Harmed investors would have a new route to getting some of their money back under a new mechanism being proposed by the Ontario Securities Commission (OSC).
The new process, outlined in a published set of rule proposals, would routinely distribute disgorged funds collected in enforcement proceedings, returning them to investors that suffer losses as a direct result of securities misconduct.
“This process is intended to be streamlined, transparent and efficient, and is designed to support better and timelier investor redress,” the OSC said in its notice detailing the proposed new regime.
As it stands, the OSC can — but rarely does — return to investors money that is collected in enforcement proceedings. Its proposals note that disgorgement orders are not intended to recover money for investors, but are rather designed to deprive violators of the proceeds of their misconduct.
However, policymakers are now seeking to do more to return money to harmed investors.
Recent legislative amendments, which received Royal Assent in December 2023 but have yet to be proclaimed, seek to create a new statutory framework for distributing money collected under enforcement disgorgement orders. The OSC’s proposed new rules aim to implement those legislative reforms.
The proposals set out eligibility requirements for investors to claim a share of disgorged money for direct losses that are caused by violations that are proven in enforcement proceedings, either before the Capital Markets Tribunal, or in the Ontario Superior Court of Justice.
Investors would not be able to collect money for losses that aren’t derived directly from proven misconduct, including losses caused by conduct that’s not proven, or that occurred outside of the time period covered in the enforcement proceeding. The proposed process would also exclude market-driven losses, opportunity cost, interest on losses, and non-financial losses.
In addition to establishing eligibility requirements for investors, the proposals also set out the circumstances for when disgorged money must be distributed — which would be all cases involving investor losses, except for insider trading cases (where it’s impossible to attribute harm to specific investors), and cases that involve amounts that are too small to justify the costs of returning it to investors.
Generally, the distribution process would be carried by a court-appointed administrator, but the proposals also set out a process for the OSC to do it directly, and provide for the use of money collected as sanctions to finance the administration of these payouts.
The proposals also require the OSC to provide public disclosure of completed distributions, and it envisions that the status of disgorgement orders will be posted on the OSC’s website to assist harmed investors.
“This increased transparency is anticipated to lead to higher levels of participation in the claims process, which may occur several years after the order was issued,” the OSC’s notice said.
The notice suggested that the adoption of a formal process for distributing disgorgement dollars may also improve the OSC’s ability to enforce collections in foreign markets, “as the presence of a notice and claims process governing disgorged amounts may be a factor that foreign courts consider to be relevant in supporting the enforceability of disgorgement orders.”
While harmed investors would also still be able to try to get money back through the courts, or from complaints to the Ombudsman for Banking Services and Investments (OBSI), they would be required to disclose any payments made under these mechanisms when claiming a share of disgorged funds to prevent investors from receiving double recovery.
And, even if the new regime is adopted, the OSC will also continue to use other mechanisms — such as no-contest settlements and court-run receiverships — to return money to harmed investors.
The proposals are out for comment until Oct. 9.