CI to pony up $156.1 million in compensation, plus make voluntary payment to the OSC

The settlement, which was approved by the OSC on Wednesday, stems from the firm’s discovery that the NAV of 23 mutual funds and 69 segregated funds was understated for five years because of unrecorded interest earned by the funds.

“We have corrected the error and conducted a thorough investigation into its cause with the assistance of an independent consultant,” says CI in a statement issued following the settlement.

“CI has developed a plan to make payments to affected investors starting in March 2016. We will be distributing an amount equal to the accumulated interest, which has remained in the funds’ bank accounts and has never been co-mingled with CI’s assets,” the firm adds. “Currently, CI and the consultant are testing the process we will use to calculate the payments and we will be able provide more information about the payments after that testing is complete.”

Along with the restitution to affected investors, CI also agreed to make a voluntary payment of $8 million to the OSC and $50,000 in costs as part of the settlement.

The firm’s parent, CI Financial Corp., announced that it has taken a provision of $10.75 million against its fourth quarter earnings to account for the cost of resolving the issue, which includes the $8 million payment to the OSC.

According to the settlement, CI self-reported the problem to regulators in June 2015. Following an investigation, the OSC alleged that CI’s controls and its oversight of an outsourced service provider, “were not sufficient to address the unique cash collateral feature of certain funds and to ensure that interest earned in related accounts was recorded and included in the net asset value [of the affected funds].” The regulator notes that there was no evidence of dishonest conduct by CI.

To resolve the case, the OSC and the firm entered a no-contest settlement, which does not require the firm to admit to any wrongdoing. The settlement notes that CI co-operated with the OSC, that the firm chose not to receive the $4 million in management fees that it would have earned on the unrecorded interest, and that it has taken action to address the weaknesses in its controls. As part of the resolution, the firm must report to the OSC on its progress at enhancing its supervisory and monitoring systems.

“We expect that registrants will establish robust systems of controls and supervision around the proper calculation and reporting of NAVs,” says Tom Atkinson, director of enforcement with the OSC, in a statement. “Investors rely on investment fund managers to oversee the accurate calculation of NAV and fund performance to assist investors in making informed investment decisions, and in cases where this does not happen, we will take enforcement action.”

This is the third no-contest deal approved by the OSC since the process was introduced. In 2014, the OSC struck the first of these deals with various subsidiaries of Toronto-Dominion Bank (TD), which found that various investment clients were overcharged. TD pledged to pay $13.5 million in compensation to clients along with a voluntary payment of $600,000 to the OSC and $50,000 in costs.

Last year, London, Ont.-based mutual fund dealer Quadrus Investment Services Ltd. also reached a no-contest settlement after self-reporting a compliance issue that resulted in certain clients paying excess fees. It pledged to pay about $8 million in restitution to clients along with a voluntary payment of $250,000 to the OSC and $20,000 in costs.