Securities regulators are working to address long-standing criticism that they don’t do enough to get money back for harmed investors. Both the industry and investor advocates are pushing regulators to do more, and they have responded by proposing a regime to put disgorged penalties money into the hands of victims of misconduct.
While the provincial regulators and the Canadian Investment Regulatory Organization (CIRO) claim to have investor protection at the heart of their mandates, there is a disconnect when it comes to enforcement. The sanctions that regulators hand out are generally designed to be preventive rather than punitive — aiming to guard against future regulatory violations instead of punishing past bad behaviour. That’s of little solace to investors who’ve suffered losses because of dealer or rep misconduct.
Investors sometimes get money back, but that often means pursuing redress in court or through mechanisms such as the Ombudsman for Banking Services and Investments (OBSI) — both of which are challenging. The courts are notoriously slow and expensive, while OBSI has limited ability to enforce its recommendations for investor compensation.
Now, both the Ontario Securities Commission (OSC) and CIRO are looking to play a bigger role in getting some money back for investors through enforcement mechanisms. The commission and the self-regulatory organization are developing processes for paying out money that’s ordered to be disgorged by violators of securities regulation — a measure used to prevent wrongdoers from profiting off their misdeeds by requiring them to give up ill-gotten gains. The money would be returned to investors harmed by the sanctioned misconduct.
The consultation on the OSC’s initial proposal closed in mid-October, and CIRO launched a second round of consultations on its proposals that runs until Jan. 20.
These proposals are supported by both the industry and investor advocates in the hope that such strategies will help repair the disconnect in securities enforcement.
“Compensating harmed investors shows that the regulatory system works for them and aligns with their expectations,” stated the submission from the Toronto-based investor advocacy group FAIR Canada on the OSC’s consultation.
“These schemes help promote confidence in the capital markets by offering wronged investors another avenue for financial redress,” the submission stated.
While the notion of returning money to abused investors may seem easy to endorse, the exercise is easier said than done. Investor confusion and disappointment could arise, given that investors’ losses often far exceed the amounts ordered in disgorgement, and the addition of another redress option could further complicate the already tricky process of getting money back. The efficacy of the proposed initiatives will depend on both their design and the regulators’ execution of them.
For both the industry and investor advocates, the central concern with the OSC’s proposals seems to be their lack of ambition. The regulator should maximize its efforts to get money back for investors, consultation feedback suggested.
The submission to the OSC from the industry trade group the Investment Industry Association of Canada (IIAC) suggested the OSC should aim to do more than simply pay out the money recovered under disgorgement orders.
“We are concerned that the limited scope of this proposed framework will negatively impact its effectiveness as a tool for investor redress,” IIAC’s submission stated.
That submission recommended the OSC consider following the approach of the U.S. Securities and Exchange Commission, which has mechanisms for both ordering disgorgement penalties on violators and collecting the associated money to be paid to harmed investors.
IIAC acknowledged that adopting a practice of routinely collecting financial penalties and paying them out to harmed investors would likely require legislative changes. In the meantime, IIAC recommended that the regulator develop rules to better define when it will use its existing discretion to distribute sanctions money to harmed investors.
Assuming payouts to harmed investors will be limited to disgorgement money, submissions to the OSC’s consultation also called for the regulator to maximize the assets available under these orders. As things stand, the regulator collects only a small portion of the disgorgement ordered in enforcement proceedings.
Between 2015 and 2024, $266 million in disgorgement was ordered in OSC proceedings, but only about $21 million (8%) was collected.
“Given these low collection rates and their effect in undermining confidence in the system’s integrity, the OSC must be given the authority and legal tools to collect financial penalties imposed on wrongdoers,” FAIR Canada’s submission to the OSC stated.
To that end, it called on the Ontario government to beef up the OSC’s collection powers by adopting some of the measures introduced by the government of British Columbia, which include giving the B.C. Securities Commission the ability to prevent people with unpaid enforcement sanctions from renewing their driver’s licences, increasing that regulator’s ability to guard against assets being hidden, and to automatically issue liens against unpaid sanctions.
“We see no reason why investors in Ontario should have weaker protections than those in B.C.,” FAIR Canada’s submission stated, noting that Ontario is the largest capital markets jurisdiction in Canada, and the OSC is the biggest regulator. “Given its responsibility to foster confidence and integrity in Ontario’s capital markets, the OSC must also be given the tools to enforce tribunal or court-imposed financial penalties, including disgorgement orders.”
FAIR Canada’s submission also called on the OSC to minimize the costs of administering distributions to investors so as to maximize the money returned to them.
While CIRO plans to build its capacity to administer such payouts within its general counsel’s office rather than use an outside body, the OSC’s proposals indicate the commission expects to seek a court-appointed administrator to manage most of its distributions.
That proposed approach raised concerns among several investor advocates, including FAIR Canada, the Canadian Advocacy Council of CFA Societies Canada and Osgoode Law School’s Investor Protection Clinic. They all expressed concern that using outside administrators would be more expensive than the regulator handling these payouts itself. They recommended that the OSC consider taking a bigger hand in managing investor distributions to keep administrative costs down.
Additionally, a number of submissions called on the OSC to ramp up its plans for alerting harmed investors to potential distributions of disgorgement money. While the OSC’s initial proposal calls for the regulator to post notices to investors on its website, several comments recommended that the regulator use a much broader range of communications channels to announce pending distributions. Recommendations included advertising, using social media and working with legal clinics to ensure that investors are alerted to pending payouts.
The regulators’ plans for paying out disgorgement money to harmed investors is a rare policy issue on which the industry and investor advocates are closely aligned. Rarer still is that both sides want regulators to be more aggressive — at least when it comes to helping harmed investors.
This article appears in the November issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.