NIN 89/34 - Settlements With The British Columbia Securities Commission [NIN - Rescinded]
| Published Date: | 1989-11-17 |
|---|---|
| Effective Date: | 1989-11-17 |
INTRODUCTION
The settlement process is a relatively new one for the British Columbia Securities Commission. The current administration's first settlement agreement was announced in April of 1988; since that time, approximately 30 settlements have been reached on a wide variety of issues. This notice summarizes some of the lessons learned and directions taken by the Securities Commission as a result of our experience with this developing process.
In this notice, our securities regulatory body as a whole is referred as the "Securities Commission", and individual Commissioners or panels of Commissioners are referred to as the "Commission proper". When discussing the policies or actions of staff of the Securities Commission with the intention of excluding reference to the Commission proper, the reference will be to the "staff" or to its chief administrative officer, the "Superintendent". All parties with whom the Securities Commission deals on settlement matters will be referred to as "respondents", without in any way adopting the legal implications of that word. Finally, all section references are to the Securities Act, unless otherwise stated.
1. WHY SETTLE?
This question needs to be asked in each instance by both sides. From the Securities Commission's perspective, a settlement can be faster, more cost efficient, and more flexible than a full hearing, while still retaining the desired regulatory end, which includes the creation of a body of precedents. The financial burden to the Securities Commission of a full hearing, which once played a significant role in deciding whether to proceed (particularly since the Securities Commission is now essentially a self-financing entity), has become less pronounced since the commission proper was granted the power under section 154.2 to order payment of costs after a hearing. (The schedule of hearing costs is set out in item 33 of section 138(l) of the Regulation). Consequently, the emphasis in deciding whether or not to settle can now more easily be determined on the broader basis of regulatory initiatives and the public interest.
Generally speaking, the settlement option is always open. Only in circumstances where the staff considers it essential that guidance be given by the Commission proper in a particular area, or where the Commission proper expresses a desire to deal with a particular type of issue at a full hearing, will settlement discussions not be entertained, and the respondents will be told that at an early stage. Whether a settlement can be reached depends, of course, on a variety of factors, some of which are discussed below.
From a respondent's perspective, there are a number of reasons why a settlement may be preferred to a full hearing
(1) the settlement process is almost always less expensive, particularly in respect of legal fees and possible hearing costs;
(2) settlements are by their nature more predictable than hearings - the respondent can to a limited extent 'control' the issues dealt with and their resolution;
(3) hearings generally tend to attract more media attention than settlements, in part because hearings involve day by day disclosures through testimony instead of a single voluntary written statement;
(4) the settlement process can be less intrusive and gruelling - the respondent is not, for example, subjected to cross examination in full public view; and
(5) the sanctions resulting from the settlement process are usually lighter than those which the Superintendent would ask for at a full hearing, and there is a greater range of alternative solutions available in the context of a negotiated settlement than is available to the commission proper in the context of a hearing.
Despite these apparent advantages, there are situations where the respondent perceives it to be in his best interest to have his case dealt with in a full public hearing. This usually occurs when the respondent feels his conduct will withstand or benefit from a review or thinks the settlement terms are too onerous, or where for one reason or another he wishes to avoid voluntary contact with the Securities Commission, which often means he will also not appear at a hearing.
2. WITH WHOM DO YOU SETTLE?
All settlement agreements to date have been entered into between the respondent and the Superintendent, without the involvement of Commissioners. The Securities Commission has developed an internal policy whereby the Superintendent is responsible for directing the investigation, "prosecution", and settlement of cases, while the Commission proper conducts impartial hearings of cases that are not settled.
This arrangement is facilitated because, under the British Columbia Securities Act, many of the powers of the Commission proper are also exercisable by the Superintendent. For example, the Superintendent can issue temporary or permanent cease-trade orders, remove a director or officer of an issuer, remove statutory exemptions from any person, or suspend or cancel a registration. Therefore, the involvement of the Commission proper is not legally required to issue the orders that typically accompany a settlement nor, as a matter of policy, is the consent of the Commission proper required in order for the Superintendent to enter into a settlement agreement.
A settlement with the Superintendent may not end matters, since the issues raised by the fact of concurrent jurisdictions can complicate the settlement process or involve several different settlements.
The jurisdictional overlap arises most often between the Securities Commission and a securities commission of another province or country (notably the United States), a self regulatory organization (an "SRO", which in Canada means a stock exchange or the Investment Dealers Association) or a civil or criminal court in British Columbia or elsewhere. It is readily apparent that complex issues may arise Out Of these situations.
Without attempting to deal with the myriad circumstances which may require consideration by respondent's counsel, it is possible to set out a few guiding principles that the staff will apply in its settlement deliberations.
(1) We will generally be amenable to entering into the same settlement agreement as a securities commission in another province if the conduct at issue in each jurisdiction is the same and the settlement is reasonably consistent with what we would normally expect.
(2) We will generally defer to the jurisdiction of an SRO in matters clearly within its mandate, for example 'churning' of an account or a breach of the SRO's rules, even if the Securities Commission participated in the investigation. If the conduct also has a larger aspect relating to the public interest, such as market manipulation (in the criminal context or otherwise), we would become involved and might enter into settlement negotiations, even if the respondent was also being disciplined by the SRO. In many cases, the sanctions imposed by the Securities Commission in these instances would be in addition to, and could go beyond, the sanctions imposed by the SRO, particularly with respect to the exercise of regulatory powers (such as removal of trading rights) that an SRO does not have. The guiding principle in this context is the protection of the public interest, which requires the Securities Commission to consider a person's fitness to participate in the securities markets, and not just his status as a member of an SRO. Accordingly, a registrant's conduct will not be immune from review by the Securities Commission solely because he is a member of an SRO that has disciplinary powers which may also be brought to bear against him.
(3) The Securities Commission would normally proceed with a hearing or settlement even if criminal or civil proceedings are underway or contemplated in connection with the conduct at issue. Reference is made to Securities Commission Notice 88/11 which sets out the staff response -that a respondent might expect in those circumstances.The Securities Commission takes the view that its regulatory function in protecting the public interest generally requires it to take action in those circumstances, and that it cannot stand by or expect other processes, criminal or civil, to deal with the Securities Commission's concerns or areas of responsibility.
3. WHEN DO YOU SETTLE?
There are three distinct stages of Securities Commission involvement in a matter during which settlement may be reached.
The first is after an investigation has commenced, but before proceedings have been initiated through a formal notice of hearing. Because these settlement agreements are based only on information known to the investigators at the time of signing, they often reserve to the Securities Commission the right to take further action if that is warranted by further facts that come to light. Occasionally the settlement will involve an undertaking on the part of the Superintendent to cease investigations, but that kind of arrangement is usually based on a fairly clear indication that further investigation will not be fruitful. At this first stage for settlement, the staff is inclined to be the most flexible, and the sanctions sought will normally never be less than at this stage.
The second stage for settlement is after a notice of hearing has been issued, with or without accompanying temporary orders. At this stage, the investigation is relatively advanced, the Attorney General's office - which provides legal services to the Securities Commission - has become involved, hearing dates have been booked and a panel of Commissioners has been established. The allegations and issues which must be dealt with in any settlement will usually have been set out in the notice of hearing. Any temporary orders issued will normally be kept in place pending the hearing or settlement. The sanctions sought at this stage will still be less than those the Superintendent feels are likely to be imposed by the Commission proper after a hearing.
The third stage of settlement is after the hearing has commenced but before a decision is rendered. These are the most difficult settlements, particularly in hearings with multiple respondents. The reason is that such settlements may involve factual matters which it is the purpose of the hearing to determine, and may be perceived as in some way tying the hands of the Commissioners on the issue of sanctions for remaining respondents before the Commissioners have reached a conclusion on the entire matter. To date, a small number of settlements have been entered into under these circumstances with no apparent ill effects, but it is not a practice which is recommended or encouraged. Different, possibly less difficult, considerations would arise if the sole respondent or all respondents in a hearing were to propose
settlement during a hearing, but to date this has not occurred.
4. HOW DO YOU SETTLE?
Very little needs to be said about this, as the procedures are not in any way unusual, and in fact will be familiar for most respondents' counsel. Several observations may be of assistance in obtaining the most favourable arrangement for a respondent.
5. WHAT FORM DOES A SETTLEMENT TAKE?(1) The respondent should have counsel conduct the negotiations for all the usual reasons, but particularly because admissions or evidence must be properly dealt with so that the respondent is not prejudiced by incorrect procedures should the matter go to a hearing.
(2) Settlement discussions prior to a notice of hearing being issued should normally be held with the enforcement person handling the matter; that person will involve his or her superior or counsel, depending on the circumstances and the significance of the matter under investigation. After a notice of hearing is issued, settlement discussions should be held with the Superintendent's counsel.
(3) Avoid unrealistic opening offers. While staff are prepared to do a certain amount of 'horse-trading' to finalize matters, their time is properly spent preparing the evidence and arguments for a hearing, not pursuing settlements which are a long way away from the staff's intended goal. Stick to the main issues, deal with the key evidence, and review past settlement agreements and decisions of the Commission proper. Be prepared to listen to the staff Is regulatory objective and place the respondent's position into that context.
(4) Expect the staff Is position to be negotiable if new evidence or the respondent's particular circumstances warrant it, but do not mistake an initial suggestion for sanctions as an early 'high-ball' offer. We have had uniformly unsatisfactory experiences with such approaches, and are now much more inclined to give a very realistic first estimate as to where we wish to end up.
(5) Notwithstanding the Securities Commission's regulatory role, it too must allocate limited resources and select cases out of competing priorities. From a purely practical perspective, we will be less inclined to pursue minor matters if evidence of more serious wrongdoing is available or made available.
(6) Be prepared to include a provision for costs in any settlement. While the amount is negotiable, the principle generally is not, particularly after a notice of hearing has been issued. These funds will be required to be paid at the time of signing the settlement; deferral of the obligation is unlikely.
A settlement is finalized by way of an agreement between the respondent and the Superintendent. It involves an agreed statement of facts, and a payment of any settlement amount or contribution to investigative costs. If the settlement involves non-financial sanctions, it will be accompanied by an order (usually from the Superintendent although occasionally from the Commission proper if it involves an exercise of powers exclusive to it) or by an undertaking from the respondent if there is no provision in the Securities Act for an order relating to the conduct undertaken or restrained.
Undertakings usually are given in respect of remedies such as restitution, disgorgement of profits, fees, or other improperly obtained benefits, obtaining certain training or experience, or improving internal organization or procedures.
The Securities Commission will not entertain settlements of the 'neither admit nor deny' variety. These types of settlements, popular in the United States as consent injunctions", are in our view of insufficient value to warrant forgoing full proceedings. While we are sensitive to the complications that admissions in a settlement may create in cases where further criminal or civil actions are pending or prospective, the hearing process poses similar problems for the respondent. As indicated previously, a settlement may be the best method for dealing flexibly with these issues.
All settlement agreements are published in the Securities Commission's bulletin (the "Weekly Summary") and in some cases, particularly after a notice of hearing has been issued, are sent to interested members of the media, usually with a summary to ensure accuracy in the case of complex issues or proceedings. No public comments, 'clarifications' or elaborations are given by the Superintendent or the staff, as the settlement agreement should speak for itself.
As a final note, settlement agreements always contain a waiver of any right the respondent may have to a hearing or appeal, and may indicate the course of action which the Superintendent is forgoing as a consequence of the settlement.
6. ENFORCEMENT OF SETTLEMENTS
To date, the enforcement of settlement agreements has not proven to be a major issue. In situations where an undertaking is breached or an order is not complied with, it is likely that an application would be made to the Supreme Court under section 140 of the Securities Act for an order directing the respondent to comply with or cease violating the order or the Securities Act. This method would make available all the contempt powers of the Supreme Court. Alternatively, the Securities Commission would, in appropriate circumstances, turn the matter over to the Attorney General's office for prosecution under section 138 of the Securities Act.
SUMMARY
Settlements are an effective way of dealing with a wide variety of situations that warrant regulatory attention but not necessarily a formal hearing. Experience may modify some of the procedures or approaches described above, but the Securities Commission will continue to encourage the voluntary and more informal resolution of issues through the settlement process. Suggestions as to how this process may be improved are always welcome.
Dated at Vancouver, British Columbia, this 17th day of November, 1989.
Neil de Gelder
Superintendent of Brokers