Securities law enforcement

• Author: Christopher Nicholls
• Pages: 427-469

427

CH AP TER 11

SECURITIES LAW

ENFORCEMENT

A. INTRODUCTION

The regulatory framework created by Can adian securities laws is for-

midable. But, without effective enforcement, the protections that should

be afforded by such laws would be only so many words on a page.

Canadian sec urities regulators play a pivotal role in enforcing secur-

ities laws. Enforcement is a central pa rt of most securities commissions’

mandates, and commands a material share of their t ime and resources.

In 1997, for example, when the OSC f‌irst became an autonomous, self-

funded agency, one of the top priorities identif‌ied by the chairm an was

the expansion of staff “with the focus on increasi ng resources in the

compliance and enforcement areas.”1

B. FORMS OF ENFORCEMENT ACTION

When securities laws are alleged to have been breached, enforcement

actions typically take one or more of four forms:

• Criminal Code prosecution for certain specif‌ic violations

• Quasi-criminal prosecution

1 Ontario S ecurities Commis sion, 1998 Annual Report (Toronto: Ontario Se curi-

ties Commi ssion, 1998) at 9.

SECU RITIE S LAW428

• Administrative enforcement action

• Civil court proceeding

Although only one of these avenues of enforcement involves a hear-

ing before a provincial secur ities commission, securit ies regulators

may nevertheless play a cr itical “gatekeeping” and quasi-“prosecutorial”

role with respect to the other enforcement chan nels.

Closely related to the enforcement mechanism s referred to above are

securities law provisions authorizing investigations and examinations

into possible infractions, including measures for interprovincial recipro-

cal enforcement and assistance.

Of course, many securit ies industry part icipants are subject to the

jurisdiction of stock exchanges or other recognized self-regulatory

organizations, such as t he Investment Industry Regulator y Organiz-

ation of Canada or the Mutual Fund Dealers A ssociation of Canada.

These bodies also play a n important role in policing the markets.

Finally, it should be remembered that Canadian securities statutes

provide certain civil remedies that are in addition to any remedies that

might otherwise be available at common law. These statutory civil rem-

edies may be pursued by private plaintiffs who have been harmed by

particular securities law infractions. The most important of these statu-

tory civil remedies relate to: civil liability for misrepresentations in a

prospectus,2 liability for misrepresentations in an offering memoran-

dum used in connection with a private placement,3 liability for mis-

representation in a take-over bid circular, an issuer bid circular or a

director’s circular,4 liability for non-delivery of a required prospectus or

bid document,5 liability for misrepresentations in various continuous

disclosure documents,6 and liability for certain insider-trading viola-

tions.7 These civil remedies are discussed in the chapters dealing with

the obligations that these remedies are designed to enforce and, accord-

ingly, are not dealt with further here.

1) Criminal Code

At the date of writing, there are at least six sections of the Criminal Code

that describe offences that relate to trading in securities. One of the goals

2 See, for example, OSA, s 130.

3 See, for example, ibid, s 130.1.

4 See, for example, ibid, s 131.

5 See, for example, ibid, s 133.

6 See, for example, ibid, s 138.3.

7 See, for example, ibid, s 134.

Securities Law Enforcement 429

of the pending Cooperative Capital Markets Regulatory System (CCMR)

initiative was to consolidate the criminal law provisions relating to mis-

conduct in the capital markets. As a result, the consultation draft of the

Capital Markets Stability Act,8 a federal statute that is part of the pack-

age of legislative instruments related to the proposed CCMR, would, if

enacted, remove from the Criminal Code the securities market criminal

offences discussed below and place them within the Capital Markets Sta-

bility Act. However, until that new statute is passed, the most serious

capital market offences are those found in the Criminal Code.

Perhaps the most important of these Criminal Code provisions i s

section 400, which provides that it is a n indictable offence to engage in

the following activities:

[make, circulate, or publish] a prospect us, a statement or an account,

whether written or ora l, [known to be] false in a mater ial particul ar

with intent

(a) to induce persons, whet her ascertained or not, to b ecome share-

holders or partners i n a company,

(b) to dece ive or defraud the members, shareholders or cre ditors,

whether ascert ained or not, of a company, or

(c) to induce a ny person to

(i) entrust or advance a nything to a company, or

(ii) enter into any securit y for the benef‌it of a company.9

A person convicted of an offence under section 400 is liable to a

maximum pena lty of ten years’ imprisonment.

The other relevant offences in the Criminal Code are found in sec-

tions 380 to 384. Among other things, t hese sections make it a crimina l

offence to engage in any of the following acts:

• “[Affecting] the public market price of stocks, [or] shares [among other

things]” “by deceit, falsehood or other fraudulent means . . . with intent

to defraud”10

• Using the mails “for the purpose of transmitting or delivering let-

ters or circulars concerning schemes devised or intended to deceive

or defraud the public, or for the purpose of obtaining money under

false pretences”11

8 Online: http://ccmr-ocrmc.ca/ wp-content /uploads/cmsa- consultation-d raft-

revised-en.pdf.

9 Criminal Code, RSC 1985, c C-46.

10 Ibid, s 380(2).

11 Ibid, s 381.