Distributing Funds Disgorged and Collected through CIRO Disciplinary Proceedings to Harmed Investors (Phase II)

Comments Due By: January 20, 2025

Background

On January 1, 2023, Investment Industry Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) amalgamated (Amalgamation) to form the New Self-Regulatory Organization of Canada (New SRO).

On February 1, 2023, New SRO published for comment its Proposal on Distributing Funds Disgorged and Collected through New SRO Disciplinary Proceedings to Harmed Investors (Proposal) as Notice 23-0010. Seven (7) comment letters were received in response to Notice 23-0010. We thank all commenters. Copies of the comment letters are publicly available on the CIRO website. A summary of the comments and our responses are available in Appendix A.

On June 1, 2023, New SRO changed its name to become Canadian Investment Regulatory Organization (CIRO).

In light of the developments since the Amalgamation (summarized below), we are republishing the Proposal, unamended, for public comment.

For this current Phase II, we have added to the original Proposal: (i) clarifications and further details in our responses to the comments (Appendix A), (ii) our impact assessment of the Proposal (Appendix B), and (iii) an updated list of consultation questions (below).

We encourage all stakeholders to review and comment upon this Phase II.

Executive Summary of the Proposal

Currently, harmed investors cannot receive a payment from CIRO related to their losses even if disgorgement was ordered in disciplinary proceedings against their investment firm or investment advisor who breached the regulatory requirements. While disgorgement orders are not imposed for the purpose of compensating investors, the funds received under these orders could be distributed to investors to offset some of the losses they suffered as a result of the misconduct giving rise to the disgorgement order.

Between April 2009 and August 2024, in 89 enforcement cases, IIROC/CIRO hearing panels ordered over $9 million in disgorgement, of which IIROC/CIRO collected over $1.8 million. MFDA hearing panels, and now CIRO hearing panels under the Mutual Fund Dealer Rules, may also order disgorgement, which is included in the global monetary sanctions imposed on respondents and collected through the MFDA/CIRO enforcement proceedings.

In 2022, an internal IIROC working group (Working Group) reviewed regulatory models that exist in various jurisdictions for returning money to harmed investors from disgorged funds and prepared a proposal on how the disgorged funds collected through disciplinary proceedings could be distributed to harmed investors.

CIRO is an investment industry regulator and does not have the ability to order compensation or restitution to investors. CIRO’s focus is on compliance with and enforcement of high industry standards and regulatory requirements. There are several dispute resolution and compensation options available to investors in Canada: complaints to their firms, which may result in private settlement and, where unsuccessful, may be escalated to the Ombudsman for Banking Services and Investments (OBSI) or may proceed to arbitration or civil court.

As such, the Working Group published a proposal for the distribution of collected disgorged funds, which builds on CIRO’s current enforcement processes (which include disgorgement orders and collection of funds through CIRO disciplinary proceedings) to provide a mechanism for the distribution of these funds by CIRO to harmed investors.

Recent Developments

Since the Amalgamation and the February 2023 publication of the Proposal, CIRO has, among other initiatives:

• formed the CIRO Office of the Investor, with a mandate to support policy development, educate investors, engage in investor outreach, and perform investor research, all with reference to all CIRO Dealer Members, including investment dealers, mutual fund dealers, and dual-registered dealers (Dealers);
• formed the Investor Advisory Panel (IAP), a panel of experts in investor issues from across Canada that advises CIRO on the development of regulatory policy, annual priorities, strategic plans, and other regulatory initiatives;
• published the Investment Dealer and Partially Consolidated (IDPC) Rules that govern the activities of investment dealers and dual-registered dealers;
• published the Mutual Fund Dealer (MFD) Rules that govern the activities of mutual fund dealers;
• announced the Rule Consolidation Project objectives, principles and roadmap, and proposed new rules as part of Phase 1, Phase 2, and Phase 31of the Rule Consolidation Project, including extending disgorgement to mutual fund dealers;
• received and considered comments from the public consultation on the Proposal;
• conducted an assessment of the Proposal’s impact on investors/clients, CIRO Dealers and CIRO (set out below); and
• received and incorporated input from the IAP regarding the Proposal.

Impact Assessment of the Proposal on Distributing Funds Disgorged and Collected through CIRO Disciplinary Proceedings to Harmed Investors

We have considered the comments received through the public consultation on the Proposal and conducted an assessment of the Proposal’s impact on investors/clients, CIRO Dealers and CIRO (Impact Assessment). The Impact Assessment is attached as Appendix B. Based on the assessment, we have concluded that, by distributing the funds ordered by CIRO hearing panels to be disgorged from advisors or firms as a result of their breaches of the CIRO Rules2to harmed investors, the proposed disgorgement distribution program will enhance investor protection and market integrity in Canada.

Republishing the Proposal for Comment

The Proposal was drafted prior to the Amalgamation and the CIRO developments set out above.

We received 7 comment letters in response to Notice 23-0010. A summary of the comments and our responses are available in Appendix A.

We have not received comments from or concerning the impact of the Proposal on mutual fund dealers and their clients.

In response to the comments to the Proposal, and in light of the developments since the Amalgamation, we are republishing the Proposal, unamended, together with a summary of the comments received, our responses and an impact assessment, for comment and inviting feedback from all stakeholders, including investors, the public, investment dealers, mutual fund dealers, and dual-registered firms and their Approved Persons and employees.

In our responses to the public comments, we have clarified certain aspects of the Proposal, including:

• The eligible investor class will be open to all investors harmed by the misconduct, not just those who participated in the CIRO enforcement proceedings, but it will be limited by the parameters of a particular disgorgement order, i.e., losses must be derived directly from the misconduct and be within the time period covered by the enforcement proceeding.
• Eligible amounts will not include market-driven losses, lost opportunity costs, interest on losses, and non-financial losses and will exclude any benefits received by an investor as a result of the misconduct and any compensation received for the same loss from other sources.
• CIRO would have discretion not to carry out a distribution if the disgorged funds collected and the number of potential claimants do not justify the costs of a distribution.
• Except in rare cases that may require an external distribution process, to preserve the value of the available disgorged funds for a distribution to harmed investors, administrative costs would generally be covered from other sanctions collected, not the disgorged funds.
• CIRO would post distribution notices and status updates on a dedicated CIRO webpage to inform harmed investors and the public, report on completed distributions, and conduct regular reviews of the program.

Stakeholder Review of Specific Questions

Under Phase II, we encourage stakeholders to review the Proposal, including updated charts summarizing disgorgement ordered and amounts collected by CIRO up to 2024, Appendix A (summary of public comments received and CIRO’s responses), Appendix B (Impact Assessment) and comment on the following aspects of the Proposal:

• application of the Proposal to a post-Amalgamation CIRO and clients of all CIRO Dealers, i.e., investment dealers, mutual fund dealers and dual-registered firms, particularly in light of the inherent limitations of the Proposal, highlighted in Appendix A;
• proposed restraints on claimants’ eligibility, i.e., limiting the distribution program by the parameters of the underlying enforcement action, where claims are readily provable as being connected to the misconduct giving rise to disgorgement;
• need to clearly distinguish the distribution of collected disgorged funds from restitution and investor compensation options in order to avoid and prevent investor confusion and overlap with the existing compensation options (such as civil courts, OBSI, arbitration);
• proposal to keep the claim administration as simple as possible to facilitate investors’ access to disgorgement distributions; and
• inclusion of an internal reconsideration mechanism of the Administrator’s determination of investor eligibility and distribution of the funds.

How to Submit Comments

Comments should be submitted in writing by January 20, 2025 and delivered to:

General Counsel’s Office
Canadian Investment Regulatory Organization
[email protected]

Commenters should be aware that a copy of their comment letter will be made available online at www.ciro.ca.

Attachments

Appendix A - Summary of comments received and CIRO’s responses (Notice 23-0010)

Appendix B - Impact Assessment of the Proposal on Distributing Funds Disgorged and Collected through CIRO Disciplinary Proceedings to Harmed Investors

• 1Rule Consolidation Project – Phase 3 | Canadian Investment Regulatory Organization.
• 2CIRO Rules include the IDPC Rules, MFD Rules, the Universal Market Integrity Rules, and all relevant policies and, as applicable, CIRO By-Law No. 1.