virtual regulation / Erhui1979

This article appears in the March 2021 issue of Investment ExecutiveSubscribe to the print edition, read the digital edition or read the articles online.

While the pandemic may have stopped the economy in its tracks last year, it hasn’t slowed down regulators’ enforcement activity.

Since the onset of Covid-19, the Investment Industry Regulatory Organization of Canada (IIROC), the Mutual Fund Dealers Association of Canada (MFDA) and securities commissions have pivoted to virtual enforcement.

Investigations and interviews are now being conducted remotely — often by video conference — and, in many cases, enforcement hearings have gone virtual as well.

“The message I’d send to the street is that the regulators’ activity is as vigilant and robust as ever,” said John Fabello, a partner with Torys LLP in Toronto who represents financial advisors in enforcement proceedings. “We on the defence side are seeing as much — if not more — regulatory activity and investigation as ever.”

In 2020 — a year that saw investor complaints surge — IIROC opened 384 case assessments, an 18.2% increase from 2019. IIROC’s completed investigations increased by 14.4% from the previous year.

The MFDA opened 461 case assessments last year compared with 453 in 2019, and there was an 11% increase in cases escalated to the regulator’s litigation group.

During the pandemic, video interviews have become the norm in investigations, but they may present challenges, Fabello warned: “You can’t go outside during a break and talk to your client. Ensuring that you’re preparing more, perhaps, than you otherwise would for the interview is important. Being prepared for interruptions or delays because of the technology is also important.”

But there are benefits to video interviews, such as making it easier for respondents and witnesses in remote locations to participate. Ellen Bessner, a partner with Toronto-based Babin Bessner Spry LLP, said respondents in enforcement cases may feel more relaxed when they’re being interviewed from home.

“I think it’s really helpful in an interview when someone can be in the comfort of their own home,” Bessner said. “They’re already nervous and stressed.”

Enforcement hearings also have gone virtual. IIROC and the MFDA are carrying out all hearings remotely, while the Ontario Securities Commission (OSC) has moved everything except quasi-criminal proceedings to a virtual format.

The Alberta Securities Commission (ASC) and the British Columbia Securities Commission (BCSC), meanwhile, now hold “hybrid hearings,” in which some parties appear in person and others appear by video conference.

While virtual hearings make participation by respondents and witnesses in remote locations easier and more affordable, video conferences may not be ideal for contested hearings involving multiple witnesses.

“When it comes to listening to witness testimony and being able to look into [witnesses’] eyes, see their body language and allow them to tell their story, I think it’s better to have everyone in the same room when that’s possible,” said Alan Keats, manager, tribunal counsel, with the BCSC.

Rod Anderson, a lawyer who focuses on securities regulation and litigation with Harper Grey LLP in Vancouver, said virtual contested hearings can be “quite inferior” to in-person proceedings, particularly with regard to witness testimony.

“The quality of [witness testimony] is not quite the same as when you’re in the same room,” Anderson said. “You don’t get the immediacy of being 15 feet away from the tribunal.”

But witnesses may be less nervous when testifying from their homes. Jeff Kehoe, director of enforcement with the OSC, said some witnesses testifying in virtual hearings have had fewer jitters and needed fewer breaks.

“You’re not in the courtroom, where you look around and everyone’s watching you,” Kehoe said. “You’re in the comfort of your home, you’re looking at your screen and you can control your environment, which I think is an improvement for some witnesses.”

Fabello warned that respondents hoping to postpone virtual proceedings until they can be held in person face an uphill battle.

“As a respondent, you have to prove prejudice or significant prejudice in order to postpone your hearing to a time when it can be done in person,” Fabello said. “It’s very hard to meet that standard, so the advice I’d give to your readership is: do not expect that you’re going to get out of a hearing or an enforcement case because of Covid.”

However, the virtual format may be superior to in-person proceedings for settlement hearings.

The majority of IIROC and MFDA hearings are settlement hearings, in which the prosecution and defence have already arrived at a negotiated settlement prior to the hearing. The OSC also conducts settlement hearings, while the ASC and BCSC approve settlements without a hearing.

“So few cases end up in a contested hearing,” said Bessner, who estimated that enforcement interviews and settlements account for about 90% of her work. “You can do settlement negotiations by phone and video, and you can do a settlement hearing on video.”

Respondents typically are required to attend settlement hearings in person, which can be costly and nerve-racking if they have to travel from remote locations, Bessner added. “They sleep in a hotel and have to find the room for the hearing — it’s really not fun,” she said.

Throughout the pandemic, hearings have remained open to the public. IIROC, the MFDA, the OSC and the ASC allow members of the public to attend hearings remotely. The BCSC still allows members of the public to attend hearings in person with social-distancing measures in place and is testing ways for the public to attend hearings virtually.

Jean-Paul Bureaud, executive director of the Canadian Foundation for the Advancement of Investor Rights (a.k.a. FAIR Canada), said that ensuring hearings remain open to the public during the pandemic is important.

“It is such a fundamental expectation of our system that these kinds of proceedings are open to the public,” Bureaud said, noting that public hearings add to the legitimacy of enforcement proceedings. “All of this has to be open and viewable by the public so people have confidence in the system.”

Kehoe said that allowing members of the public to virtually attend hearings has made the OSC’s enforcement efforts more transparent. He noted that more than 120 members of the public attended a July 2020 virtual settlement hearing for Coinsquare Ltd.

“I see what’s happened in the last eight to nine months as something that’s enhanced transparency and access to justice,” Kehoe said.

A key objective of enforcement is creating a credible deterrent to misconduct by showing would-be scofflaws that there are consequences to breaking the rules. Virtual hearings have been key to achieving this goal during the pandemic, according to Cynthia Campbell, director of enforcement with the ASC.

“The most critical part, from my perspective, is that the cornerstone principles of credible deterrence are timely and transparent enforcement and accountability,” Campbell said. “Without remote hearings, we wouldn’t be able to have that.”

IIROC, the MFDA and the OSC have indicated they will likely continue to hold settlement hearings virtually after the pandemic, but the extent to which virtual participation will continue in contested hearings remains to be seen.

“I think hearing panels and all parties will be more open to having hybrid hearings, where some people are appearing by video conference and some people are in person,” said Charles Corlett, acting vice-president of enforcement with IIROC.

Charles Toth, vice-president of enforcement with the MFDA, said the pandemic has been a proving ground for the use of technology in enforcement proceedings.

“I think everyone is adapting to the Covid environment and finding that we can make virtual hearings work in situations where we didn’t think they could work before,” Toth said.