Enforcement activity by Canada’s provincial stock-market cops dropped sharply during the first two years of the pandemic. Now, as investments look sicker, will regulatory activity get more robust? There are reasons to fear it will not.
The statistics are included in the recent annual report of the Canadian Securities Administrators (CSA), the umbrella group for provincial authorities. The only thing big about the numbers, unfortunately, was the font size.
In the 12 months ended March 31, the regulators collectively assessed $14.88-million in restitution for investors. That’s million with an “m.” It was the second-smallest amount in the past five years, after fiscal 2020.
The $16.06-million in sanctions and penalties assessed was the smallest amount in the past five years, dropping from $20.4-million in the prior year.
The combined $30.94-million in financial assessments was about half of any of the past five years, including the $62.67-million in fiscal 2021. It was almost $190-million three years ago and $125-million the year before that.
It’s not just about the money, however. In each of the past two years, seven securities-law offenders received a total of little more than 15 years of prison time. In the three prior years, the aggregate sentences ranged from 29.7 years to 48.7 years.
One person was convicted of violations in the past year in Canada. One. In the prior four years, the numbers ranged from six to 13 convictions per year. The numbers for individuals and companies banned from the markets hit multiyear lows in the past two years.
The numbers can be quite lumpy, as CSA spokesperson Ilana Kelemen said in an e-mailed statement, based on “the complexity of cases, respondents, victims and impacts from court proceedings out of our control. The pandemic over the past two years has impacted court proceedings (court closures and trial adjournments) and influenced the number of cases (quasi-criminal and criminal) concluded and the sentences obtained.”
She added that “numbers alone do not convey the full scope of our enforcement actions,” as “CSA members effectively collaborated to enforce securities laws and make the capital markets better for investors.” (Provincial securities regulators can hand off certain tips to other market regulators – such as the Investment Industry Regulatory Organization of Canada, which regulates brokers and fund companies and plays a large role in insider-trading cases – or regulators in other countries.)
Ms. Kelemen said the CSA’s best estimate of the markets its members regulate, based on their research, is in excess of $4-trillion worth of public companies, investment funds and private markets.
That figure is relevant when we bring the United States and its national regulator, the Securities and Exchange Commission, into the picture. SEC chair Gary Gensler says it oversees more than US$100-trillion in capital markets, or about 30 times the size of the Canadian estimate.
The numbers of payments and penalties imposed by the SEC are about 150 times the Canadian figures, however.
In the fiscal year ended Sept. 30, 2021, the SEC obtained judgments and orders for almost US$2.4-billion in disgorgement (a return of ill-gotten gains) and more than US$1.4-billion in penalties. While the disgorgement figure was down 33 per cent from the prior fiscal year, penalties were up 33 per cent.
The SEC’s fines and disgorgement add up to more than US$11 per person in the U.S. Canadian penalties and restitution work out to about 80 cents per capita.
Let us acknowledge that Canadian courts and judicial processes seemed slower to ramp up than U.S. ones and give Canadian regulators the benefit of the doubt. And there are certainly differences between the SEC’s role and mandate and those of our provincial securities regulators. I have no doubt that Canadian securities lawyers would tell me these are apples and oranges.
But if they are apples and oranges, the U.S. has a hell of a lot more fruit than Canada does, and the pandemic isn’t the only reason for that.
Sadly, if Canadian enforcement culture changes, it will likely go in the wrong direction. All eyes should be on Ontario, which historically has delivered the majority of activity owing to its role supervising the Toronto Stock Exchange. In most years, 50 per cent to 75 per cent of financial assessments come out of Ontario, according to statistics obtained by asking the 13 provincial and territorial regulators for their own data.
There are reasons to fear a change under the Ontario Securities Commission’s new leadership, namely chair Heather Zordel, a securities lawyer and Tory fundraiser appointed to the position by Premier Doug Ford. Her past actions suggest she’d like the OSC to take a light touch, to be polite, to enforcement.
Her two recent dissenting opinions in OSC cases, written while she served on commission adjudicative panels, take innovative approaches to excusing bad behaviour in the markets. One suggests investors have little recourse when a company doesn’t operate the business it said it would in its offering prospectus; the other defines material information so narrowly that it’s hard to imagine anyone ever getting convicted of insider trading again.
Mr. Ford may have felt Ms. Zordel would be an advocate for “the little guy.” Instead, she seems to advocate for the smallest issuers of securities, who are far too often the greatest perpetrators of fraud and no friends of the “little guy” at all.
It will probably be another two summers before we can see the results of Canada’s postpandemic securities enforcement activity. Here’s hoping Ontario’s possible regulatory relaxation doesn’t infect the other provinces.
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David Milstead