The New Self-Regulatory Organization of Canada (New SRO) released a consultation earlier this month with respect to distributing disgorged funds, entitled the Proposal on Distributing Funds Disgorged and Collected through New SRO Disciplinary Proceedings to Harmed Investors.
The New SRO is not currently able to release disgorged funds to investors that have suffered a loss, even if a disciplinary proceeding has ordered disgorgement. Disgorgement aims to ensure that respondents, who are found liable for breaching regulatory requirements, do not keep any funds they obtained (e.g. incorrect commissions or fees), or benefit from losses avoided, as a result of their contravention. Disgorged funds differ from amounts that may otherwise be recovered by investors for losses as a result of their advisors’ activities. The New SRO reviewed research and recommendations from an internal working group and is proposing to enhance its existing enforcement process to add a mechanism to distribute disgorged funds to harmed investors.
Under the proposal, an eligible investor would be a person who suffered direct financial loss because of the contravention giving rise to the disgorgement directly linked to the enforcement findings. A potential class of investors would thus be identified at the investigation stage. While the consultation acknowledges that this may exclude certain investors, it will prevent focusing the enforcement process on investor compensation (which can still be pursued elsewhere) when the focus is intended to be the prevention and deterrence of misconduct.
It is suggested that the program be structured outside of the enforcement process and be administered by a separate branch of the New SRO (an Administrator). Once the enforcement process is completed and funds are disgorged and collected, notice would be provided to all known eligible investors, and claimants would need to opt in within a prescribed time frame set by the Administrator (within 30-90 days). Claimants would need to declare any recovery obtained elsewhere and claims for payment would then be assessed by the Administrator. The working group also recommended that the New SRO’s Office of the Investor act as liaison between the Administrator and investors.
Harmed investors would not be prevented from bringing civil claims or seeking compensation elsewhere for losses arising from the same conduct. Specific questions posed in the notice accompanying the consultation relate to the proposed restraints on eligibility and the potential for investor confusion with respect to their redress options.
Comments are due on the proposal by May 1, 2023.
February 28, 2023