In an effort to boost investor protection, the Canadian Investment Regulatory Organization (CIRO) is revisiting a proposal to pay some of the money collected in enforcement proceedings to harmed investors.
Shortly after CIRO was created in January 2023, it launched a consultation on a policy for distributing funds, collected under disgorgement orders imposed against dealers and reps, to investors who were harmed by their misconduct.
Currently, the self-regulatory organization (SRO) can order disgorgement — a mechanism intended to deprive securities law violators of the proceeds of their misdeeds; however, no formal process exists for returning any of that money to harmed investors.
Following CIRO’s initial consultation, and an assessment of its proposed new policy, the regulator concluded that the proposed policy will “have a net positive effect by enhancing investor protection and market integrity without adding significant costs.”
As a result, the SRO has republished that proposal for a second round of consultation to gather feedback on explicitly including disgorgement as a sanction against mutual fund dealers, dual-registration dealers and their reps, along with other details of the proposal that have been firmed up in the wake of the initial consultation.
For instance, the regulator said all investors harmed by the misconduct would be eligible to apply for a share of any money that’s recovered, not just investors who participate in the regulatory proceedings, although eligibility would be limited to harm inflicted by the misconduct during the period covered by the enforcement action.
It also clarified that investor loss claims won’t include opportunity costs, interest on losses, non-financial losses or market-driven losses. Also, any losses would be netted against compensation that investors receive from other sources, such as recommendations of the Ombudsman for Banking Services and Investments and any benefit an investor received from the misconduct.
The SRO also indicated that the infrastructure to administer investor payouts would be built within CIRO’s general counsel’s office, which would be separated from its enforcement department and from its new Office of the Investor.
“We are not creating a new compensation program,” it said. “Instead, we are proposing to build a disgorgement distribution program using CIRO’s existing structure and resources, including current hearing panels’ processes and CIRO’s organizational setup.”
It would also have discretion to decline to distribute money to harmed investors in cases where the payouts wouldn’t justify the administrative costs, and those costs would generally be paid out of other sanctions, not the disgorged funds.
The second round of consultation runs until Jan. 20.