Grading Canada’s enforcement efforts

March 8, 2012

By John Mackie

CANADA, March 8 (Business Law Currents) – With the Supreme Court of Canada having put an end to the notion of a national securities regulator this past December, securities regulation and enforcement remain matters of provincial and territorial jurisdiction, at least for the time being. In the wake of that decision, several reports have recently been issued regarding enforcement activities by provincial regulators.


One of those reports was the 2011 report on enforcement activities by the Canadian Securities Administrators (CSA). The CSA reports that the number of proceedings commenced fell from 178 in 2010 to 126 in 2011. The number of individuals and issuers identified in such proceedings fell similarly.

CSA members concluded an aggregate of 124 cases in 2011, involving 237 individuals and 128 companies. By comparison, the 174 concluded cases in 2010 involved 207 individuals and 100 companies.

In terms of the type of proceeding concluded, illegal distributions (for example, Ponzi schemes) remain the primary form of wrongdoing, representing over half of the overall total. These are followed by registrant misconduct, insider trading, and disclosure violations. While illegal distributions are significant, many don’t involve reporting issuers, which are more commonly associated with allegations of insider trading or disclosure violations. An interesting question for regulators is whether that split is consistent with the expectations of the public.

About half of the proceedings commenced by members of the CSA ultimately end in settlement. A quarter are considered at the tribunal level, and the remainder go to court. Of the $52 million in total fines in 2011, $41 million were assessed in connection with illegal distributions. Restitutions and disgorgement amounted to $42 million in connection with illegal distributions, out of $50 million in total.


In addition to the CSA Report, the Ontario Securities Commission issued its own report on 2011 enforcement activities. One notable highlight from that report was the fact that, in addition to monetary orders, courts in Ontario ordered jail terms for eight individuals in 2011, ranging from 30 days to three years. The commission indicated that this focus will continue in 2012. There are currently five cases in litigation before the provincial courts.

One other aspect of securities enforcement noted in the OSC’s report was the use of administrative orders. In 2011, the OSC Commission issued 110 cease trade orders, 83 director and officer bans, 118 exemption removals, and 45 registration restrictions.

The OSC took the additional step in January of publishing information regarding the commission’s authority to impose monetary sanctions such as administrative penalties and disgorgement orders, and its success in collecting same.

The OSC disclosure on the collection of monetary sanctions is an illuminating one. It indicates that, from 2005 up to the end of 2011, the OSC has assessed $229 million in monetary sanctions and costs, of which $110 million, or 48 percent, has been collected to date.

Virtually the entire amount collected is related to sanctions and costs assessed from settlements. The OSC collected 71 percent of the $156 million in monetary sanctions and costs assessed from settlements, and just 1 percent of the $73 million assessed from contested hearings. A review of the early 2012 numbers suggests the trend is not improving.

Of the $110 million collected to date, $104 million, or nearly 95 percent, was collected from five financial institutions as part of settlement agreements entered into in 2009 with respect to asset-backed commercial paper (ABCP). In other words, of the $119 million in sanctions not related to that ABCP settlement, less than $10 million has been collected.

Though the OSC’s disclosures on monetary sanctions are admirable and should prove useful as future reports are issued, they also illustrate the abysmal record of the commission in collecting on fines and the like. Admittedly, one of the difficulties is that many of the organizations faced with such issues are insolvent or actively hiding funds off-shore. Even so, it is worth considering whether regulators should be announcing huge monetary sanctions when the likelihood of collection may be negligible.


To illustrate the types of enforcement actions discussed in the CSA and OSC reports, consider the case of Caldwell Investment Management Ltd. The OSC had alleged that Caldwell failed to provide adequate compliance oversight and supervision to an adviser that was responsible for providing portfolio management services to various investment funds. In 2011 the case was settled, with Caldwell ordered to submit to a review of some of its practices and procedures, and pay costs of $25,000. A summary of that settlement appears in the annual information form regarding the Caldwell funds.

Another enforcement matter addressed by the CSA in 2011 concerns commercial real estate manager and developer Homburg Invest. The company’s controlling shareholder and decision maker had been the subject of concerns expressed by the Netherlands Authority for the Financial Markets (AFM) since 2009. Homburg Invest was regulated in the Netherlands as an investment fund and was licensed by the AFM.

In April 2011, the AFM instructed Homburg Invest that founder Richard Homberg could no longer serve as a policymaker or person of influence. In August, following a hearing before the Nova Scotia Securities Commission, the company acknowledged it had failed to file a News Release and a Material Change Report in a timely manner following its receipt of the AMF’s decision. Indeed, the company only publicly disclosed this news at the end of May, following the dismissal of Homburg Invest’s appeal to local courts in the Netherlands.

The company agreed to pay a $75,000 fine plus costs to settle the matter with the Nova Scotia Securities Commission (NSSC). Subsequently, in the belief that the company would not be able to effectively restructure without the AFM license, and hopeful that the appointment of a monitor under the Companies Creditors’ Arrangement Act (CCAA) would address the concerns of the AFM, Homburg Invest moved ahead with a CCAA filing. Unfortunately for Homburg Invest, the AFM nonetheless revoked the company’s license, preventing it from issuing new equity in the Netherlands and thus reducing the restructuring alternatives available.

The Homburg case illustrates a difficult quandary for Canadian regulators. Would the NSSC have agreed to settle the case on the same basis had it known the company would ultimately end up in creditor protection? After all, investors may have an entirely different view as to the extent of damage suffered by the company’s one-month delay in disclosing its issues with the AFM.

Another example of how an enforcement matter can have ripple effects through an issuer’s operations is the case of Citadel Income Fund, which sought to raise up to $116 million in 2011 through an offering of warrants. In March 2011, staff of the OSC recommended against the issuance of a receipt for the prospectus for the offering. The recommendation stemmed from concerns relating to the 2009 acquisition by Crown Hill Fund of Citadel Group of Funds’ administrative contracts. The OSC alleged that transaction was undertaken primarily in the interests of the manager rather than the fund, contrary to the Ontario Securities Act.

In August, the OSC overturned the decision to deny a receipt on the basis that there was insufficient evidence to justify the refusal. However, it ordered that the receipt be made conditional on the Crown Hill providing an undertaking not to use the assets of the Fund to acquire the management contracts of another fund until a final decision on the merits of the enforcement proceeding had been rendered.

As it stands, Crown Hill’s hearing will take place in May of this year. Thus, while the company was able to proceed with its warrant offering for the Citadel Income Fund, it was required to include disclosure of the open enforcement matter in the prospectus and will continue to have the issue hanging over its head.


One significant point highlighted by the CSA in its report is that securities enforcement in Canada is not just multi-jurisdictional. It also involves a number of self-regulatory organizations (SROs); in particular, the Investment Industry Regulatory Organization of Canada (IIROC), the Mutual Fund Dealers Association of Canada (MFDA), and the Chambre de la sécurité financière (CSF). Indeed, those three organizations concluded 133 enforcement cases in 2011, compared with 115 in 2010.

Consider that comment in light of the following statement from the federal government’s factum for the Supreme Court reference on a national securities act:

The experience of investigators is that securities crime is both an interprovincial and international phenomenon. From the criminal investigation perspective, again the subject matter of regulation is something that transcends provincial and even national borders.

The members of the CSA and the SROs involved in securities regulation and enforcement in Canada already face enormous challenges, whether it be a lack of resources, the complexity of the issues, or collection challenges. When the inter-jurisdictional issues are laid on top of these challenges, it is perhaps no surprise that the investing public continues to have doubts about the efficacy of Canada’s regulators on this front.


(This article was first published by Thomson Reuters’ Business Law Currents, a leading provider of legal analysis and news on governance, transactions and legal risk. Visit Business Law Currents online at )

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