In a recent decision of the OSC in Re Caldwell Investment Management Ltd. (October 12, 2018), a hearing panel (the “Panel”) denied a motion by Caldwell Investment Management Inc. (“Caldwell”) for further pre-hearing disclosure from OSC Staff. The motion was made in the context of an upcoming enforcement proceeding alleging, among other things, that Caldwell had breached its best execution obligation under s. 4.2 of NI 23-101 by placing most of its trades for execution through a related dealer, without having adequate policies and procedures in place to ensure that Caldwell’s best execution obligation was being met.
Caldwell brought a motion under R. 27 of the OSC’s Rules of Procedure seeking an order requiring Staff to disclose additional documents and information in Staff’s possession alleged to be necessary to enable Caldwell to defend itself. This included materials related to Staff’s discussions with its expert, and materials related to best execution practices and procedures of other OSC registrants obtained through the Commission’s regulatory programs, including information from firms that use affiliated dealers to execute orders on behalf of clients.
The Panel denied both requests.
With respect to the request for materials related to Staff’s discussions with its expert, consistent with Moore v. Getahun 2015 ONCA 55, the Panel determined that notes reflecting an expert’s preliminary views and “partial draft expert reports” of an expert who had not yet produced a final report are protected by litigation privilege and do not have to be disclosed. Since an expert report, if delivered by Staff, would be provided to Caldwell in due course, there was “no compelling reason to subordinate the privilege to a need to disclose to allow for full answer and defence”.
The Panel also denied the request for production of information and materials in Staff’s possession related to other OSC registrants.
In its Statement of Allegations, Staff allege that Caldwell was in a conflict of interest in directing trades to its related dealer for execution, and that in many cases, the equity commission rates and bond spreads charged by the related dealer were significantly less favourable than what unaffiliated dealers were charging Caldwell. Examples of the average commission rate charged to a particular Caldwell mutual fund by the related dealer in comparison to the average rate charged to the same Caldwell fund by the unaffiliated dealers were specified in the Statement of Allegations. Staff also allege that Caldwell made misleading statements in its Annual Information Form that it paid brokerage fees “at the most favourable rates available to the Funds”.
According to the Panel, at issue was Caldwell’s best execution practices measured against the applicable regulatory standard, not against other registrants whose business models, services, markets and types of clients will all vary. Accordingly, the “raw materials” demanded by Caldwell were judged not to be helpful to its defence and accordingly not required to be produced by Staff pursuant to its obligations under the Stinchcombe standard.
The Panel also concluded that disclosure of such information obtained by Staff from other registrants, who were not party to the motion, would undermine those registrants’ expectations of confidentiality in the examination process.
Finally, the Panel noted that in addition to lack of relevance, the requested production “would be a very onerous task that would adversely affect the efficiency of a proceeding of this kind”. Unfortunately, this concept of proportionality has not been applied by OSC Staff during investigations, when vast amounts of electronic documents and data may be demanded of market participants pursuant to a summons issued under s. 13 of the Securities Act, regardless of the cost to produce.