Allocation and use of funds from sanctions and settlements

If someone contravenes Ontario securities law or commodity futures law, the Ontario Securities Commission (OSC) can bring an enforcement proceeding against them. During these proceedings, a panel of independent adjudicators have the power to impose sanctions, including administrative penalties or payment of any amounts obtained as a result of non-compliance with Ontario’s securities law or commodity futures law. Panels may also approve voluntary payments to the Commission under settlement agreements.

The funds payable under these sanctions and settlements may be allocated by the Commission in accordance with clause 19(2)(b) of Ontario’s Securities Commission Act. Specifically, this provision allows the Commission to allocate the funds (i) to or for the benefit of third parties, (ii) for use by the Commission or third parties for the purpose of educating investors or promoting or otherwise enhancing knowledge and information of persons regarding the operation of the securities and financial markets, or (iii) for any other purpose specified in the regulations.

Recommendations for using sanction and settlement money

OSC staff present recommendations to the Commission, as a Board of Directors (Board), regarding allocations of sanction and settlement  money to harmed investors and other third parties in accordance with the mandate of the OSC. Recommendations are generally made after the funds have been received.

The allocation of these funds is guided by the purposes set out in section 1.1 of Ontario’s Securities Act and Commodity Futures Act, including:

  • to provide protection to investors from unfair, improper, or fraudulent practices
  • to foster fair, efficient, and competitive capital markets and commodity futures markets and confidence in those markets
  • to foster capital formation, and
  • to contribute to the stability of the financial system and the reduction of systemic risk

For example, the Board may allocate these funds to:

  • investors who have suffered a financial loss as a direct result of misconduct that gave rise to the payment of the monetary sanction or settlement payment
  • whistleblowers who meet the requirements set out in OSC Policy 15-601 Whistleblower Program
  • other third parties, for the purposes of undertaking initiatives that further the purposes of the Securities Act or Commodity Futures Act

Distributions to harmed investors

Administrative penalties and disgorgement are not imposed for the purpose of compensating harmed investors. However, in making recommendations on how to allocate or use sanction and settlement money received in a particular matter, OSC staff consider whether any investors suffered financial losses as a direct result of the misconduct giving rise to the payment, and if so, whether a distribution of the funds to those investors can be reasonably carried out in the circumstances.

Recommendations generally consider the following factors:

  1. Whether there are identifiable investors who can be shown to have suffered readily quantifiable financial losses as a direct result of the misconduct giving rise to the payment. OSC staff generally won’t recommend that funds be allocated to investors in cases where it is difficult to establish the number and identity of investors who have suffered financial loss, or where it is difficult to establish the amount of the loss attributable to that misconduct (for example insider trading or disclosure violations).
  2. The number of known or potential investors harmed by the conduct, their cumulative financial losses, and the potential complexity of the distribution. Generally, OSC staff will seek to have a receiver appointed by the court to carry out the distribution. The court will grant a claims process order that  establishes the process by which the receiver will administer claims, including how the receiver will provide notice to the public about the claims process, and how investors can put forward a claim and the deadline for doing so. Generally, this includes direct notice to known investors and some form of broad notice to potential claimants, such as a notice published in newspapers in the geographic regions where investors are thought to reside.
  3. The amount likely to be recovered by the investors who have suffered financial losses, considering the amount available for distribution compared to the amount that would likely be incurred in distributing the funds through a receiver. The costs of the receivership will be deducted before distributing any funds remaining to approved claimants. The potential amounts received relative to the anticipated costs of the receivership is a key consideration when making recommendations.

Refer to current distributions of funds from sanctions and settlements to see active distributions and to find out how to submit a claim.

Allocations of sanction and settlement money to other third parties or for use by the Commission

When a distribution of sanction or settlement money to the investors who were harmed by the conduct giving rise to the payment can’t be reasonably carried out in the circumstances, the funds may be allocated to other third parties or used by the Commission to educate investors or otherwise expand knowledge regarding securities and financial markets. At least once per year, OSC staff make recommendations to the Board, based on the existing balance of sanction and settlement money, regarding amounts that should be set aside for:

  • potential payments to whistleblowers who meet the requirements set out in OSC Policy 15-601 Whistleblower Program
  • educating investors or promoting or otherwise enhancing knowledge and information of persons regarding the operation of the securities and financial markets

Proposing an initiative to the OSC

The Board may periodically consider requests to make an allocation or allocations to fund third-party initiatives that further one or more of the purposes of Ontario’s Securities Act or Commodity Futures Act. Requests submitted for consideration should include:

  • a thorough description of the proposed initiative
  • information about the persons leading the proposed initiative
  • how the initiative supports one or more of the purposes of Ontario’s Securities Act or Commodity Futures Act
  • the intended outcomes of the initiative
  • criteria for measuring the success of the proposed initiative
  • a proposed budget for how any funding would be used
  • how the results of the initiative, including the expenditure of any funds received, will be reported to the Board

Based on a sufficiently developed request containing this information, OSC staff make recommendations to the Board on whether the proposed initiative should be funded. Recommendations may be presented to the Board on an ad hoc basis, or if a number of requests are received, may be presented together to ensure that the strongest proposals are prioritized for potential funding. Staff generally won’t recommend funding initiatives that duplicate or significantly overlap with existing or planned initiatives of the OSC’s Investor Office or other branches.

In addition to considering ad hoc requests, the Board may, from time to time, issue a general or specific call for proposals for initiatives to receive potential funding from sanction and settlement money.

Requests for funding may be submitted to [email protected] with the subject line “Allocation request.”

Reporting

The OSC discloses how it has allocated or used sanction and settlement money in its annual report.