New SRO proposes payback for harmed investors

Harmed investors could potentially collect some of the ill-gotten gains that are disgorged in disciplinary proceedings under a proposal from the new industry self-regulatory organization.

The new SRO published a proposal Wednesday that sets out a mechanism for returning some of the money collected from its enforcement proceedings to investors who suffered from the misconduct.

The model set out in the paper was recommended by an internal working group that examined the issue of investor restitution.

Its proposal would allow investors to make claims for disgorged funds after enforcement proceedings are completed and the sanctions are paid.

“Rather than creating a standalone restitution program, new SRO could build on its current processes regarding disgorgement and the collection of the funds through enforcement proceedings,” it said, adding that potentially eligible investors could be identified at the investigation and prosecution stages.

Under the proposal, investors eligible to make a claim for disgorged funds would be limited to the time periods and specific allegations of misconduct proven in the enforcement proceeding.

“Although this approach potentially risks excluding certain investors, removing these limits risks shifting the focus of the enforcement process from prevention and deterrence of misconduct to investor compensation, which investors should pursue in other fora,” it said.

Additionally, the group said it will be “critical” to structure the new program outside of the existing enforcement process.

“Once a disgorgement order is made and funds are collected, the assessment of claims and distribution of funds to investors should be carried out by a separate branch of new SRO, not involved in the disciplinary proceedings,” it said.

However, given the fact that the new SRO is just getting up and running, it did not specify which group within should administer the proposed program.

In cases where the funds that are ordered to be disgorged are not fully collected, money would be paid out to eligible victims on a pro-rated basis.

According to the paper, the Investment Industry Regulatory Organization of Canada collected about $1 million of the $7.9 million in disgorgement that was ordered in its enforcement proceedings between 2009 and the end of 2022.

The proposal is out for comment until May 1.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.