Our Paper

We begin by reviewing the legislative history of the public interest power in the Act. This is followed by an in-depth analysis of the jurisprudence pertaining to the use of section 127 and its predecessor provisions, absent a breach of securities laws. We then examine the guiding principles that can be gleaned from the jurisprudence.

In reviewing prior jurisprudence, it appears to us that one standard should be used to determine if the public interest power should be exercised. In Canadian Tire Corp v CTC Dealer Holdings Ltd,7 the Ontario Divisional Court noted that the impugned conduct confounded the "justifiable expectations" of shareholders and the capital markets in general. We suggest that this standard would be more appropriate and would allow the Commission and practitioners to move away from labels, such as "abusive," which are difficult to define and may be simply unhelpful. The application of the justifiable expectations standard moves away from labels and focuses on preventing future conduct8 in order to protect investors, enhance market efficiency and promote confidence in the capital markets.

The application of the justifiable expectations standard starts with a fairly straightforward question: Would a reasonable investor lose confidence in the capital markets and be less willing to invest if the Commission did not take action to deter a repetition of the conduct in question? If the answer is clearly yes, then the "expectations" aspect of this standard has been met. In terms of "justifiable," we suggest that there are various policy reasons why the reasonable expectations of investors may not be supported under the Act. Limitations to the exercise of the public interest power include: (i) those imposed by the objects and purposes of the Act;9 (ii) the fact that the power may not be exercised to punish, but only to be preventive and prospective;10 (iii) the fact that the power may not be exercised to provide a private remedy, which would include redress for breach of fiduciary duty;11 and (iv) the fact that a transactional nexus to Ontario is important in considering whether to exercise the power.12

In considering whether a transaction or conduct defeats the justifiable expectations of shareholders and the capital markets in general, prior jurisprudence has provided the following guidelines:

1. As a threshold issue, the conduct or transaction must contravene or be inconsistent with the policy and animating principles underlying securities laws and must have an impact on the capital markets.
   
   
2. The more the conduct or transaction is not specifically regulated under the securities laws, the more outrageous or egregious (or outside acceptable business conduct) the conduct or transaction must be. If the conduct or transaction is regulated under a statute not assigned to the Commission (for example, the Canada Business Corporations Act13), the term "flagrant" may be more appropriate.
   
   
3. If the conduct or transaction has been addressed by the Legislature without being made subject to regulation, then the exercise of the public interest power is highly unlikely.
   
   
4. The following conduct or transactions are more likely to be sanctioned: (i) artificial transactions; (ii) transactions structured intentionally to "end run the statutory scheme or exploit a loophole";14 and (iii) conduct or transactions which would otherwise be illegal, but are not caught by provisions in the securities regulations based on a technical matter, and are clearly (and intentionally enacted) contrary to the underlying principles of the statutory provision in question.
   
   
5. Conduct or transactions which run contrary to the "fundamental principles" under the Act, particularly those set out in section 2.1(2) of the Act including the "requirements for timely, accurate and efficient disclosure of information" and "requirements for the maintenance of high standards of fitness and business conduct to ensure honest and responsible conduct by market participants,"15 are more likely to be subject to the exercise of the public interest power.

http://www.mcmillan.ca/The-Exercise-of-the-Public-Interest-Power-by-the-OSC--A-New-Standard-is-Needed