On October 9, 2024, the IIAC responded to the Ontario Securities Commission (OSC) request for comments on a proposed rule to distribute disgorged funds to harmed investors.

The Background

Currently, the OSC has the discretion (there is no statutory requirement or prescribed process) to distribute the funds that it collects from respondents to enforcement proceedings to third parties, such as harmed investors. The proposed rule contemplates that, in prescribed circumstances, the OSC will be required to distribute disgorged funds to investors that have suffered a direct financial loss as a result of a contravention of Ontario securities law. The OSC will be required to publish information on its website with respect to the amounts received and notice of the claims process.

IIAC Response

The IIAC generally supports the objectives of the proposed rules and appreciates the OSC’s efforts to establish a framework for the timely and effective distribution of funds to harmed investors. Our comments and recommendations concern the limited scope of the proposed distribution framework and its effectiveness as a tool for investor redress. Specifically,

• The framework does not include the distribution of funds paid to the OSC in respect of administrative penalties. There does not appear to be any reasoned basis for this exclusion. This is of concern given disgorgement orders are not made in all cases in which a respondent is held to have breached securities law. Moreover, the amount and frequency of disgorgement orders is highly variable from year-to-year, and a significant portion of the payments made to the OSC relate to administrative penalties. Despite this, the distribution of administrative penalties to harmed investors remains subject to the Commission’s discretion under the proposed amendments.
• It is not clear whether the proposed definition of “disgorgement order” includes disgorgement orders that are made as part of approved settlement agreements. We note that the proposed rule and Companion Policy draw a distinction between funds received in respect of disgorgement orders and funds received for the payment of settlements. This limitation may negatively impact the effectiveness of the OSC’s proposed framework, given that a disproportionate number of OSC enforcement proceedings are concluded by way of settlement.

In light of the foregoing, the IIAC recommended that the OSC extend its proposed framework to include settlement payments. Our latest recommendations to members of the Canadian Securities’ Administrators and CIRO are here.