The Privilege Against Self-Incrimination in U.S. Criminal Proceedings: What the Decision of the United States Court of Appeals for the Second Circuit in United States of America v. Allen and Conti Means for Canadians

On July 19, 2017 the United States Court of Appeals for the Second Circuit ruled that the Fifth Amendment’s prohibition on the use of compelled testimony in American criminal proceedings applies even when a foreign sovereign has compelled the testimony.

The US. Department of Justice (DOJ) laid criminal fraud charges against the Defendants, both former employees of the London office of a foreign based bank, after an investigation by the U.K. Financial Conduct Authority (FCA) into their role in the bank’s LIBOR submissions to the British Bankers’ Association.

During the FCA’s investigation, both Defendants were compelled to testify under threat of imprisonment, pursuant to a grant of direct (but not derivative) use immunity. The FCA initiated an enforcement action against one of the Defendants’ former co-workers, Robson, which was subsequently stayed in favor of criminal prosecution of Robson by the DOJ.  However, before the enforcement action was stayed, Robson received as disclosure from the FCA transcripts of the compelled testimony of both Allen and Conti, which he reviewed.

At their trial on various fraud offences, the DOJ alleged that the Defendants had honored requests from the bank’s derivatives traders to submit higher or lower LIBOR submissions dictated by the traders’ (and the bank’s) interest in having LIBOR fixed at a higher or lower level on particular dates.  Key evidence against them at trial came from Robson, who had co-operated with the DOJ and pleaded guilty. Ultimately both Allen and Conti were convicted of all counts.

On appeal, Allen and Conti argued that the Government had violated their Fifth Amendment rights when it used tainted evidence from Robson, consisting of their own compelled testimony given to the FCA, against them at trial.  Citing other decisions of the Second Circuit, they submitted that in order to be admitted at trial in a U.S. criminal trial, inculpatory statements obtained overseas by foreign officials must have been made voluntarily.

The Court of Appeals for the Second Circuit agreed, stating that a violation of the Fifth Amendment occurs when a compelled statement is offered at trial in an American courtroom against a defendant, regardless of whether the statement was compelled at the instance of a foreign government, and even when the defendant’s testimony was compelled by foreign officials lawfully in a manner that does not shock the conscience or violate fundamental fairness.

While the Court recognized the risk that foreign powers might inadvertently take steps that could obstruct U.S. federal prosecutions in efforts to obtain admissible evidence, it concluded that those developments need not affect the fairness of trials on American soil. The Court further highlighted the need for “intimate cooperation and coordination…between U.S. prosecutors and foreign authorities”.

In this case, a violation of the Defendants’ Fifth Amendment rights occurred when the DOJ tendered the evidence of Robson, whose testimony was found to have been tainted by, and indeed dramatically changed after, his exposure to the Defendants’ compelled testimony.   As a result, the convictions were vacated and the indictment against them dismissed as it was also procured on the basis of tainted evidence given before the grand jury.

What does this mean for Canadians? North of the border, provincial securities legislation permits securities regulators to compel individuals to testify under oath against themselves during a securities regulatory investigation. Refusal to testify renders the witness liable to be committed for contempt of court by the superior court of the province as if in breach of an order of the Court.  Although the answers given by the witness under statutory compulsion cannot be used to incriminate the witness in a criminal or quasi-criminal prosecution in Canada, the evidence can be used against that individual in a securities regulatory enforcement proceeding to consider the imposition of sanctions which do not include imprisonment.

While the decision of the Second Circuit does not bind U.S. courts outside of the Second Circuit, it should provide some reassurance to Canadians that any testimony compelled from them under Canadian law will not be used against them in a U.S. criminal prosecution.  This may assist in addressing concerns arising from decisions like those of the Alberta courts in Alberta (Executive Director of Securities Commission) v. Brost 2008 ABQB 161  and Beaudette v. Alberta Securities Commission 2015 ABQB 57.  In both cases, the Alberta Court of Queens Bench decided that the possibility of criminal prosecution in the U.S. using information compelled by domestic securities regulators did not give rise to a violation of the Canadian Charter or Rights and Freedoms. The result in Beaudette was upheld by the Alberta Court of Appeal  2016 ABCA 9, and leave to appeal to the Supreme Court of Canada was refused [2016] S.C.C.A. 97.

Conversely, it may  make it more difficult for Canadians to argue that they should not be compelled to answer questions in Canada due to the threat or existence of a parallel investigation by the U.S. DOJ without additional “protective mechanisms”, the need for which was recognized by the Ontario Superior Court  in Catalyst Fund General I Inc. v. Hollinger Inc. (2005), 255 D.L.R. (4th) 233; aff’d (2005), 79 O.R. (3d) 70 (C.A.); Nortel Networks Corp. v. Dunn [2008] O.J. No. 369; Mr. A. v. Ontario Securities Commission [2006] O.J. No. 1768.

Investment advisors’ legal duties fall under the spotlight

In a decision released July 6, 2017- Shinoff v BMO Nesbitt Burns Inc et al.– Justice France Dulude of the Québec Superior Court provided helpful guidance on the duties owed by investment advisors to their clients.  The plaintiff claimed that the defendants had failed to provide investment advice that was appropriate for his financial objectives.  He claimed that the defendant’s negligent decision to make significant investments in preferred shares led to a loss of $5.3 million, for which he sought damages pursuant to Article 1463 of the Civil Code of Québec.

The plaintiff was unsuccessful at trial. According to Justice Dulude, the evidence firmly established that the plaintiff had not communicated his objectives and risk tolerance consistently to the defendants.  Furthermore, the plaintiff’s expert witnesses “did not present credible and reliable opinions to establish the transactions recommended by the defendants were not suitable in light of [the plaintiff’s] objectives.”[1].  The judge considered standards of conduct set by a variety of sources, including the Know Your Client (KYC) rule from the Canadian Securities Institute[2], the Securities Act and Securities Regulation[3], and the rules of Mandate, which Justice Dulude explained as follows: “the investment advisor must act as a knowledgeable professional, demonstrating honesty, prudence and diligence in the best interest of the client.”[4]

This decision is useful for the investment advisor community, because it provides further guidance on the required standard of conduct. Investment advisors should be aware of some of the key takeaways from Justice Dulude’s reasoning:

  • KYC remains the cardinal rule. Conducting a thorough client intake and taking detailed notes for all client meetings establishes a strong basis from which later investment decisions can be justified. Ensure that you understand and take into account the client’s financial situation, return objectives, risk tolerance, investment knowledge, and time horizon.[5]
  • Communicate risks to clients as clearly as possible. The plaintiff said it best in an email to a defendant: “my measuring stick will always be the downside!”[6] Communicating risk appears to be even more crucial for non-traditional investments (in this case, preferred shares), or when the client is an inexperienced investor and may not understand a conventional explanation of risk.
  • Take the necessary time: In a busy investment advisory practice, advisors may be tempted to rely on monthly or quarterly portfolio updates to keep clients informed. This may not be sufficient to avoid liability. Instead, consider inviting clients to speak over the phone or in person periodically. Justice Dulude put significant weight on the evidence that the plaintiff was in constant contact with his investment advisor, asking many questions related to the proposed transactions.[7] With this level of communication, a client’s claim of being misled or kept in the dark will be less persuasive.
  • Sophie Melchers and Francois-David Paré of Norton Rose Fulbright were counsel to the BMO Nesbitt Burns Inc. and the investment advisor

The author would like to thank Eric Vice, summer student, for his contribution to this article.

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OSC Approves Its 9th No Contest Settlement

On July 13, 2017, the Ontario Securities Commission (OSC) announced that it had approved yet another “no-contest” settlement resolving unproven allegations by OSC Staff that there were inadequacies in certain mutual fund dealers’ systems of controls and supervision which resulted in clients paying excess fees that were not detected or corrected in a timely manner, constituting a breach of section 11.1 of National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations, and  conduct contrary to the public interest. The  dealers neither admitted nor denied the allegations.

As in a string of other similar no contest settlements with other dealers, in the Settlement Agreement OSC Staff acknowledged that the dealers had discovered and promptly self-reported the alleged inadequacies, provided prompt, detailed and candid cooperation to the OSC, formulated an intention to pay appropriate compensation to clients and former clients in connection with their self-reporting of the alleged inadequacies, and co-operated with the OSC with a view to providing appropriate compensation to the affected clients. As well, corrective action had been taken, including a review of the dealers’ other businesses operating in Canada to identify whether there were any other instances of inadequacies in their systems of controls and supervision leading to clients paying excess fees on mutual funds managed by an affiliate of the dealers, and implementation of enhanced control and supervision procedures.

As with other similar no contest settlements entered into by other dealers with OSC Staff, the dealers agreed to pay compensation to clients affected by the alleged control and supervision inadequacies in a specified amount, to make a voluntary payment to the OSC to be designated for allocation or use by the Commission, and to pay costs related to Staff’s investigation.

This is the ninth no-contest settlement under the OSC’s Revised Credit for Co-operation Program, which was introduced on March 11, 2014 in OSC Staff Notice 15-702 – Revised Credit for Co-operation Program.  Eight out of nine no contest settlements to date have been with financial institutions. Seven of those settlements involved unproven allegations that the financial institutions charged excess fees to retail clients and the payment of compensation to clients. In none of those cases has class action proceedings been commenced following the settlement.

No contest settlements are a “win win” proposition.

The benefit to the market participant of such settlements is two-fold: they reduce the risk of a class action relating to the same conduct because no admission of wrong doing is made, and also the reputational hit typically associated with contested OSC proceedings.

The Commission benefits by avoiding the time and expense of protracted enforcement investigations and regulatory proceedings, and recoups at least some of their costs in the settlement.

Stakeholders and the capital markets generally also benefit from these settlements that incent market participants to promptly detect and self-report potential wrong-doing, enhance internal processes voluntarily, and agree to fairly compensate affected stakeholders even in circumstances where they may have defences to allegations that they acted illegally.   This is clearly in the public interest.

The author would like to thank Scott Thorner, summer student, for his contribution to this article.

Johnny Come Lately: The Conclusion of the OSC Hearing Into Sino-Forest

By now the facts underlying the recently concluded Ontario Securities Commission hearing into Sino-Forest Corporation should be well known.  Sino-Forest was a reporting issuer in Ontario, reportedly in the business of operating commercial forest plantations in the People’s Republic of China.  Between 1995 and its demise in 2013, when it entered into a Plan of Compromise and Reorganization resulting in its former bondholders receiving substantially all of its remaining assets, it raised approximately $3 billion from investors.

Shortly after a short seller’s report in June 2011 alleging that the Company was a fraud, Commission Staff commenced an investigation that resulted in the issuance of a Notice of Hearing and Statement of Allegations against the Company and the individual Respondents.

After 188 days of hearing extending over a 2 year period, and a further delay of over a year in releasing its decision, the Ontario Securities Commission has finally released its decision concerning allegations of fraud against Sino-Forest Corporation, its co-founder, Chair and CEO, Allen Chan, and senior executives Albert Ip, Alfred Hung, George Ho and Simon Yeung.

The result of the OSC hearing is not a surprise. All of the Respondents (except Yeung) were found to have engaged in dishonest courses of conduct during the period June 2006 to January 2012 that caused the assets and revenue derived from the Company’s purchase and sale of standing timber to be fraudulently overstated, contrary to s. 126.1 of the Ontario Securities Act.  That conduct included  the provision to the Company’s auditors of false information and documentation, including fraudulent audit confirmations and management representation letters, and back dating of standing timber purchase contract documentation.

Sino-Forest was also found to have engaged in conduct that resulted in Sino-Forest’s public disclosures in respect of its standing timber business being misleading in a material respect, contrary to s. 122 of the Act . Each of Chan, Ip, Ho and Hung were found to have permitted or acquiesced in the making of those misrepresentations.

The OSC further determined that Chan fraudulently concealed his interest in a series of transactions through which Sino-Forest purchased a controlling interest in Greenheart, Group Limited, a public company listed on the Hong Kong Stock Exchange.  Sino-Forest made misrepresentations concerning that transaction, contrary to s. 122 of the Act,  which Chan permitted or acquiesced in.

Finally, each of Chan, Ip, Hung, Ho and Yeung were found to have made materially misleading statements to Staff during Staff’s investigation.

Nothing in the Commission’s legal analysis underlying these findings is particularly novel. The Commission identified and applied existing law relating to the definition of fraud, the test for materiality as it relates to a reporting issuer’s disclosure obligations, and the standard of care expected of directors and officers of reporting issuers. The defence that business is conducted differently in China was rejected.  Regardless of cultural differences that may exist, Ontario securities law applies to reporting issuers in Ontario, and to the conduct of their officers and directors.

The hearing to determine what sanctions should be imposed is yet to be commenced. However, any sanctions are likely to be symbolic only.  Administrative fines levied against the individual respondents, all of whom are non-residents, are unlikely to be paid. Barring the individual respondents from further participation in the capital markets of Ontario is a hollow remedy, given the fact that none of the architects of the fraud are in Canada or ever likely to set up residence here.  Indeed, the individual respondents remained outside the jurisdiction for the entirety of the hearing, testifying only by video link from overseas, presumably due to concerns arising from an RCMP investigation which never resulted in charges.

Query what the benefit is to the Ontario capital markets and investors from this lengthy and expensive regulatory proceeding, concluded so long after the events in issue.

Another Kick at the Canadian Effort to Create a National Securities Regulator

In a recent decision, a majority of the Quebec Court of Appeal held that the latest proposal to create a national securities regulator was unconstitutional.

The Spectre of Federalism

Unlike every other G-20 country, Canada does not have a national securities regulator. There is a long history of attempts to change this.  As early as 1935, the Royal Commission on Price Spreads recommended the formation of a national securities board.  In 2011 the issue came before the Supreme Court of Canada in the Securities Reference. The Supreme Court held that a draft Canadian Securities Act was outside of federal jurisdiction, but kept the door open to federal regulation by recognizing that the presence of systemic risks may permit federal jurisdiction.

In response, the federal government developed a scheme involving a memorandum of agreement (MOA) voluntarily entered into by provinces and territories.  The MOA provides that participating provinces would adopt parallel provincial legislation delegating the authority to regulate the capital markets to a national regulator.  The provincial legislation would be accompanied by federal legislation delegating further powers to the same regulator.  The national regulator would be overseen by a Council of Ministers comprised of provincial ministers and the Canadian Minister of Finance.  Ontario, British Columbia, New Brunswick, Prince Edward Island , Saskatchewan and the Yukon were on board.

Quebec was not and brought a reference before the Quebec Court of Appeal.  At issue was: 1) whether the MOA respected the constitutional limits for delegation of provincial authority; and 2) whether the companion federal legislation was within federal jurisdiction.  Quebec argued that both the MOA and the federal legislation breached of the division of powers set out in the Constitution.

The Decision

Four of the five Justices hearing the reference held that the MOA fettered the parliamentary sovereignty of the provinces by requiring participating provinces to adopt decisions made by the Council of Ministers.  The MOA required the provinces to enact amendments and regulations proposed by a Council of Ministers and required provinces to provide notice before withdrawing from the MOA.  This imposed unconstitutional limits on the parliamentary sovereignty of participating provinces.

The MOA also granted certain provinces an effective veto over decisions of the Council of Ministers.  This undermined Canada’s argument that the MOA was grounded in federal jurisdiction over systemic risks of a national scale.  In the view of the majority, how could a matter that transcended interests of a purely local and provincial nature, provide for a provincial veto?

The majority also concluded that the federal legislation itself was within federal jurisdiction if the provisions setting out the role and powers conferred to the Council of Ministers were removed.

The Dissenting Opinion

Justice Schrager, J.A., disagreed with the majority and held that both the federal and provincial laws were intra vires.  Justice Schrager agreed with the majority that the MOA may constitute illegal delegation, but the Court did not have jurisdiction to review the MOA—which was not a law but an intergovernmental agreement.  Regulations passed through the procedures set out in the MOA may be subject to court scrutiny, but the MOA itself was not.

Justice Schrager held that there was no breach of provincial sovereignty if only the legislation was under scrutiny.  The provinces could choose to amend or repeal the provincial legislation at any time.  This would be contrary to the agreement in the MOA, but the provinces retained the authority to breach it.  Since the reference question concerned the MOA, Schrager J.A. declined to answer the question as framed.

Justice Schrager also disagreed with the majority’s finding that the provisions of the federal legislation setting out the role and powers of the Council of Ministers were unconstitutional.  Jutsice Schrager held that Parliament has the power to delegate in the manner that it chooses, as long as Parliament retains the sovereignty to resile from the delegation.


The Quebec Court of Appeal has dealt another blow to Canada’s efforts to create a national securities regulator.  While the Supreme Court in the 2011 Securities Reference provided some hope that a federal securities regulator may be constitutional, the Quebec Court of Appeal indicated no such openness.  According to the majority of the Quebec Court of Appeal, even a voluntary agreement between the provincial and federal governments to enact parallel legislation and delegate authority to the same regulator would violate the division of powers set out in the Constitution.  It remains to be seen whether this causes Canada to return yet again to the drawing board or whether further litigation awaits.  After nearly a century of attempts to create a national securities regulator, this will not be the end of it.

Re OSC decision In the Matter of Issam El-Bouji, et al.

After a proceeding has ended, does the Ontario Securities Commission retain jurisdiction to give directions to the parties or grant other relief? That is the question that was recently before the Commission in In the Matter of Issam El-Bouji. In answering the question in the negative, the Commission confirmed that it does not have inherent jurisdiction.

In 2014, the Commission made an order prohibiting Mr. El-Bouji from acting as the Ultimate Designated Person (“UDP”) of the moving parties, Global RESP Corporation and Global Growth Assets Inc. (the “Order”).  After the Order was handed down, Mr. El-Bouji’s daughter applied to have her registration amended in order to take over the role of UDP.  Staff took the position that the Order requires any newly appointed UDP to be independent of Mr. El-Bouji and any entities owned or control by Mr. El-Bouji, which Ms. El-Bouji was not.  The moving parties disagreed and sought direction from the Commission with respect to the interpretation of the Order, as well an order requiring the Commission Director to amend Ms. El-Bouji’s registration to allow her to take over as UDP.

The Commission concluded that once a proceeding has ended, the tribunal becomes functus officio and retains no jurisdiction regarding that proceeding, except in limited circumstances.  In coming to this conclusion, the Commission considered that, as a creature of statute, it has no inherent jurisdiction, and any authority to retain jurisdiction must be derived from statute.  Here, the moving parties did not raise section 144 of the Securities Act, which empowers the Commission to revoke or vary a previous decision.

In the absence of a statutory basis, the Commission was left to consider whether there existed any other circumstances that would allow it to retain jurisdiction. Such exceptional circumstances typically include an error in the original order that requires a remedy, or a provision in the original order that expressly allows the Commission to reserve jurisdiction. Neither circumstances was present in this case.

Ultimately, while the Commission sympathized with the moving parties’ position, that was not sufficient to clothe the Commission with jurisdiction it did not have. The Commission dismissed the motion, holding that the proper venue for the moving parties to raise these issues was before the Commission Director on Ms. El-Bouji’s application to amend her registration.

The author would like to thank Erika Anschuetz, student at law, for her contribution to this article.

#needsimprovement: CSA releases report on social media disclosure practices by Canadian public companies

The Canadian Securities Administrators (CSA), concerned by the increased prevalence of corporate disclosure through social media, have issued guidance for Canadian public companies. Their notice follows a review of the tweets, blogs, posts and videos of 111 public companies on various social media websites, as well as the companies’ own websites.  The three key areas identified for improvement are: (i) ensuring that material company information is not released on social media before being generally disclosed; (ii) providing sufficient and balanced information so as not to be misleading or inconsistent; and (iii) putting in place adequate social media governance policies.

  1. Selective or early disclosureSecurities laws in Canada prohibit directors, officers, employees and others in a “special relationship” with the company from informing others of material information about the company before the information has been generally disclosed. Posting information through social media or on the company’s own website does not mean the information has been generally disclosed. Instead, it may result in some investors receiving valuable company information before others.

    Although securities laws do not specify what it means for information to be “generally disclosed”, it is understood that the information must have been disseminated in a manner calculated to effectively reach the marketplace and investors must have been given a reasonable amount of time to analyze the information. A news release distributed through a widely circulated news or wire service will generally satisfy the requirement, as will a press conference or conference call announcement, so long as interested members of the public may attend in person, by phone or electronic means, adequate notice is provided and a transcript or replay of the call is made available afterwards.

  2. Misleading and unbalanced informationOne of the attractions of social media is it is typically short and snappy. The downside is it may not provide sufficient information and, as a result, may be misleading or inconsistent with other sources of corporate disclosure. The other risk with social media is that the information provided may not be balanced and is more likely to be overly promotional in tone. For example, the CSA requires unfavourable news to be disclosed just as promptly and completely as favourable news.

    In addition, companies should avoid disclosing forward-looking information through social media, that is, statements regarding possible events, conditions or financial performance that is based on assumptions about future economic conditions and courses of action. This is because social media often does not lend itself to complying with other securities law disclosure requirements related to forward-looking information, such as the requirements to identify material risk factors that could cause actual results to differ materially and to provide the material factors and assumptions supporting such information. That type of information would be difficult to provide on a message board or a blog, much less a 140-character tweet.

  3. Insufficient internal governanceWithout an adequate social media governance policy, companies are more likely to run afoul of securities laws by posting unbalanced, misleading or selective disclosure. The CSA recommends that a corporate policy cover at least the following items:
  • who can post information about the company on social media
  • what type of sites (including personal social media accounts vs. corporate) can be used
  • what type of information about the company (financial, legal, operational, marketing, etc.) can be posted on social media
  • what, if any, approvals are required before information can be posted
  • who is responsible for monitoring the company’s social media accounts, including third-party postings about the company
  • what other guidelines and best practices are followed (for example, if employees post about the company on personal social media sites they should identify themselves as employees of the company)

Other Important Considerations

In addition to the concerns related to securities law compliance addressed in the CSA notice, companies should also consider the following in developing a robust social media governance policy:

  • Terms of Use: Ensure you understand and can accept the terms of use of each social media site where the company posts, including prohibitions on use for commercial purposes and legal responsibilities assumed with site use.
  • Privacy: Include provisions in the policy to protect third-party confidentiality and privacy.
  • Intellectual Property: Include guidelines around: (i) respecting third-party intellectual property; and (ii) the protection and use of the company’s own intellectual property to address issues such as consistent trademark use and the inadvertent disclosure of proprietary information or trade secrets.
  • Employment: Ensure that relevant employment legislation, employee privacy policies and employment agreements are considered to confirm compliance and consistency with a social media governance policy. Ensure there are policies in place that provide adequate guidelines for social media usage by employees.

The CSA Staff Notice is available here.


Only 61% of issuers address cyber security in their risk factor disclosure. Is your company one of them?

Earlier this year, the Canadian Securities Administrators (CSA) released the results of a review of the disclosure of 240 issuers in the S&P/TSX composite index on cyber security issues.  The review found that only 61% of issuers addressed cyber security in their risk factor disclosure, 20% of these issuers had identified a person or group responsible for cyber security, and “few” issuers disclosed that they had been subject to cyber-attacks but none disclosed these as material.

The Securities and Exchange Commission’s (SEC)’s Office of Compliance Inspections and Examinations (OCIE) also conducted a survey on capital market cyber security issues and published a report finding that a majority of broker-dealers (88%) and advisers (74%) stated that they have experienced cyber attacks.

Not surprisingly, cyber security has been identified as a priority area by both the CSA and the SEC.  As a result, there are a growing number of regulatory publications concerning cyber security, including the CSA’s September 2013 Staff Notice 11-326 and September 2016 Staff Notice 11-332 .  The latter sets out that CSA members:

  • expect issuers to: i) provide risk disclosure that is as detailed and entity specific as possible, ii) address in any cyber-attack remediation plan how the materiality of an attack would be assessed, and iii) consider the impact on the company’s operations and reputation, its customers, employees and investors;
  • expect registrants to remain vigilant in developing, implementing and updating their approach to cyber security hygiene and management; and
  • expect regulated entities to: i) examine and review their compliance with ongoing requirements outlined in securities legislation and terms and conditions of recognition, registration or exemption orders, which include the need to have internal controls over their systems and to report security breaches, and ii) adopt a cyber security framework provided by a regulatory authority or standard-setting body that is appropriate to their size and scale.

In January 2017, the CSA published Multilateral Staff Notice 51-347 which recommends that issuers disclose specific cyber security risks and disclose cyber security breaches where they amount to a material fact or a material change.  However, the CSA cautioned that it does not expect issuers to disclose details that are sensitive in nature or that could compromise their cyber security.  The CSA has also undertaken roundtable discussions modeled after similar discussions in the U.S.  The first of these roundtables was held on February 28.

The Canadian regulators have largely followed their counterparts in the U.S.  In October 2011, the SEC published a guidance on cyber security providing an overview of specific disclosure obligations that may require a discussion of cyber security risks and cyber incidents.  The SEC has also begun to undertake enforcement actions in respect of cyber security disclosure.  Yahoo! Inc., for example, recently disclosed that the SEC is investigating whether its disclosures about cyber attacks complied with securities law.  It is only a matter of time before we see similar enforcement actions in Canada.

We expect that regulatory attention to cyber security risk and disclosure will only continue to grow.  Capital market participants should not only protect themselves from cyber security risks, but also be aware that they may face regulatory exposure if they do not.

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OSC: New Commissioner Appointments

On March 3, 2017, the Ontario Securities Commission announced the appointment of two new Commissioners: Robert P. Hutchison and Mark J. Sandler.

Mr. Hutchison joins the Commission from Borden Ladner Gervais LLP, where he practised for over 40 years in the business law group.  Mr. Sandler was formerly a senior partner of Cooper, Sandler, Shime & Bergman LLP.  Mr. Sandler is an experienced appellate and trial litigator specializing in criminal and regulatory law.

Mr. Hutchison and Mr. Sandler will each serve a two year term on the Commission, effective February 2, 2017.

Thinking Inside the Sandbox: CSA Supports Innovative Business Models

The Canadian Securities Administrators (CSA) recently launched a regulatory sandbox initiative as part of a push to foster greater innovation among industry participants.  Under the initiative, qualifying businesses that have registered or received relief from certain requirements will be permitted to test novel products and services throughout the Canadian market.

The CSA provided the following examples of business models that may be eligible for the sandbox initiative:

  • online platforms, including crowdfunding portals, online lenders, angel investor networks or other technological innovations for securities trading and advising;
  • business models using artificial intelligence for trades or recommendations;
  • cryptocurrency or distributed ledger technology based ventures; and
  • technology service providers to the securities industry, such as non-client facing risk and compliance support services (also known as regulatory technology or regtech).

The CSA described the purpose of the initiative as being to “facilitate the ability of those businesses to use innovative products, services and applications all across Canada, while ensuring appropriate investor protection.”  The Ontario Securities Commission has a similar new Fintech support initiative called Launchpad (see:

To apply to the CSA regulatory sandbox, business should contact their local securities regulator for consideration.

The author would like to thank Brian Peebles, articling student, for his assistance in preparing this legal update.