Legal “loophole” thwarts OSC investigation

An apparent loophole in the Ontario Securities Act has allowed an unnamed individual to avoid answering questions in an Ontario Securities Commission (OSC) investigation — for now.

The individual — identified only as B in a recent OSC decision — said they wanted to co-operate with the investigation and answer questions in response to a summons, but feared that doing so would violate the terms of their employment contract.

B sought assurance from the OSC that testifying would not breach B’s employment contract. Failing that, B wanted to seek the same assurance from the Ontario Superior Court of Justice.

The Ontario Securities Act requires a person who has received a summons under Section 13 of the act to testify. Section 154 of the act provides protection from contract-based lawsuits arising from said testimony when a person discloses information “in compliance with Ontario securities law.”

And that’s where the apparent loophole came into play. Section 1 of the Ontario Securities Act defines “Ontario securities law” as the act itself or a decision made under the act — but not a summons, per se.

OSC staff argued, among other things, that the summons B had received amounted to a decision by the OSC and therefore fell under Ontario securities law. But Timothy Moseley, the OSC vice chair who heard the case, disagreed, noting that the “linguistic contortion necessary to conclude that a summons is a decision would, in my view, require a clear expression of legislative intent.”

Moseley ultimately decided the OSC didn’t have the jurisdiction to determine whether B’s testimony would violate the terms of B’s employment contract and authorized B’s request to take the matter up with the Superior Court.

In an interview, securities lawyer Robert Keller said Moseley’s decision offered a “very technical” interpretation of the Securities Act. “Because of the way the Securities Act is drafted, I think the legislation inadvertently created a loophole,” Keller said.

Keller noted that the order that sets up an investigation under Section 11 of the Securities Act “clearly is a decision of the commission, so it is part of Ontario securities law.” But a summons isn’t a decision, so it technically isn’t part of Ontario securities law as defined by the act. Consequently, Keller said, the protections offered by Section 154 of the Securities Act do not apply — which means B’s employer could, theoretically, sue B if B were to testify.

Keller said that it’s important not to “impute bad motives” to either B or B’s counsel in this case. The OSC decision, Keller noted, did not indicate whether B has been accused of wrongdoing.

“This is not just about losing your job — you could be sued,” Keller said. “You could be out hundreds of thousands of dollars if you answer questions your employer didn’t want you answering.”

It’s now up to the Ontario Superior Court of Justice to determine whether B’s employment contract precludes B from testifying to the OSC. But it’s highly unlikely, Keller suggested, that the court will rule that an employment contract shields B from testifying.

“I cannot imagine a world in which the Superior Court of Justice will say an employment contract somehow immunizes you from having to testify confidentially to the Ontario Securities Commission,” Keller said.

It could be a long time, however, before the court makes a decision in this case — assuming it makes a decision at all.

“What if B decides not to apply to the Superior Court of Justice?” Keller said. “I’m just speculating, but it could be a while before we see a decision from the Ontario Superior Court of Justice.”