One of the characteristics of capital markets regulation in Canada has traditionally included a clear delineation of function and jurisdiction. Provincial securities regulators make and ensure compliance with its rules and its staff's policy pronouncements, enforced largely through its associated tribunal. Civil and criminal enforcement is the purview of the courts. Recovery for investors harmed by misconduct of market participants has been the purview of the courts or statutory ombud services. These lines are increasingly blurring, and that trend appears to continue.
On July 11, 2024, the Ontario Securities Commission (OSC or Commission) published a new set of proposed rules (together, the Proposed Rule) for comment that introduces a new avenue of facilitating the repayment of funds to financially harmed investors.
On December 4, 2023, Bill 146 created a statutory requirement that money received under an order for disgorgement must be distributed to harmed investors, subject to certain conditions and requirements to be dictated by the OSC. Disgorgement is an equitable remedy that aims to deprive a wrongdoer of the monetary funds they obtained illegally by not complying with the Securities Act (Ontario) (OSA) and the Commodity Futures Act (Ontario) (CFA).
The OSC published the Proposed Rule to give effect to Bill 146. The Proposed Rule outlines the procedure the OSC and harmed investors must follow for the funds collected under a disgorgement order to be distributed appropriately to harmed investors. The Proposed Rule is open for a 90-day comment period that will expire on October 9, 2024.
Current state of the law
Under the OSA and CFA, both the Capital Markets Tribunal (the Tribunal) and the Ontario Superior Court of Justice have the authority to make disgorgement orders.
When the Tribunal makes a disgorgement order, the Commission receives the funds recovered from the wrongdoer. Currently, there is no statutory requirement to distribute these funds to those investors harmed by the conduct of the wrongdoer. Instead, the Commission allocates these disgorged funds towards the costs of enforcing orders, for the benefit of third parties, educating investors on the operation of the financial markets, and for any other purpose specified in the regulations.
The Ontario Superior Court is also authorized to order a person or company that has not complied with the OSA or CFA to disgorge any amounts obtained as a result of the non-compliance. Currently, these disgorged amounts are payable to the Minister of Finance.
Change on the horizon
In 2021, the Capital Markets Modernization Taskforce (the Taskforce) and the Auditor General of Ontario recommended changes to the current process of distributing disgorgement funds. The Taskforce recommended that a statutory process be put in place to support the distribution of disgorged funds to harmed investors. The Auditor General of Ontario recommended that the Ontario Ministry of Finance work with the OSC to ensure disgorged funds are distributed to harmed investors.
As a result of these recommendations, on November 2, 2023, the government of Ontario introduced Bill 146, Building a Stronger Ontario Together Act(Budget Measures), 2023 (Bill 146) which included amendments to the OSA, CFA, and Securities Commission Act, 2021, and the requirement that money received under a disgorgement order must be distributed to harmed investors, subject to certain conditions and requirements. In addition, these amendments also create a new flexible framework for distributing these disgorged funds which allows OSC rules to address the following
- the circumstances in which money received by the OSC under disgorgement orders is required to be distributed
- the eligibility requirements for investors seeking a payment from the disgorged amounts received by the OSC
- a process for distributing disgorged amounts to harmed investors in cases where a court-appointed administrator is not used
- the use of other monetary sanctions and settlement payments received by the OSC to pay certain administrative costs in relation to the distribution of disgorged amounts
The Proposed Rule was drafted to address these factors and to support better and timelier investor redress.
The Proposed Rule
In accordance with Bill 146, the Proposed Rule sets out a requirement that disgorged amounts received by the OSC must be distributed in accordance with this rule. However, there are two exceptions to this requirement (1) where the disgorgement was ordered in relation to a contravention of the "insider trading and tipping" prohibitions under section 76 of the OSA (2) where the amount received by the OSC is too small to justify the costs of distributing it.
Under the Proposed Rule, if a distribution of disgorged amounts from a wrongdoer is required, the Commission is required to post a notice of the claims process. This notice informs investors of the amount that has been disgorged from a given wrongdoer and notifies investors of the appropriate time in which they are able to make a claim regarding their entitlement to payment from the disgorged funds.
Under the claims process, harmed investors are required to submit applications with information to prove their claims to help the OSC identify harmed investors and quantify and verify their financial loss.1
After submitting a claim, harmed investors will not receive any payment until all claims filed under the Proposed Rule have been considered and the amount to be paid to each applicant has been determined. The distribution may be carried out either by a court-appointment administrator or by the OSC directly. However, the OSC anticipates that most distributions will be conducted by a court-appointed administrator.
Additionally, receiving a payment under the Proposed Rule does not preclude harmed investors from also seeking to recover their losses through other channels, such as by filing a civil claim or by submitting a complaint to the Ombudsman for Banking Services and Investments (OBSI), as was the case in AIC Limited v. Fischer, 2013 SCC 69. However, it remains to be seen what the impact of payments received under the Proposed Rule will have on other means of recovery.
Furthermore, the Proposed Rule provides a framework for the payment of administrative costs for each distribution. The goal of this framework is to reduce the amount of the administrative costs being paid from the disgorged amounts to be distributed to harmed investors. The framework states the administrative costs for each distribution will be paid
- first from the allocation of any administrative penalty or settlement money received by the OSC in relation to the same proceeding that gave rise to the disgorged amount being distributed
- next from the allocation of other unrelated sanction and settlement money held by the OSC in such an amount as the OSC considers to be appropriate after considering a non-exhaustive list of factors
- finally, if any administrative costs remain, from the disgorged amount that is being distributed
Other Canadian jurisdictions
Both the British Columbia Securities Commission (BCSC) and the Authorité des marchés financiers (AMF) in Québec already have statutory frameworks in place for distributing disgorged funds to harmed investors.
In British Columbia, the BCSC's framework resembles the OSC's proposed framework in that when the BCSC receives money from a disgorgement order, the BCSC is required to publish a notice and receive and consider applications for payment from the money collected. However, the BCSC's framework differs from the OSC's with respect to who is able to submit a claim. Under the BCSC's framework, only eligible applicants who, among other things, have suffered pecuniary loss as a direct result of the misconduct that gave rise to the disgorgement order, may submit claims for payment from the disgorged funds.
In Québec, the AMF's framework takes a different approach in that a distribution process follows a disgorgement order if "the proof justifying the order" shows that persons have sustained a loss in the course of the non-compliance. As a result, Québec's Financial Markets Administrative Tribunal will order the AMF to provide to the tribunal the distribution process. Similar to the OSC's proposed framework, the distribution will not take place if the process would cost more than what is available for distribution.
Implications
The Ontario government and the OSC, through their enactment of Bill 146 and the Proposed Rule, have acknowledged a common pain point in the securities law enforcement process; namely the long process harmed investors face before receiving any redress. By addressing this pain point and providing an avenue for more efficient investor redress, the Proposed Rule is intended to instill greater confidence in capital markets and bolster confidence in the OSC's ability to support the best interests of investors.
However, the Proposed Rule and its associated claims process will also likely significantly elevate the quantity of claims submitted to the OSC, thereby augmenting the existing caseload. This flood of claims, on top of the Commission's existing caseload, without additional resources will create a strain on the Commission's operational capabilities which could lead to delays in delivering redress to harmed investors, despite the goal of the Proposed Rule being to alleviate this very issue. How the Commission plans to manage this operational challenge remains to be seen.
Moreover, the new regime under the Proposed Rule may further blur the lines between the roles of regulators, courts, and statutory ombud services (last year the CSA published [PDF] proposed reforms to OBSI, providing it with the ability to make binding decisions), putting creating competitive pressures amongst them. Such pressures may give rise to more aggressive efforts to "do right" for investors. In addition, it may also lead to confusion and impact accountability.
Footnote
1 Section 9 of the Proposed Rule describes the requirements to file a claim, and the proposed companion policy provides additional guidance on the information applicants must provide to support their claim.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.