Will new powers lead to more effective capital markets regulatory enforcement?

The effects of recent measures to broaden the investigative and enforcement powers of securities regulators began to be felt in 2024.

Over the last year, the British Columbia Securities Commission (BCSC) implemented and first used the Administrative Penalties Imposed by Notice (APIN) mechanism. The APIN allows significant penalties to be imposed without a hearing for less serious contraventions of securities laws. Meanwhile, the Ontario government contemplated new proposals to distribute recovered funds to harmed investors and to ease requirements for delivering investigative summonses.

We also witnessed a significant increase in the quantum of monetary sanctions imposed by securities regulators across Canada. In a rare year, the Supreme Court of Canada weighed in on two issues critical to capital market participants: regulatory jurisdiction and the enforceability of penalties in bankruptcy. The Court is poised to consider the definition of “material change” in 2025. We also saw Canadian courts continue to demonstrate a reluctance to interfere with regulatory tribunal decisions.

We expect that 2025 will see a continued increase in both enforcement activity and the severity of sanctions imposed as regulators take advantage of their new powers. 2025 will likely see new priorities for securities regulators on both sides of the Canada-U.S. border, as a result of what are likely to be a series of regulatory and political leadership changes.

Broadened powers give rise to increased sanctions

In the last three years, capital markets enforcement activity has picked up considerably, indicating a more aggressive posture by securities regulators in seeking to address violations and protect investors. For the year ended June 30, 2022, the Canadian Securities Administrators (CSA) reported that member jurisdictions imposed $16 million in administrative penalties. The following year [PDF], administrative penalties increased slightly to $18.4 million. However, in the year ended June 30, 2024 [PDF], penalties rose by nearly 50% to $27.6 million.

A similar trend is evident when comparing statistics regarding restitution orders. For the year ended June 30, 2022, restitution orders made by regulators and courts amounted to $14.8 million. The following year, that amount increased by over 33% to $20.9 million. This number more than tripled to $75.6 million in the 12-month period ending June 30, 2024.

The Supreme Court of Canada is expected to provide clarity regarding the definition of “material change”, with significant implications for capital market actors.

The recent increase in enforcement activity is not surprising given recent reforms and proposed changes to securities’ regulators enforcement powers across Canada. In 2023, the Ontario Ministry of Finance proposed amendments to the Ontario Securities Commission’s (OSC) enforcement powers, including a controversial proposal to distribute funds recovered through disgorgement orders to harmed investors. As we have previously written, the proposed rule risks further blurring the lines between the roles of regulators, courts and statutory ombudspersons, creating competitive pressures amongst them and leading to more aggressive efforts to “do right” for investors. British Columbia already has such powers and regularly distributes funds recovered to investors.

The Ontario Ministry of Finance has also announced plans to ease requirements for delivering summonses by email. The intention is to streamline the enforcement process with a view to increasing the efficiency of regulatory actions.

As we previously wrote, the BCSC has a new mechanism at its disposal, referred to as the APIN. This new mechanism allows the BCSC to levy potentially significant administrative penalties without a hearing for certain less serious contraventions of securities regulations. Under APIN, fines can be levied in amounts of up to $100,000 per violation for individuals and up to $500,000 per violation for entities.

The APIN mechanism was used by the BCSC for the first time in 2024. Capstone Asset Management Inc. was fined [PDF] $12,000 for failing to maintain the appropriate insurance coverage and for failing to implement adequate policies and procedures at the time of the insurance coverage contravention.The BCSC is expected to increase its use of the mechanism in the coming years. As recently as October 2024, the BCSC imposed a $40,000 administrative penalty on the CEO of a publicly traded issuer for failing to file timely reports of trading in securities.

Securities oversight by the Supreme Court of Canada

We have recently been afforded a rare opportunity for Canada’s highest court to provide some judicial direction regarding securities regulatory oversight in two appeals, with a third pending. In 2025, the Court will hear a further appeal from a decision in a securities class action in which the Court will be required to consider the definition of “material change” — a fundamental concept that defines disclosure obligations for Canadian public companies.

At the end of 2023, in Sharp v. Autorité des marchés financiers, the Supreme Court of Canada directly addressed whether provincial administrative tribunals, particularly securities regulators, have the power to sanction out-of-province conduct. As we have previously written, Québec’s provincial securities regulatory agency, the Autorité des Marchés Financiers, brought an action before Québec’s provincial securities tribunal, the Financial Markets Administrative Tribunal, alleging that certain British Columbia residents participated in a transnational “pump-and-dump” scheme to manipulate the market for shares of Solo International, Inc. in contravention of the Québec’s securities legislation.

On appeal, the Supreme Court dismissed the appellants’ challenge to the jurisdiction of the provincial securities tribunal. The Court found that there was a sufficient connection between Québec and the appellants. Therefore, applying Québec’s securities regulatory scheme to the appellants was fair. Notably, the Supreme Court emphasized the need for a flexible and purposive approach to jurisdictional issues in the securities regulatory context, given that contemporary securities manipulation and fraud are often transnational, extending across provincial and national borders.

In July 2024, the Supreme Court of Canada released its decision in Poonian v. British Columbia (Securities Commission). As we have written, the case has significant implications for securities and capital markets. The Supreme Court held that the BCSC could not enforce penalties against individuals who had declared bankruptcy. This decision has created a critical gap between securities law and bankruptcy law. It has prompted calls for bankruptcy law reform to ensure that securities regulators can effectively enforce penalties against individuals who attempt to use bankruptcy as an escape hatch from their financial obligations. Notably, the decision confirmed the enforceability of disgorgement orders in a bankruptcy.

In the new year, the Supreme Court of Canada will be weighing in on the interpretation of the phrase “material change” for purposes of Canadian securities law. The Supreme Court granted leave to appeal earlier this year in the securities class action concerning Lundin Mining’s failure to disclose certain operational issues that were alleged to have constituted a material change. The Ontario Court of Appeal endorsed a two-step analysis to determine whether a material change has occurred. First, a court must consider whether the issuer has experienced a “change”. This includes a change in risk in an organization’s business, operations or capital. At this stage, a court does not consider the magnitude of the change. Second, as prescribed by the securities legislation, a court must consider whether the change would reasonably be expected to have a significant effect on the market price of the issuer’s securities. The Court of Appeal clarified that it is only at this second stage of the analysis that the court considers the magnitude or materiality of the change.

The Supreme Court of Canada’s decision is expected to provide clarity regarding the definition of “material change”. Given the importance of this concept, its decision will likely have significant implications for capital market actors, particularly in terms of their timely disclosure obligations. The hearing of the appeal is tentatively scheduled for early in 2025.

Continued judicial deference to securities regulators

In 2024, Canadian courts also demonstrated a continued reluctance to interfere with regulatory tribunal decisions. Courts have, in the past, exhibited considerable deference to securities regulators’ decisions regarding the scope of their enforcement powers and how those powers should be exercised. It is clear that this trend is likely to continue.

In Brar v. British Columbia (Securities Commission), two appellants challenged the constitutionality of the provision authorizing the BCSC to compel evidence from witnesses and enforce compliance through contempt proceedings. In a unanimous decision, the B.C. Court of Appeal dismissed the appeal. As we wrote, the Court upheld the constitutionality of the provision based on the Supreme Court of Canada’s 1995 decision in British Columbia Securities Commission v. Branch without considering the impact of more recent changes to the scope of regulators’ enforcement powers. The Court was clearly reluctant to intrude upon matters involving a regulatory investigation.

Meanwhile the OSC successfully defended its investigation efforts against Binance Holdings Limited. As we discussed last year, Binance pursued a series of court and tribunal challenges following the commencement of OSC Staff’s investigation into the company’s activities and alleged breaches of an undertaking that it had previously given. In 2023, the Ontario Capital Markets Tribunal determined it did not have jurisdiction to oversee Staff’s investigative process. The Divisional Court dismissed Binance’s application for judicial review, directing Binance back to the OSC. In 2024, the OSC concluded it also lacked jurisdiction to entertain Binance’s application. This raises an important question as to whether companies in Ontario have any practical means of challenging an investigative summons.

Outlook for capital markets oversight

As we move into 2025, the Canadian capital markets landscape is poised for further evolution. We expect that securities regulators will continue to pursue enforcement positions aggressively, particularly in novel and developing market areas. Regulators are likely to be emboldened by the judiciary’s continued deference to regulatory authorities, by the flexible approach to jurisdictional issues in securities regulation and by ongoing reforms expanding enforcement powers. Hopefully, they will pursue enforcement in a way that does not unduly limit capital markets growth and innovation. Enforcement priorities may also change in the coming years as a result of both regulatory and political leadership changes. After a lengthy search, Canada’s largest capital markets regulator, the OSC, recently appointed a new Director of Enforcement and a new Chief Operating Officer. It remains to be seen what impact this change may have. In the United States, we also expect to see changes in direction as the new presidential administration establishes its priorities for the United States Securities and Exchange Commission and other regulators. Market participants should stay informed and be prepared for these changes, as they will undoubtedly impact compliance and enforcement practices in the capital markets.