Ontario Securities Enforcement

The Ontario Securities Regulatory Framework

Ontario securities law is governed primarily by the Securities Act, R.S.O. 1990, c. S.5 and the Securities Act (Ontario)'s subordinate regulations and rules. The Ontario Securities Commission (OSC) is the provincial regulatory authority responsible for administering the Securities Act and protecting investors while fostering fair and efficient capital markets.

The Capital Markets Modernization Act, 2021, S.O. 2021, c. 8 made significant structural changes: it established the Capital Markets Tribunal (CMT) as a separate adjudicative body, splitting the OSC's combined regulatory and adjudicative functions. The OSC now handles investigation, surveillance, and prosecution. The CMT adjudicates contested enforcement proceedings and imposes administrative sanctions.

Ontario cooperates with the Canadian Securities Administrators (CSA) — a provincial and territorial umbrella organization — on national instruments and policy statements. Enforcement is primarily provincial but may involve coordination with RCMP and the CCAC (Canadian Capital Markets Enforcement) for criminal prosecutions.

OSC Investigation Powers

Part VI of the Securities Act (ss. 11–20) grants the OSC broad investigative authority. The OSC may order an investigation where it appears that:

• A person has contravened Ontario securities law
• A trade or act has been undertaken contrary to the public interest
• A reporting issuer's affairs are being conducted in a manner contrary to the interests of investors

Compelled Production and Testimony

Under s. 13, an OSC investigator may summon any person and require them to: produce records and things in their possession or control, and give evidence under oath about any matter relevant to the investigation. Refusal to comply is an offence.

The Charter implications of compelled testimony under s. 13 are significant. In Jarvis v Canada [2002] 3 SCR 757, the Supreme Court held that when the predominant purpose of a regulatory investigation shifts to criminal prosecution, the protections of s. 7 and s. 11(d) of the Charter apply. OSC investigators must be attentive to this "predominant purpose" test when a civil investigation transitions toward quasi-criminal charges.

Witnesses compelled under s. 13 have use immunity under Charter s. 13 — their compelled testimony cannot be used against them in subsequent criminal proceedings, except to impeach their credibility. But derivative evidence obtained from the compelled testimony may be admissible, subject to the Grant analysis.

Freeze Orders

Section 17 of the Securities Act authorizes the OSC to apply to the Superior Court for an order freezing assets — prohibiting a person from trading in, disposing of, or otherwise dealing with specified property. Freeze orders can be obtained on an ex parte basis on short notice where urgency is demonstrated, and can extend to money, securities, and other assets.

The CMT (formerly the OSC Tribunal) also has power under s. 127 to impose interim orders, including temporary cease trade orders and trading restrictions pending a full hearing, where necessary for investor protection or market integrity.

Section 127 Administrative Sanctions

Section 127 of the Securities Act empowers the Capital Markets Tribunal to make a broad range of orders "in the public interest" after a hearing. These administrative sanctions include:

The "public interest" standard under s. 127 is broad — it is not confined to technical contraventions of the Act. The OSC (and now the CMT) can sanction conduct that, while technically lawful, undermines investor protection or market integrity. This was affirmed in Committee for the Equal Treatment of Asbestos Minority Shareholders v Ontario (Securities Commission) [2001] 2 SCR 132.

Settlement agreements are the most common outcome of OSC enforcement proceedings. Respondents and OSC staff negotiate agreed statements of facts and proposed sanctions, which are then reviewed and approved (or rejected) by the CMT. Rejected settlements require the panel to proceed to a contested hearing.

Insider Trading and Tipping

Section 76 of the Securities Act prohibits insider trading and tipping. The prohibition has three components:

Material Non-Public Information (MNPI)

"Material" information is information that would reasonably be expected to have a significant effect on the market price or value of the security if it were generally disclosed. "Non-public" means not generally disclosed through prescribed channels (press releases, SEDAR filings, or widely disseminated public media).

Special Relationship

The s. 76 prohibition applies to persons "in a special relationship" with the reporting issuer. This includes directors, officers, and employees of the issuer; persons who have a substantial business relationship with the issuer; and persons who have received MNPI from any of those persons. The "tippee" who receives MNPI from an insider and then trades also falls within the special relationship.

Trading and Tipping Prohibitions

Under s. 76(1), a person in a special relationship with a reporting issuer who possesses MNPI must not: (i) trade in securities of the issuer, (ii) inform another person of the MNPI except in the necessary course of business.

The "necessary course of business" exception permits disclosure in the course of normal business dealings — e.g., disclosing to legal counsel, auditors, or underwriters. The OSC has taken a narrow view of this exception, and the CMT has sanctioned persons who disclosed MNPI to family members or social contacts.

Civil liability for insider trading is available under s. 134 of the Securities Act — a person who trades while in possession of MNPI is liable to the seller (or buyer) at the opposite side of the transaction for damages. Class actions for insider trading under s. 134 have been certified in Ontario.

Market Manipulation and Fraud

Part XXII.1 of the Securities Act (ss. 126.1–126.2) creates offences for:

• Fraud (s. 126.1(1)(a)) — engaging or attempting to engage in any act, practice, or course of conduct that the person knows or ought reasonably to know perpetrates a fraud on any person
• Market manipulation (s. 126.1(1)(b)) — engaging in conduct that the person knows or ought reasonably to know results in or contributes to a misleading appearance of trading activity or an artificial price for a security
• Misleading or untrue statements (s. 126.2) — making a statement that the person knows or ought reasonably to know is misleading or untrue in a material respect and that would reasonably be expected to have a significant effect on the market price of a security

Market manipulation tactics targeted by the OSC include: wash trading (buying and selling the same security to create artificial volume), matched orders, pump-and-dump schemes (artificially inflating prices through promotional activity and selling into the rise), spoofing (placing and cancelling orders to create false market depth), and layering.

The "ought reasonably to know" standard for both manipulation and misleading statements imports an objective element — recklessness or gross negligence can suffice, removing the need to prove subjective intent in administrative proceedings. Criminal prosecution for market manipulation also exists under the Criminal Code s. 380 (fraud) and requires subjective intent.

Quasi-Criminal Enforcement

Part XXIII of the Securities Act (ss. 122–125) creates quasi-criminal offences that carry significant penalties:

• S. 122(1) — general offence for contravening the Act, regulations, or rules, or making false or misleading statements: fine of up to $5 million per count and/or imprisonment up to five years less a day
• S. 122(3) — obstruction or misleading an OSC investigation: same penalties
• S. 124 — offences by corporations: director and officer liability for offences committed by the corporation, with a due diligence defence

Quasi-criminal prosecutions under Part XXIII are tried in the Ontario Court of Justice. Unlike administrative proceedings before the CMT, quasi-criminal offences require proof beyond a reasonable doubt and attract full Charter protections including ss. 7, 10(b), 11(b), and 11(d).

The OSC may pursue both administrative and quasi-criminal proceedings arising from the same facts — the administrative proceeding determines civil sanctions, while the quasi-criminal proceeding proceeds independently. Double jeopardy protections under Charter s. 11(h) have been held not to bar parallel proceedings because the administrative proceeding is civil, not criminal, in nature.

Continuous Disclosure Violations

A major source of OSC enforcement activity is failure to comply with continuous disclosure obligations under Part XVIII of the Securities Act. Reporting issuers must file:

• Annual information forms (AIF)
• Annual and interim financial statements
• Management's discussion and analysis (MD&A)
• Material change reports (within 10 days of a material change)
• Business acquisition reports (BAR) for significant acquisitions

Failure to file, late filing, or filing materially misleading disclosure can result in administrative sanctions under s. 127, including cease trade orders that prevent the issuer's insiders from trading in its securities. The OSC's continuous disclosure review program conducts routine reviews of reporting issuers' disclosure and may initiate proceedings where deficiencies are identified.

Director and officer liability under s. 138.1 of the Securities Act for secondary market disclosure misrepresentations allows investors to bring class actions against responsible corporate insiders without needing to prove reliance on the misrepresentation — a significant departure from common law fraud.

Frequently Asked Questions