On July 29, 2016, the Ontario Securities Commission approved a no-contest settlement agreement with three Bank of Nova Scotia dealers in connection with fee overcharges that had gone undetected by the dealers’ internal control systems, and that had affected thousands of clients dating back to 2009. As a part of the settlement, the Scotia dealers agreed to implement a compensation plan to pay back the impacted clients in the amount of nearly $20-million. Also included as a part of the settlement was a “voluntary payment” by the dealers in the amount of $800,000 for use by the OSC for the purpose of educating investors, and a further payment of $50,000 for Staff’s costs of the investigation. This settlement is the fifth of its kind under the OSC’s no-contest regime, and demonstrates the importance of identifying problems internally and cooperating with the regulator to the extent possible in the circumstances.
The settlement resulted from the self-reporting by three Scotia dealers, namely Scotia Capital Inc., Scotia Securities Inc. and HollisWealth Advisory Services Inc., following their discovery of the overcharges. In particular, the Scotia dealers identified that they had overcharged clients who held certain mutual funds, ETFs and structured products over a period of six years from 2009-2015. The overcharges apparently occurred as a result of what OSC Staff characterized as “inadequacies in the Scotia Dealers’ systems of controls and supervision which formed part of their compliance systems”.
The Settlement Agreement noted a number of mitigating factors that were present in this case. Among these mitigating factors was the fact that there was no evidence of dishonest conduct by the Scotia dealers (and no such conduct was alleged by Staff). In other words, the overcharges were entirely inadvertent. In addition, the Settlement Agreement noted that the Scotia dealers discovered and reported the problems to the Commission, and that the dealers “provided prompt, detailed and candid cooperation to Commission Staff”. Moreover, as a part of the settlement, the Scotia dealers complied with Staff’s request that the dealers conduct an extensive review of their 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 directly paying excess fees. The Scotia dealers advised that there were no other instances of overpayments. In addition, the Settlement Agreement noted that the Scotia dealers are taking corrective action, including implementing internal controls to address the inadequacies that gave rise to the overcharges, and to prevent the re-occurrence of these inadequacies going forward.
Self-Reporting in the Whistleblowing Era
The OSC implemented a no-contest settlement regime in 2014 as part of its Credit for Cooperation Program, which seeks to enhance self-policing, self-reporting, and self-correcting of conduct that runs afoul of securities legislation and the public interest in general. No-contest settlements allow OSC Staff, in limited circumstances, to reach a settlement without the respondent having to admit to any wrongdoing or liability. When determining whether no-contest settlements are appropriate, OSC Staff may consider several factors, including the degree of investor harm, the deterrent effect of the settlement, and the respondent’s cooperation.
The OSC’s Credit for Cooperation Program now exists in the same world as its recently adopted Whistleblower Program, which has been in force for just three weeks. As we have discussed in detail, the Whistleblower Program encourages employees with information about breaches of securities laws to report those breaches directly to the OSC’s Office of the Whistleblower, and carries with it the potential for significant awards to be paid out to whistleblowers.
The outcome in this case may well have been different had a whistleblower – and not the Scotia dealers themselves – reported the overcharges to the OSC. This case underscores the importance of robust internal controls and reporting mechanisms that allow companies to detect and self-report problems to the Commission. While it took some time for the Scotia dealers to identify the overcharges in this case, the consequences for the dealers would likely have been more severe if the issue had been brought to the regulator’s attention through different channels.