10/6/2014Poonam Puri, Of Regulatory Reform and Enforcement Effectiveness: Options for a Common Enforcement Agency for Canada Professor Poonam Puri Osgoode Hall Law School, York University Friday, May 2, 2008

10/6/2014Poonam Puri, Introduction – A National or Common Securities Regulator for Canada There have been many proposals for a National or a Common Securities Regulator in Canada, from the mid 1960s onward, including: –Porter Report (1964); –CANSEC Proposal (1967); –Proposals for a Securities Market Law for Canada (1979); –1994 Proposal (1994); –1996 Revival of 1994 Proposal ( ); –Wise Persons Committee (2004); and –Crawford Committee (2006). But, we have not been able to build and sustain the political and regulatory will to implement significant structural change to our securities regulatory framework. Challenges and back-drop: Constitutional division of power; Quebec, B.C. and Alberta’s concerns about federal control, local and regional markets, interests, sensitivities, etc. The recently struck Expert Panel on Securities Regulation (2008) will have to address the current realities and challenges in their proposed model for a common regulator and in their model legislation to create the conditions for a more successful outcome than previous reports and studies.

10/6/2014Poonam Puri, Introduction – Enforcement In contemporary debates on securities regulation in Canada, enforcement effectiveness is a top priority for all capital markets participants. Enforcement effectiveness impacts cost of capital (“the Canadian discount”) and competitiveness, as well as investor confidence. Focusing on structural changes to our enforcement framework may be a way forward while a resolution of the remaining issues surrounding the debate on a common securities regulator continues to be resolved. This paper presents three options for reform to the enforcement structural framework.

10/6/2014Poonam Puri, Current Enforcement Framework InvestigationProsecutionAdjudication 13 Securities Commissions 13 Administrative Hearing Tribunals 3 SROs 3 SROs Hearing Panels Provincial and Territorial Police Forces Provincial and Territorial Crown Prosecutors 13 Courts – Provincial Offences RCMP Commercial Crimes Unit Federal Crown Prosecutors Courts – Federal Offences RCMP IMET

10/6/2014Poonam Puri, Current Enforcement Framework InvestigationProsecutionAdjudication 13 Securities Commissions 13 Administrative Hearing Tribunals Provincial and Territorial Police Forces Provincial and Territorial Crown Prosecutors 13 Courts – Provincial Offences RCMP Commercial Crimes Unit Federal Crown Prosecutors Courts – Federal Offences RCMP IMET

10/6/2014Poonam Puri, Current Enforcement Framework InvestigationProsecutionAdjudication 13 Securities Commissions 13 Administrative Hearing Tribunals Provincial and Territorial Crown Prosecutors 13 Courts – Provincial Offences Federal Crown Prosecutors Courts – Federal Offences RCMP IMET

10/6/2014Poonam Puri, Current Enforcement Framework InvestigationProsecutionAdjudication RCMP IMET

Concerns with Criminal Enforcement Both the RCMP and IMET have been the subject of considerable criticism. David Brown, Rebuilding the Trust, Task Force on Governance and Cultural Change in the RCMP (December 2007). Cory/Pilkington Report, Critical Issues in Enforcement (2006); Recommendations include: –Expand mandate of IMET; –IMET should complete its investigations expeditiously; –IMET should be structured to take into account provincial interests in enforcement; –Establish processes and protocols for sharing information; –Develop policies for police staffing to ensure continued development and retention; and –A Senior Independent Review Officer should be appointed for each IMET and for each regulator, to provide focus, supervision, and a locus of accountability for strategic decisions. A SIRO has ultimate authority to refer matter for ultimate prosecution, or limit, curtail, or terminate an investigation. 10/6/2014Poonam Puri, 20088

Concerns with Criminal Enforcement Nick LePan, Enhancing Integrated Market Enforcement Teams, Achieving Results in Fighting Capital Markets Crime (October 2007); Recommendations include: –Enhanced leadership and tone from the top, emphasizing results; –Fighting capital markets fraud to have a higher priority within the RCMP and PPSC; –Clarifying accountability and who is in charge within the RCMP; –Appointing a more senior leader at RCMP HQ to actively oversee the program; –Put in place a more discipline, results-based management and oversight of investigations to focus, keep them on track and speed up getting to results; and –Specific measures to improve HR management in IMET to address: pay scales, high vacancy rates, staff turn-over, promotions, and opportunities. Securities Fraud Enforcement Working Group (2007); Recommendations include: –Power to compel third party witnesses. 10/6/2014Poonam Puri, 20089

Option 1: Separate Agency for IMET Create a separate, new federal agency to investigate capital markets offences of a criminal nature. –RCMP Deputy Commissioner Pierre-Yves Bourduas indicated that there has been “much discussion” about whether IMET should retain its connection with the RCMP or whether a separate agency should be created. (Standing Committee on Banking, Trade and Commerce, June 16, 2007). –Agency could house specialized investigators (and a cadre of specialized prosecutors who work closely with investigators) to achieve efficient, timely and fair investigations and prosecutions. –Agency could enforce existing Criminal Code offenses or capital markets offences could be carved out from the Criminal Code into a new piece of federal legislation. 10/6/2014Poonam Puri,

Option 1: Separate Agency for IMET Opportunities: –IMET is comprised of about 150 people in a force which is 26,000 strong; IMET cannot realistically change much within the constraints of RCMP structure. –New agency can structure its own pay and promotion scale without regard to RCMP’s rigid structures. –During the course of a lengthy investigation, an officer would stay put within a separate IMET agency; he/she could not be diverted to perform other duties within the RCMP which the existing structure permits. –Greater likelihood that officers/investigators can build their careers and earn promotions, without moving out of this specialized agency. –Greater opportunities for accountability, transparency, and a results-oriented mandate. Challenges: –Budget/Funding? Governance? Accountability? Transparency? –Transition plan. 10/6/2014Poonam Puri,

10/6/2014Poonam Puri, Current Regulatory Framework InvestigationProsecutionAdjudication 13 Securities Commissions 13 Administrative Hearing Tribunals

Concerns with Regulatory Enforcement Complexity and duplication of jurisdiction and responsibility: Much effort is spent co- coordinating and co-operating amongst provincial and territorial counterparts, SROs, criminal law authorities and international counterparts. Lack of enforcement in high profile cases Delays between detection and action, and delays in adjudication Inadequate penalties Concerns about ineffective enforcement, in comparison to the U.S. Remedies are effective only in province in which they were ordered Range of sanctions and maximum penalties vary from province to province Sanctioning principles vary across the country and priorities vary across country Lack of accountability, given 13 provincial and territorial regulators pursuing their own enforcement agenda. –Confusion between criminal and regulatory matters and who is accountable for what. 10/6/2014Poonam Puri,

Option 2: Common Adjudicative Tribunal Carve out the adjudicative function from the 13 provincial and territorial securities commissions and combine into one pan-Canadian adjudicative tribunal. –Concern with the current system: Other than Quebec, the adjudicative function is embedded within the organizational structure of the securities commission, creating a perception of bias. –Many calls for adjudication to be independent of the securities commissions. (Baillie/Beck/Waitzer, Osborne, Cory/Pilkington, Allen, Crawford.) –Council of Ministers of Securities Regulation noted that it is examining the potential benefits of establishing an independent securities tribunal (Progress Report 2007) 10/6/2014Poonam Puri,

Option 2: Common Adjudicative Tribunal Opportunities: –A roster of expert commissioners would be created, drawing on retired judges, industry participants, lawyers, and other professionals. –Would allow for greater consistency in application and enforcement of principles --in light of interest in Canada in moving towards principles based regulation. –Would also allow for greater consistency in principles used to lay sanctions. –May include a mechanism to make sanctions apply across the country. Challenges: –Accountability? Governance structure? Funding? –Other than the independence issue, it does not address the other key criticisms of enforcement efficiency and effectiveness. So, this option may not be a major win on its own, but it has value when coupled with another option. –Is the political and regulatory will there to make this happen? 10/6/2014Poonam Puri,

Option 3 – Create a Common Enforcement Agency Carve-out the investigation and prosecution functions from the provincial securities commissions and combine them into one pan-Canadian agency that would investigate and prosecute regulatory and quasi-criminal offences. –Leave other substantive areas including policy making, corporate finance, mergers and acquisitions, etc to existing commissions. 10/6/2014Poonam Puri,

Option 3 – Create a Common Enforcement Agency Opportunities: –Enforcement priorities can be established at a single, common level. –Greater consistency – particularly important in light of interest in principles-based regulation –Budget/resources that were used to co-ordinate and co-operate can now be used for substantive matters. –Real possibilities for effective and efficient co-ordination with SROs, criminal law authorities and international bodies. –Existing provincial and territorial commissions can continue to deal with policy, corporate finance, etc. Challenges: –Federal? Provincial? Constitutional basis? –Governance structure? Accountability? Staffing? –What securities laws would this agency enforce? –Is the political and regulatory will there to make it happen? –Is this option just as difficult and complicated to achieve as a common regulator? 10/6/2014Poonam Puri,

Evaluating the Options Key criteria to evaluate the options include: –Ability to deal with key criticisms of enforcement; –Constitutionality validity; –Stability of structure; –Cost effectiveness; and –Transition path and costs. 10/6/2014Poonam Puri,

Conclusion All three options presented are potentially useful methods of addressing enforcement issues. –Option 1 would be the easiest to implement; –Option 2 would be an improvement over the current system, but primarily by removing the perception of bias; and –Option 3 would be the most difficult to implement, given the negotiation that will be required to effect it, but it will have the greatest impact on enforcement effectiveness. The three options presented are not mutually exclusive. Option 4 - A variation involving further consolidation could be considered. –An agency that combines Options 1 and 3: separate IMET from the RCMP and separate the 13 provincial/territorial investigative and prosecutorial functions from the commissions. Place them into one pan-Canadian agency that deals with criminal and regulatory enforcement actions. –Would need to crystallize the protocols on information sharing between criminal and regulatory bodies. –Option 2’s Adjudicative Hearing Tribunal could have a broader mandate - to hear regulatory matters as well as criminal and quasi-criminal matters.