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When regulators charge small firms with violations, those firms often don’t have the time or money to launch legal battles. Instead, they often have to admit guilt.

But if firms could pay fines without stating guilt, cases would close sooner, regulators could cut costs and firms could escape major reputational damage. Sound good? In 2011, the Ontario Securities Commission proposed using no-contest settlements, which don’t require respondents to admit to the allegations against them.

But the no-admit, no-deny approach concerns investor advocates, who warn no-contests seem like a loophole for wrongdoers. At OSC’s June 2013 enforcement forum, Dimitri Lascaris of Siskinds LLP in London, Ont., said, “There’s no stigma attached to [no-contest] settlements [and] what’s the point of achieving less investor protection [faster]?” Such settlements also make it difficult for investors to evaluate firms and advisors, he added.

The OSC forum sparked renewed discussion about whether the settlements could speed enforcement, even as U.S. regulators pull back on using them: SEC head Mary Jo White says respondents won’t be eligible for no-contests if many investors have been harmed or markets are at risk, for instance.

The fine print

The OSC argues the Securities Act doesn’t require firms to admit to allegations and accept sanctions, so these settlements already have basis in law.

In fact, regulators used no-contest settlements before 1994, said forum participant Jim Douglas of Borden Ladner Gervais. A June 2013 OSC study supports his claim: no-contest settlements were used to close two cases in the early 1990s.

Douglas added the commission shouldn’t exclude the settlements simply because regulators moved from a flexible regime to one where respondents can only enter into templated settlements. OSC enforcement director Tom Atkinson toed the same line, saying markets have become more complex over the past few decades, and “[OSC’s] resources are limited…We must be open to other ways of resolving enforcement actions.” At an OSC dialogue in October 2013, Atkinson stressed the purpose of no-contest settlements isn’t to dilute accountability. They would only be offered to those who commit minor violations; those who commit fraud wouldn’t be eligible.

When deciding whether to offer the settlements, the OSC will consider:

whether respondents have cooperated with regulators;

the degree and timeliness of respondents’ self-reporting;

the remedial steps they’ve already taken, such as compensating investors or disgorging ill-obtained profits.

Those who’ve previously been the subject of enforcement activity will still be eligible, however.

Warning

The U.S. securities and exchange commission has decided no-contest settlements won’t be allowed if they could hide valuable information from investors.

Industry concerns

New York securities lawyer Bill Singer says Canadian regulators can’t embrace quick-fix measures simply because they’re used in other markets. There “must be different flavours of regulation [globally] to reflect different justice systems” and investor attitudes.

Since Canada lacks a national regulator, no-contest settlements could only be adopted province by province—and that could further fragment regulatory consistency.

Garfield Emerson of Emerson Advisory in Toronto says wrongdoers may view the settlements as easy outs. If too many no-contests are granted, he adds, “violations could turn into a cost of doing business.”

He also stresses, “[Regulatory] commissions right now are both prosecutor and jury in the sense that commission staff [lead] enforcement proceedings, and then propose settlements for approval by the commission.” Since there’s no separation between prosecution and adjudication, he recommends they use independent and external adjudicative tribunals to ensure no-contest settlements are fair.

Katie Keir is assistant editor of Advisor Group.

Originally published in Advisor's Edge

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