Investor advocates and industry players alike are concerned about broadening the uses for the Ontario Securities Commission’s (OSC) large stockpile of enforcement sanctions.
Over the summer, Ontario’s Ministry of Finance proposed a regulatory change that would expand the approved uses for money accumulated by the OSC in enforcement proceedings, such as penalties, voluntary payments and disgorgement orders. Those funds have swollen to about $123.7 million as of the OSC’s latest fiscal year, which ended March 31.
Currently, collected enforcement money can only be used for approved investor protection objectives, including repaying harmed investors, compensating whistleblowers and for activities to benefit investors generally (such as funding investor education and advocacy initiatives).
The proposals, which were out for comment until Sept. 18, would allow that money to be used for other purposes, such as financing certain technology investments at the OSC and to support initiatives from the OSC’s Office of Economic Growth and Innovation.
Some stakeholders worry the enforcement sanctions could be turned into a slush fund for expenditures that wouldn’t necessarily benefit investors.
Investor advocacy group FAIR Canada — which has received financing from the OSC’s designated fund — supported deploying the money collected from enforcement sanctions rather than allowing it to languish, but stressed that those expenditures must benefit investors.
“FAIR Canada agrees with the desirability of avoiding the accumulation of a large balance of enforcement money. Such money should be put to good use; it serves no purpose if it sits idle and unused,” the group stated in its submission.
“It is important to remind ourselves, however, that the enforcement funds were collected in cases where investors were harmed. As such, the right thing to do would be for the commission to continue to prioritize returning such money to those harmed investors.”
Returning money to harmed investors has long been a challenge for regulators. In its most recent fiscal year, the OSC ordered $23.6 million in sanctions, collected about 30% and paid out less than $143,000 to injured investors.
This poor record also was documented in a 2021 report from Office of the Auditor General of Ontario, which found that the OSC “has not effectively used its accumulated Designated Fund … for the benefit of the investor community as much as permitted within the existing securities laws in Ontario.”
That report found that between 2017 and 2021, the OSC paid out only 6%–11% of sanctions it collected.
Several methods can be used to return money to harmed investors, including the OSC doing so directly, having a court-ordered receiver handle the process or having the Ministry of the Attorney General manage the distribution.
The auditor general’s report found that “the receivership method of distributing funds is not efficient in cases where limited funds have been recovered for distribution, as the costs of a receivership including the receiver’s fees, disbursement and legal costs, are significant and may not result in significant compensation being paid to individual investors.”
The auditor general documented one case where the OSC imposed $6.9 million in sanctions but only collected $560,000. The costs of returning money to investors through a court-ordered receivership ate up another 21% — leaving the harmed investors to recover 9% of their losses.
Returning money to investors through the attorney general’s office has proven to be much slower than receiverships. While the cases that involved court-appointed receivers were wrapped up in less than 12 months, the auditor general found the attorney general took between 14 months and three years to make distributions to harmed investors.
To improve this performance, the auditor general recommended the government provide the OSC with greater scope to administer and distribute funds to harmed investors.
“If the OSC were to be given similar powers as have been given to the Quebec and B.C. securities commissions, the distributions would likely result in more efficient and timelier distributions to investors,” the auditor’s report said.
The auditor also found the OSC has been too miserly: “We observed that the reserved amounts are significant and the OSC paid out much less than planned,” the report stated.
This has continued since the auditor general’s report was released. In fiscal 2022, the OSC reserved $43 million of the fund’s $117 million for potential future uses, including $20 million for whistleblower payments and another $20 million for investor education. Yet, in the previous fiscal year, it set aside $22 million but only distributed about $4 million.
The auditor general recommended establishing criteria and processes for the “timely use” of these funds, including funding third parties that “support the OSC’s investor protection mandate,” paying whistleblowers and financing investor education.
The 2021 report made no mention of expanding the uses of this money to finance IT or innovation projects — and these ideas raised red flags in the current consultation.
“We are concerned with the concept of potentially levying disciplinary fines against financial industry participants, only to collect and potentially reinvest those fines in initiatives that primarily benefit the business interests of industry,” the Canadian Advocacy Council of CFA Societies Canada’s (CAC) submission stated.
The CAC criticized the idea of using enforcement money to finance the regulator’s IT investments, calling it “particularly puzzling given that the commission has amassed significant operating surpluses, as well as very large surpluses accrued in the [Canadian Securities Administrators’] National Systems Partnership, ostensibly earmarked in part for regulatory technology.”
The Investment Industry Association of Canada (IIAC) agreed, noting that the OSC recorded an operating surplus of $143 million in fiscal 2023.
“Based upon these most current financial statements, the need to draw from enforcement money to fund [IT] systems and data analytics is unclear,” the IIAC’s submission stated.
The IIAC recommended the government consider increasing allocations to charities and external financial literacy programs that serve the public interest.
The CAC also suggested better uses for expanded spending, citing Indigenous reconciliation, financial education and outreach as “suitable initiatives” for the funds.
The CAC also suggested the money could be used to improve audit standards, which would “stand to benefit all investors in the province and improve overall market integrity.”