The Ontario Securities Commission (OSC) has published a notice and request for comment on several proposed rules that will establish a process to distribute money received by the OSC under disgorgement orders to harmed investors, primarily in Proposed OSC Rule 11-502 Distribution of Amounts Paid to the OSC under Disgorgement Orders and its related companion policy. Similar rules are proposed under the Commodity Futures Act (Ontario) (collectively, the Proposed Rules). Currently, there are no specified procedures for distributing those funds back to investors. The British Columbia Securities Commission and Autorité des marchés financiers both already have statutory frameworks.
On November 2, 2023, the government introduced Bill 146, Building a Stronger Ontario Together Act (Budget Measures), 2023 that included legislative amendments to the Securities Act (Ontario), the Commodity Futures Act (Ontario), and the Securities Commission Act, 2021. The amendments, once in force, will establish a new statutory framework governing the distribution of money received by the OSC under disgorgement orders to investors who incurred direct financial losses due to the contravention of Ontario securities law or Ontario commodity futures law giving rise to the disgorgement order.
While disgorgement orders are not intended to ‘compensate’ investors, the Proposed Rules suggest that, in certain circumstances, amounts received under these orders can be distributed to investors who incurred direct financial losses because of the conduct giving rise to the order.
The framework under the Proposed Rules include:
- the circumstances in which money received by the OSC under disgorgement orders is required to be distributed;
- the eligibility requirements for investors seeking a payment from the disgorged amounts received by the OSC;
- a process for distributing disgorged amounts to harmed investors in cases where a court-appointed administrator is not used; and
- the use of other monetary sanctions and settlement payments received by the OSC to pay certain administrative costs in relation to the distribution of disgorged amounts.
An “eligible applicant” for funds will be a person or company that (i) incurred direct financial losses as a result of a contravention that gave rise to a disgorgement order, and (ii) did not directly or indirectly engage in the contravention that gave rise to the disgorgement order.
It is currently proposed that the OSC will make disgorged funds available for distribution unless the disgorgement order related to a contravention of the “insider trading and tipping” provisions (because it is difficult to establish that this conduct has caused direct financial harm to investors or quantify losses) or the amount received is too small to justify the costs of distributing it (anticipated to be less than $50).
Funds will be made available through a notice and claims process conducted by either a court-appointed administrator or directly by the OSC, with the former being used in most cases. It is anticipated that a claims-based process will be needed to identify harmed investors and verify their financial losses. Investors are not precluded from seeking to recover from other sources such as a civil claim, but applicants under the proposed framework must disclose any such payments to prevent double recovery.
Amounts collected are anticipated to be held for three years or until sufficient amounts are collected to warrant making a distribution. In determining the amount to be paid to an eligible applicant, the OSC must consider the amount of money received under the disgorgement order, the direct financial loss suffered by the applicant, the direct financial losses suffered by all eligible applicants, and any other information considered appropriate in the circumstances.
The OSC will be obligated to publish information with respect to the money received, and if distribution is required, a notice of the claims process. A report will also be published on each completed distribution within a prescribed time frame. The OSC intends to create ‘plain language’ resources to help investors understand the new statutory distribution framework and the payment application process.
The consultation notes that the OSC will also continue to use other existing tools to return money to harmed investors, including in appropriate circumstances no contest settlements and receiverships.
Comments on the proposal are due by October 9, 2024.
August 30, 2024