Settlement solutions: the

Giving firms options about what they admit in dispute actions could mean less work for regulators. No contest settlements would keep the regulatory process moving and avoid situations in which advisors litigate matters to the last gasp for fear any admissions will destroy their reputations.

David Hausman, a lawyer at Fasken Martineau in Toronto, said the removing of some discussions and agreements from the record would encourage settlements and prevent bogging of the complaint queues at self-regulatory organizations and provincial regulators. The problem, he told a Canadian Institute conference on securities litigation this week, is that the industry’s regulatory structure is to some extent predicated on the airing of firms’ dirty laundry.

In the U.S., respondents are permitted to settle with regulators “without admitting or denying guilt.” That legalese speeds the settlement process by allowing securities firms to pay claims to regulators and disgorge funds that make investors whole, without opening themselves up to further actions. Standard new account opening forms in the U.S. require that clients agree to settle the bulk of disputes in arbitration forums, rather than in civil court. But that option doesn’t exist in Canada.

As a practical matter, said Jeffrey Kehoe, the IDA’s director of enforcement and litigation, it would be difficult for regulators to take every matter they encounter to the hearing stage, so structural changes that encourage respondents to settle would be a good thing. At the same time, it’s not an option to simply enact no contest admissions policies because such regulatory changes have to be approved by the CSA and should, in theory, be harmonized among the provinces and SROs.

Alberta Securities Commission enforcement director John Petch added that it’s in the best interests of securities regulators to show that misconduct has negative consequences, so they’re just as happy holding hearings as achieving settlements. But the settlement option gives the respondent the opportunity to decide whether it’s better to have one round of bad publicity by making an admission, or to suffer round after round of exposure as a hearing is written up in the daily newspapers.

Advisors also settle as a practical matter, noted James Douglas, a lawyer at Borden Ladner Gervais in Toronto. If a respondent doesn’t have unlimited funds, he knows it will be impossible to carry litigation to the bitter end. And there’s always the risk of having to pay administrative funds and still be on the hook for a settlement if the case is lost.

Filed by Philip Porado, Advisor’s Edge, philip.porado@advisor.rogers.com