More than five years have passed since the Ontario Securities Commission (OSC) first proposed the use of “no-contest” settlements to resolve certain types of enforcement cases. In the two years that these deals have been in use, more than $250 million has now been returned to investors as a result.
In late October, an OSC hearing panel approved the latest settlement agreement under the commission’s relatively new policy of allowing firms to settle enforcement cases without admitting or denying wrongdoing. In that case, a trio of Canadian Imperial Bank of Commerce (CIBC) dealers agreed to return more than $73 million to clients who were overcharged by the firms.
The overcharging took several forms, including clients paying both embedded trailer fees and account fees for products they held in fee-based accounts, and clients holding the higher-fee versions of funds when they qualified for lower-fee editions.
In addition to returning money to investors, the firms also agreed to make a $3-million voluntary payment to the OSC, to pay $50,000 in costs and to tighten their internal controls to ensure that these sorts of lapses won’t happen again. The settlement also specifies that the OSC does not allege any sort of intentional wrongdoing by the firms involved and that the OSC didn’t find any evidence of dishonest conduct. The settlement also notes that CIBC itself reported the issue to the regulator in 2015.
Investor restitution, efforts at remediation and co-operation with the regulator are conditions that the OSC established for the use of no-contest settlements when the regulator first proposed the idea in 2011. At that time, no-contest settlements were introduced ostensibly to help expedite the resolution of disciplinary cases (along with a handful of other tools designed to enhance the efficiency of enforcement). All these tools would reduce the risk that a regulatory settlement could lead to further civil action by eliminating the requirement that firms admit wrongdoing when they settle regulatory cases.
If firms don’t have to admit to any misdeeds before the OSC, the theory held, these firms could settle cases without fear of creating additional liability for themselves.
When the idea was first proposed, it was mostly welcomed by securities lawyers, but investor advocates worried that allowing firms to resolve cases without admissions of guilt would make it tougher than ever for investors to recover their losses, and that this approach wouldn’t act as much of a deterrent.
Working well
However, in the first couple of years since the policy was adopted, it seems to be working relatively well for investors. So far, a handful of large financial services institutions have stepped forward to report issues to the OSC. The CIBC case is the sixth instance of the regulator settling an enforcement action without any admissions. Five cases have involved dealers or fund portfolio managers, and one involved an audit firm.
Perhaps more important, these deals have resulted in investors receiving a combined total of around $270 million in compensation. And, unlike most of the monetary sanctions and restitution ordered by securities regulators in Canada, which often are never collected, this money is going back into the pockets of investors.
Investor advocate that initially worried about the impact of using no-contest settlements have since seemingly warmed to the idea – the way that the OSC has used them so far. Ermanno Pascutto, chairman of the Canadian Foundation for Advancement of Investor Rights (FAIR Canada), says that he is supportive of no-contest settlements in which the firm voluntarily discloses and makes full compensation to clients.
On top of the monetary recovery for clients, these cases also have given firms a process for coming forward to correct systemic issues that in some instances, appear to have gone undetected for a long time. For example, in the CIBC case, the settlement indicates that some of the overcharging began in 2002 and continued to 2016 – making for a 14-year error. Before the no-contest settlement policy was introduced, these were not the types of cases regulators typically uncovered or took on.
Exceeding expectations
The OSC states that it is happy with the way the policy is working. “The implementation of no-contest settlements is exceeding our expectations,” says Jeff Kehoe, enforcement director at the OSC. “We have seen a lot of success here. In just two years, we have approved six no-contest settlements, resulting in approximately $270 million in compensation to investors. That’s a significant amount of money.”
Kehoe adds that the policy also is resulting in cases being resolved “more quickly and effectively, [which is, in turn] freeing up investigative resources that can be directed to other enforcement work.”
Kehoe says the OSC will continue to develop new approaches. “If enforcement is to continue to be an effective tool in the proper functioning of our changing capital markets,” he says, “we must develop the tools to meet different risks. The no-contest settlement has emerged as a great example of such a strategic enforcement tool.”
Since the introduction of no-contest settlements, the OSC has launched a whistleblower program – another tool designed to encourage more self-reporting of misconduct. That program has received a number of tips since it launched in July, but none has yet resulted in enforcement action.
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Correction
An earlier version of this article mistakenly reported that more than $250,000 was returned to investors as a result of no-contest settlements. The correct amount is more than $250 million.
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