For publicly listed companies in Canada, there may come a day when you receive a request for information from a provincial securities commission in connection with a securities investigation. Receiving such a request can be unsettling, but the manner in which you respond will set the tone and trajectory of your subsequent dealings with the commission. Below are five important considerations to keep in mind as you navigate and respond to any information request from your securities commission.
I. What is the nature of the request?
There are a number of information requests that securities commissions in Canada can make in connection with an investigation, and different reasons for doing so. Securities commissions have both regulatory and quasi-criminal enforcement powers and can launch investigations in support of potential charges in either context.
As a general rule, regulatory proceedings are more common and are heard by a commission tribunal. The commission must establish its case on a balance of probabilities basis, and possible sanctions include monetary penalties, cease trade orders and bans on serving as an officer or director. In contrast, quasi-criminal proceedings are brought before a court and require the commission to prove its case beyond a reasonable doubt. However, the available sanctions are more serious, as a convicted party can be imprisoned. It may not be clear from the initial information request whether the commission is considering regulatory or quasi-criminal charges; if it is not, this is something that should be kept top of mind as the investigation progresses.
Regardless of the nature of the underlying allegations, a securities commission will request information in one of two contexts:
- Informal investigation: In the early stages of an investigation, a commission may seek voluntary cooperation in the form of requests for witness interviews or documentation. Although market participants are not obliged to comply with these requests, there may be good reason for doing so, particularly if the recipient of the request is the subject of the investigation. Several jurisdictions offer cooperation programs where commission staff may recommend a negotiated resolution or narrowed allegations in exchange for cooperation in the investigation process. However, information provided on a voluntary basis can be used more broadly by commissions than information that is compelled, and so the risks associated with voluntary disclosure must be carefully considered.
- Formal investigation: If a commission has commenced a formal investigation under securities legislation, the commission and its investigators will have broad investigative powers and can obtain orders compelling parties to produce information and documents, or summonsing individuals to attend examinations.
II. What action needs to be taken immediately?
Once a request for information is received, there are certain steps that the recipient should consider taking immediately. For instance, a document preservation protocol may be required in order to ensure that relevant information is not inadvertently destroyed. Notice of the investigation may need to be disseminated to certain employees or personnel, with appropriate guidance regarding their confidentiality obligations. If an interview request or summons has been made, steps should be taken to begin preparing the witness.
In addition, consideration must be given to whether the company that is the subject of the investigation has an obligation to publicly report the investigation. This will depend on materiality, which may evolve over the course of the investigation.
III. What is the extent of the required disclosure?
As noted above, Canadian securities commissions have broad powers to compel witnesses to attend examinations and market participants to disclose records and information. There are serious consequences for failing or refusing to respond to a commission's formal demand for disclosure. An adverse inference may be drawn if enforcement proceedings are subsequently commenced, and a party who fails to attend an examination may be held in contempt of court.
However, the powers afforded to commissions are not absolute and there are some protections afforded to parties involved in a commission investigation. For example, a commission is not entitled to documents protected by privilege. Further, while compelled testimony given in the context of a formal investigation can be used in any related enforcement proceeding, it generally cannot be used in separate proceedings against that same party due to Canada's protections against self-incrimination.
In addition, the extent to which information must be disclosed will be circumscribed by the underlying order compelling the disclosure or examination. A copy of this order should be obtained so that the nature and scope of the investigation is clear, as this will inform the obligations of the responding party. The order will also clarify whether the alleged securities law violations are regulatory or quasi-criminal in nature, which is an important consideration in determining how to respond for the reasons articulated above.
IV. Will the disclosure be used in other proceedings?
In determining how to respond to an information request (whether formal or informal), parties should assess the likelihood that the information to be disclosed will be used by other law enforcement agencies or securities commissions, or made public in the future. While securities investigations and the information gathered therefrom are confidential and can only be publicly disclosed in limited circumstances, securities commissions can and do share information with other commissions and law enforcement agencies, both domestically and internationally. This is particularly relevant to cross-listed companies that are subject to oversight by the Securities and Exchange Commission.
Further, if the commission decides to pursue enforcement proceedings following an investigation, any documents filed as evidence in that proceeding are generally available to the public. Parties will have to consider the potential ramifications of information being made publicly available and make decisions accordingly. For example, resolving a matter with the commission in the early stages of an investigation may mitigate reputational risk by keeping the matter out of the public domain or limiting the amount of information that may be shared with other law enforcement agencies.
V. What can I learn from the investigation?
While responding to a securities investigation can be stressful and disruptive, it also provides companies with an opportunity to assess their operations and identify any areas for improvement or further examination. Parties should review not only the issues that are the subject of the investigation, but also ancillary or underlying processes, procedures and controls that might have contributed to those issues. Taking proactive steps to thoroughly review the circumstances that resulted in the investigation will almost certainly result in a stronger organization emerging at the conclusion of the investigation.
When an information request is received from a securities commission, your best response is often a matter of strategy. There are circumstances where disclosure is unavoidable, but there may also be opportunities to leverage disclosure requests to obtain a more favourable outcome for you and your company. Our team at Dentons is well-equipped to help you navigate these considerations and ensure your response aligns with the overall strategy for your case.
About Dentons
Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Specific Questions relating to this article should be addressed directly to the author.
