The Ontario Securities Commission (“OSC”) recently published for comment proposed rules and policies that would establish a process to distribute funds that the OSC receives under disgorgement orders to harmed investors. The OSC modelled its proposal after the British Columbia Securities Commission’s statutory framework for distributing disgorged funds and incorporated elements from other jurisdictions’ distribution processes.

Background

Bill 146, Building a Stronger Ontario Together Act (Budget Measures), 2023 (“Bill 146”), introduced amendments to the Securities Act (Ontario) (“OSA”), Commodity Futures Act (Ontario) and Securities Commission Act, 2021 (Ontario) that establish a new statutory framework for distributing money received under disgorgement orders to investors who have incurred direct financial loss as a result of the contravention of Ontario securities or commodity futures laws (the “Amendments”). The Amendments are based on recommendations from the Ontario government’s Capital Markets Modernization Taskforce and provide that regulations will address, among other matters, requirements relating to investor eligibility and the circumstances in which funds received by the OSC must be distributed.

The OSC has, accordingly, published for comment Proposed OSC Rule 11-502 Distribution of Amounts Paid to the OSC under Disgorgement Orders and Proposed OSC Rule 11-503 (Commodity Futures Act) Distribution of Amounts Paid to the OSC under Disgorgement Orders (collectively, the “Proposed Rules”) and related companion policies. Bill 146 received Royal Assent in December 2023; however, the Amendments will come into force on a later date. It is anticipated that the Proposed Rules will come into force at the same time as the Amendments.

Proposed Rules

The Proposed Rules provide that the OSC will make disgorged funds that it receives available for distribution in all cases unless: (i) the disgorgement was ordered in relation to a contravention of the insider trading and tipping prohibition under the OSA; or (ii) the amount received is too small to justify the costs of distributing it. The amount received and notice of the claims process will be required to be published on the OSC’s website. Investors will be eligible to receive a distribution if they have incurred direct financial loss as a result of, and did not directly or indirectly engage in, the contravention that gave rise to a disgorgement order.

While it is anticipated that most distributions will be conducted by a court-appointed administrator, the Proposed Rules outline the process for distributions carried out directly by the OSC. In such instance, the claims notice must include certain prescribed information, not limited to a description of how an eligible applicant may pursue a claim and the final date for filing a claim (which must be at least 90 days from the date the notice is posted). Investors’ claims must describe the financial loss incurred, supported by documentary evidence, and identify any other sources from which payment for the amount claimed has been paid, is payable or may be payable and the amount of that payment. After reviewing all claims filed, the OSC may make a payment to an applicant if it is satisfied that: (i) the applicant is eligible; (ii) the amount of direct financial loss can be quantified; and (iii) sufficient proof of the loss has been provided. No payments may be made until all claims filed have been considered and the amount to be paid to each applicant is determined. Notwithstanding the foregoing, in the event of a disputed claim, the OSC may make partial payments while holding back a portion of the disgorged amount.

The Proposed Rules also include a framework for the payment of certain administrative costs relating to distributions, which aims to minimize the portion of the disgorged amount that is spent on such costs.

The OSC will be required to publish a report, within 60 days of the date the funds are fully distributed, that sets out the amount received under the disgorgement order, the method of distribution, the estimated number of harmed investors, the total number of applicants and the number who received a payment, the total value of all approved claims, the total amount distributed to applicants, the value of any administrative costs paid from the disgorged amount and the percentage of each eligible applicant’s approved claim that was paid under the distribution.

Next Steps

The OSC will accept comments on the Proposed Rules until October 9, 2024.

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