Originally published July 2017
On July 13, 2017, the Ontario Securities Commission (OSC) announced that it had approved yet another "no-contest" settlement resolving unproven allegations by OSC Staff that there were inadequacies in certain mutual fund dealers' systems of controls and supervision which resulted in clients paying excess fees that were not detected or corrected in a timely manner, constituting a breach of section 11.1 of National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations, and conduct contrary to the public interest. The dealers neither admitted nor denied the allegations.
As in a string of other similar no contest settlements with other dealers, in the Settlement Agreement OSC Staff acknowledged that the dealers had discovered and promptly self-reported the alleged inadequacies, provided prompt, detailed and candid cooperation to the OSC, formulated an intention to pay appropriate compensation to clients and former clients in connection with their self-reporting of the alleged inadequacies, and co-operated with the OSC with a view to providing appropriate compensation to the affected clients. As well, corrective action had been taken, including a review of the dealers' other businesses operating in Canada to identify whether there were any other instances of inadequacies in their systems of controls and supervision leading to clients paying excess fees on mutual funds managed by an affiliate of the dealers, and implementation of enhanced control and supervision procedures.
As with other similar no contest settlements entered into by other dealers with OSC Staff, the dealers agreed to pay compensation to clients affected by the alleged control and supervision inadequacies in a specified amount, to make a voluntary payment to the OSC to be designated for allocation or use by the Commission, and to pay costs related to Staff's investigation.
This is the ninth no-contest settlement under the OSC's Revised Credit for Co-operation Program, which was introduced on March 11, 2014 in OSC Staff Notice 15-702 – Revised Credit for Co-operation Program. Eight out of nine no contest settlements to date have been with financial institutions. Seven of those settlements involved unproven allegations that the financial institutions charged excess fees to retail clients and the payment of compensation to clients. In none of those cases has class action proceedings been commenced following the settlement.
No contest settlements are a "win win" proposition.
The benefit to the market participant of such settlements is two-fold: they reduce the risk of a class action relating to the same conduct because no admission of wrong doing is made, and also the reputational hit typically associated with contested OSC proceedings.
The Commission benefits by avoiding the time and expense of protracted enforcement investigations and regulatory proceedings, and recoups at least some of their costs in the settlement.
Stakeholders and the capital markets generally also benefit from these settlements that incent market participants to promptly detect and self-report potential wrong-doing, enhance internal processes voluntarily, and agree to fairly compensate affected stakeholders even in circumstances where they may have defences to allegations that they acted illegally. This is clearly in the public interest.
The author would like to thank Scott Thorner, summer student, for his contribution to this article.
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