In a major development for securities law enforcement in Ontario, on February 10, 2016, the OSC announced its approval of a “no-contest” settlement with mutual fund company CI Investments Inc. (“CI”). As part of the settlement, CI agreed to return $156.1 million to harmed investors - the largest investor compensation ever granted in a no-contest settlement in Canada - as a result of allegations that CI understated the value of certain mutual funds. In addition to restitution for investors, CI agreed to make a voluntary payment to the OSC of $8.05 million to advance the OSC’s mandate of protecting investors and to cover investigation costs.

The no-contest settlement follows CI’s self-reporting to the OSC in June 2015 that it had inaccurately calculated the net asset value (NAV) of several of its mutual funds during a five-year period, resulting in investors purchasing and selling units of funds for understated value. Seven of CI’s mutual funds had set up bank accounts where interest was earned on deposits serving as collateral for forward-purchase agreements. However, between December 2009 and June 2015, the interest accumulated on the collateral was not recorded as an asset nor included in the NAV calculations of the seven funds, resulting in the value of those mutual funds, and any other funds that had invested in the seven funds, as being understated. OSC Staff accordingly alleged that CI failed to establish a system of control and supervision sufficient to ensure compliance with Ontario securities law.

The OSC implemented a no-contest settlement regime in 2014 in an effort to improve the regulator’s enforcement capabilities. As we have previously discussed, no-contest settlements allow OSC Staff, in limited circumstances, to settle with alleged wrongdoers without having to admit to any wrongdoing or liability. In concept, market participants are thought to be more likely to reach a settlement with the OSC if they can do so while minimizing their exposure to class actions and other litigation which so often follow on the heels of regulatory proceedings. However, the Ontario no-contest settlement regime is unavailable where parties have engaged in certain conduct, including abusive, fraudulent, or criminal conduct, or misconduct leading to investor harm that has not been addressed to the OSC’s satisfaction.

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. In this case, OSC Staff did not allege any dishonest conduct by CI, and noted their “prompt, detailed and candid co-operation” after reporting the matter.

While no-contest settlements are seen by proponents as a pragmatic tool to foster securities law compliance and allow regulators to deploy resources more strategically, they have attracted considerable controversy. Detractors in Canada and the United States have argued that no-contest settlements permit respondents to effectively ‘buy their way out of trouble’ without having to acknowledge wrongdoing or the impact of their actions on the public. In addition, there is an ongoing vigorous debate south of the border over the SEC’s no-contest settlement regime and the ability of courts to determine whether proposed settlements are “fair and reasonable” without knowing whether any of the facts in the alleged wrongdoing are true. In this case, critics may point to the high settlement figure or the $8.05 million payment to the OSC to argue that the regulator is incentivized to push for no-contest settlements, even where reducing the sanctions or narrowing the allegations would be more appropriate.

To put the CI award in context, it is the fourth settlement that the OSC has concluded under its no-contest settlement regime, and is by far the largest. The nearly $160-million investor compensation that CI has agreed to make dwarfs the next-closest no-contest settlement with several TD Bank entities regarding excess client fees, which totalled $13.5-million. That said, it is still considerably smaller than those that have been awarded by the SEC, including a controversial $285 million settlement made between the SEC and Citigroup. As well, the cash required to fund the settlement payments remains in the bank accounts of the funds, and consequently the settlement should not have a material financial impact on the funds or CI. Nevertheless, it would appear that the OSC is serious about using its relatively new no-contest tool to secure major settlements in complex and high-stakes proceedings.

While the CI settlement is remarkable for its size, it is also notable that the no-contest regime was available to CI in part because CI was able to detect the issue internally, and then acted swiftly to report and cooperate with the OSC. Significantly, the OSC introduced no-contest settlements 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. As we have discussed in previous posts, robust internal controls and reporting mechanisms are key to minimizing the risk of significant exposure. While the CI funds were required to make a major payment as a part of this settlement, the consequences would likely have been much more severe had CI failed to take timely and proactive steps to resolve the situation in cooperation with the regulator.