When is a ‘Penalty’ Not ‘Penal’? – Rowan v OSC

Last week, the Ontario Court of Appeal (“ONCA”) released its decision in Rowan v Ontario Securities Commission 2012 ONCA 208  [Rowan]. In Rowan, the chief issue was whether s. 127(9) of the Ontario Securites Act, RSO 1990, c S.5 [the Act], which allows the Ontario Securities Commission (“OSC”) to order administrative monetary penalties (“AMPs”) of up to $1 million per breach of securities law, violated s. 11(d) of the Charter of Rights and Freedoms. Writing for a unanimous Court, Justice Sharpe dismissed the appeal, holding that AMPs are not ‘penal’ such as to engage section 11 and are

“entirely in keeping with the Commission’s mandate to regulate the capital markets, where enormous sums of money are involved and where substantial penalties are necessary to remove economic incentives for non-compliance with market rules.”

The ONCA’s reasoning in Rowan was proper. Nonetheless, the case personifies philosophical challenges that arise at the intersection of administrative and constitutional law.

Background

Roger Rowan was an officer of Watt Carmichael Inc. (“WCI”), an investment dealer registered under the Act. Harry Carmichael was the Ultimate Designated Person of WCI, responsible for overall compliance with regulatory requirements. Michael McKenney was the Chief Compliance Officer of WCI, responsible for day-to-day compliance activities. Biovail Corporation is a reporting issuer in Ontario whose Chairman and Chief Executive Officer, (current Ottawa Senators owner) Eugene Melnyk, established a series of trusts in the Cayman Islands. The trusts had discretionary trading accounts with WCI, enabling Mr. Rowan to make trades without prior client authorization. Mr. Rowan was also a Director of Biovail.

The OSC made a number of findings against Messrs. Rowan, Carmichael and McKenney, levying a number of sanctions against them as punishment. Though the Commission did not find Mr. Rowan guilty of insider trading, it did determine that he had repeatedly breached s.107 of the Act, which requires heightened reporting by insiders. The Commission also found that Mr. Rowan had acted contrary to the public interest by failing to provide complete and accurate information to Biovail concerning the number of Biovail shares over which he exercised control or direction (which, in turn, led Biovail to issue a number of incomplete and misleading circulars). The OSC also determined that Mr. Rowan engaged in a significant number of discretionary trades during Biovail’s “blackout periods” (periods declared by public companies during which insiders are not permitted to trade company shares due to the increased risk of insiders having access to relevant, undisclosed information). The OSC also made findings against Messrs. McKenney, Carmichael and WCI, determining that they had failed to properly monitor Rowan’s trading and ensure that WCI had adequate procedures in place to ensure compliance, respectively. Pursuant to s. 127(9) of the Act, which allows the Commission to order payments of up to $1-million per breach of securities law, the OSC imposed a number of AMPs against Messrs. Rowan, Carmichael, McKenney and WCI, totaling over $1.2 million.

In coming to its decision, the OSC determined that the Charter’s section 11(d) right to a fair and public hearing by an independent and impartial tribunal (which the OSC conceded it is not), was not engaged because the guarantees in section 11(d) are only triggered by an individual being “charged with an offence,” as which AMPs cannot be appropriately characterized.

On appeal to the Divisional Court, the OSC’s ruling was upheld. While Constitutional interpretations by an administrative tribunal are subject to review on a correctness standard by a reviewing court, the Divisional Court concurred with the OSC’s interpretation.

The ONCA Upholds the OSC Decision

The ONCA upheld the Divisional Court’s decision, making detailed reference to the leading s. 11(d) case, R v Wigglesworth [1987] 2 SCR 541 [Wigglesworth]. In Wigglesworth, the Supreme Court of Canada (“SCC”) rejected the proposition that all persons subject to proceedings leading to the imposition of a penalty should be regarded as “charged with an offence” for the purposes of section 11. Instead, Justice Wilson held that s.11 was only triggered in the case of “criminal and penal matters” (emphasis added). Such matters, she held, could be further split into two categories:

1. proceedings that are criminal by their very nature, and
2. proceedings that could result in a conviction with  “true penal consequences.”

As regards fines, the SCC in Wigglesworth observed that the imposition of monetary penalties is only penal when it appears to be ordered for the purposes of redressing the wrong done to society at large rather than for the maintenance of internal discipline within a limited sphere of activity. Accordingly, where a tribunal has a virtually unlimited ability to impose fines, to avoid triggering section 11, it would be restricted to imposing fines solely to achieve the purpose of the administrative regime.

The appellants alleged that because the OSC could impose an AMP for up to $1 million per breach (i.e. every trade in breach of the Act), that AMPs transcend an administrative sanction and become a penal one. Relying on Wigglesworth, however, the ONCA disagreed, noting that so long as the penalties were directed towards the maintenance of internal discipline within the securities regime, section 11 was not triggered. That the AMPs could amount to $1 million per breach was insignificant given the “enormous sums of money” often involved. Without such a deterrent, Justice Sharpe observed, AMPs risked becoming viewed as simply “the cost of doing business.”

Analysis

The ONCA applied Wigglesworth properly. AMPs clearly fit within the OSC’s mandate to regulate capital markets and are a necessary deterrent to encourage compliance. Accordingly, they are not ‘penal,’ and do not, on the jurisprudence, trigger section 11. That said, it is worth asking what the purpose of section 11(d) is and whether the Wigglesworth line of thinking squares with that purpose. To require court-like protections in each and every case  would undeniably  be damaging to the interests of efficiency that administrative regimes aim to achieve. Conversely, however, section 11(d) is simply a manifestation of the far broader value that underlies its verbal configuration – the idea that before governmental authority attaches a consequence to an action (in the form of both the actual penalty imposed as well as the stigma), certain procedural requirements should be met.

Rowan epitomizes the tension that exists at the intersection of administrative law and Charter values such as those underlying section 11(d). The Charter guarantees the rights in section 11 to those “charged with an offence.” It makes no facial distinction between criminal and administrative “offences.” Such a nuance comes entirely from judicial interpretation.

Realistically, there is no turning back the clock on Wigglesworth. The expansive role of administrative tribunals throughout Canada, and the benefits derived from using highly specialized bodies, is here to stay. Consider this, though – the OSC not only imposed substantial AMPs against Mr. Rowan, but also prohibited him from being a director or officer of a reporting issuer for 7 years or of a registrant for 3 years, significantly limiting his ability to make a living. Likewise, Mr. Carmichael was required to resign from any current positions as an officer or director of a registrant and prohibited from acting in a supervisory role for 45 days, and Mr. McKenney was required to resign from any current position as an officer or director of a registrant and suspended from serving in such a capacity or any other supervisory role for a year. Finally, WCI was required to undergo an independent review, a costly process. Given these potential consequences, surely there is a case to be made that a potential transgressor of the Act should have the protections section 11 speaks to, and not just the heightened degree of procedural fairness that is (admittedly) already accorded by OSC proceedings.