legislation. In 2021, provincial regulators imposed fines and obtained sanctions of only C$20.3 million (the lowest figure since 2008). Collecting fines from those convicted is a known challenge across Canada, with certain provincial securities regulators seeking creative ways to increase repayment, such as the power to block those with unpaid fines from renewing their driver’s licence.

Cease trading orders are bans on trading that fall into two categories: (1) bans on trading of specific securities; and (2) bans on trading by certain people or companies.^[64] For instance, the British Columbia Securities Commission may order that all persons, the person named in the order or a class of persons must cease trading in or be prohibited from purchasing any securities, a specified security or a specified class of security.^[65]

As set out above, extra-provincial orders permit a provincial regulator to make an order in respect of a person or company who has been convicted of an offence outside the governing province. For example, the Alberta Securities Commission can make an order with respect to a person or company where they have been convicted by another securities authority in Canada or outside Canada.^[66]

Orders preventing individuals from acting as directors of companies are also commonplace. Where regulators deem it appropriate, suspension or termination of registration are also available as sanctions.^[67] However, in practice, this sanction is more commonly applied by SROs, which are empowered to impose a variety of sanctions on their professional members.

Sanctions under the Criminal Code

Although it is less commonly used, the Criminal Code is the final mechanism for sanctioning securities violations.^[68] Convictions under the Criminal Code fall under either summary or indictable offences, with indictable offences being more serious. The applicable procedure depends on the seriousness of the offence itself.^[69] For example, in accordance with Section 380, anyone who ‘defrauds the public or any person, whether ascertained or not, of any property, money or valuable security or any service’ is guilty of either a summary or an indictable offence and is liable to up to a minimum of two years in prison.^[70] Some offences, such as gaming in stocks or merchandise pursuant to Section 383(1), do not have minimum sentencing requirements. Accordingly, a variety of sanctions, including, but not limited to, fines or probation, would be available to the prosecution.

The maximum term of imprisonment for securities-related indictable offences is 14 years and Canada has codified a set of aggravating circumstances that may be considered when imposing a sentence, such as if the value of the fraud exceeds C$1 million, the number of victims involved and the effect on the stability of the securities market.^[71]

Footnotes