The OSC has finalised a new statutory framework that will determine how funds, collected under Capital Markets Tribunal or Ontario Superior Court of Justice disgorgement orders, are distributed to harmed investors.
In this article, Dan Thomas summarises the new Rules establishing the framework, and the key considerations for market participants.
Disgorgement, whether imposed by the Tribunal or the Superior Court, requires respondents to pay any amounts obtained through non-compliance with securities or commodity futures laws. Although disgorgement orders do not aim to compensate investors, recent legislative amendments in Ontario allow for distributing disgorged funds to investors who suffered direct financial losses due to misconduct leading to the order.
Following “careful consultation with stakeholders”, the OSC has published its finalised Rules on June 12 noting that the new framework “aligns the OSC with other Canadian and international regulators with similar distribution frameworks.” In this regard, the OSC has modelled its approach on the British Columbia Securities Commission’s statutory framework for distributing disgorged funds, as well as aspects of l’Autorité des marchés financiers (AMF) regime in Quebec. The origin of Ontario’s framework is found in the 2021 Capital Markets Modernization Taskforce Final Report.
THE NEW OSC RULES
The new finalised OSC Rules 11-502 and 11-503 and their companion policies are expected to come into force late Summer or early Fall 2025.
According to these new Rules:
- The OSC will make disgorged funds that it receives available for distribution in all cases subject to three exceptions (summarised in the commentary below).
- The OSC will publish details of disgorgement orders on its website.
- The new Rules will apply only to those funds received under orders issued after the amendments come into force.
- Investors will be able to register for updates regarding distributions and, if eligible, file claims. The OSC will also provide updates about funds received and the status of outstanding orders and distributions.
- To be considered for distributions, applicants must demonstrate direct financial loss and that they did not, directly or indirectly, engage in the misconduct/contravention that gave rise to the disgorgement order. The onus is on the harmed investor to furnish sufficient evidence to demonstrate their quantifiable financial losses were a direct consequence of the misconduct leading to the disgorgement order. Estimated losses will not be sufficient. Lost opportunities to invest funds in an alternative investment are not to be regarded as a compensable harm under the framework.
- An investor’s claim must include certain prescribed information, not limited to: describing the financial loss incurred, documentary evidence in support, and identifying any other sources from which payment for the amount claimed has been paid, is payable, or may be payable. Legal representatives such as trustees or executors may file on behalf of applicants unable to do so directly.
- The OSC may make a payment to an applicant if it is satisfied that: (i) the applicant is eligible; (ii) the amount of direct financial loss can be quantified; and (iii) sufficient proof of the loss has been provided.
- If all or part of the claim is denied, an applicant can provide additional information within 35 days of the OSC’s notice of denial.
- No payment may be made until all claims filed have been considered and the amount to be paid to each applicant is determined.
- Similar to the Securities and Exchange Commission’s (“SEC”) regime for distributing disgorged funds, the OSC may directly administer some distributions, or request the appointment of a court-approved administrator. The latter court-appointed process is likely to be utilised in complex cases or where there are a high number of claims.
- The OSC is required to publish a report – summarising each completed distribution, including amounts recovered, paid, and used for administrative costs, and the percentage of each eligible applicant’s approved claim that was paid under the distribution – within 60 days of final disbursement to promote transparency and awareness.
The OSC has stated that it will “continue using no-contest settlement and receiverships to return money to harmed investors in appropriate cases”, but the new disgorgement process is now firmly part of the OSC’s “investor redress toolkit”.
CONSIDERATIONS FOR MARKET PARTICIPANTS
The OSC catches up with other provinces on disgorgement but court-appointed administrators likely to continue to be the norm
The new framework places the OSC on the same footing as British Columbia, Quebec, and other securities regulators, as authorities statutorily empowered to distribute funds obtained from disgorgement orders directly to investors harmed by securities and commodity futures violations.
According to the OSC’s Notice of Publication, dated June 12, 2025, it does not appear that the Commission will carry out distributions in-house unless the pool of applicants is small in number and can be “readily identified”, and the financial losses can be “readily quantified”. The OSC further stated it would “rely primarily on the specialized expertise and resources of third-party court-appointed administrators to carry out distributions”.
It will be interesting to see how cross-border issues affect the choice of either a court-appointed or an in-house OSC administered distribution process. The geographic location of potential applicants, including foreign applicants, is likely to be a key consideration in choosing the method of distribution, as the specialised expertise of a third-party administrator may be necessary to address issues associated with distributing funds to recipients outside of Canada. This will, of course, increase the administrative costs in cases involving harmed investors residing overseas.
The three exceptions to the requirement that disgorged funds are distributed to harmed investors
Under the new statutory regime, there are three exceptions where distribution to harmed investors would not be required. First, the OSC will not distribute disgorged funds arising from violations of Ontario’s insider trading or tipping laws under section 76 of the Ontario Securities Act. Any disgorged amounts received in relation to such violations will be dealt with under the Securities Act. Interestingly, a version of this first exception does not feature in similar disgorgement regimes elsewhere in Canada.
Second, where the amount of funds available does not justify the costs of any distribution. If the amount collected under a disgorgement order is insufficient to cover all claims, the OSC may allocate funds on a pro-rata basis. The OSC may hold partial collections for up to three years or until sufficient funds are collected before deciding whether a distribution is warranted, based on the prospects of recovering additional funds and the costs of distribution. This creates the risk that the prorated basis of distribution may significantly lower the amount received by any given investor. If the funds collected are too small to justify the cost of distribution, the OSC will instead likely use the funds received for other purposes, as authorised by the Securities Commission Act.
Third, no distributions will be made in circumstances where the decision giving rise to the disgorgement order has not been finally disposed of. In other words, the distribution requirement will not apply in circumstances where the deadline for filing an appeal of the decision that gave rise to the disgorgement order has not yet expired, or an appeal of the decision has been filed and the appeal process is ongoing. In these circumstances, the OSC will continue to hold any funds received under the disgorgement order for potential distribution to eligible applicants until after the appeal process has been exhausted.
This third and final exception, introduced in the finalised Rules only after comments were received and considered by the OSC on the Proposed Rules, has the potential unfortunate effect of prolonging the waiting game harmed investors will have to play before they receive recompense for the misconduct they suffered.
Effect on class proceedings
The new Rules provide a means for harmed investors to recoup a portion of their proven and quantifiable direct financial losses. As such, the new Rules may reduce instances of class proceedings arising from breaches of securities laws by the entity subject to the disgorgement order, because harmed investors will have received some degree of recovery. However, this view is very case specific – if the recovery through disgorgement does not come close to touching the quantum of damages suffered by a proposed class, there is clearly a higher risk of class proceedings. Therefore, the risks of class proceedings will depend on the facts of each case.
It is important to note that receiving a payment through the new statutory framework does not prevent harmed investors from also pursuing recovery of their losses via other avenues, for example, the Ombudsmen for Banking Services and Investments (“OBSI”) or a traditional civil claim.
Administrative penalties not included in the distribution of funds
The new Rules received a degree of criticism in the consultation period from some stakeholders who argued that the framework did not include the distribution of funds paid to the OSC in respect of administrative penalties and, further, that the OSC had not put forward a reasoned basis for this exclusion. For the reasons the Investment Industry Association of Canada (“IIRC”) noted in its response to the proposals, this remains a concern – disgorgement orders are not imposed in all cases in which a respondent is held to have breached securities and commodity future laws, and the amount and frequency of disgorgement orders fluctuates greatly year-on-year.
The OSC appears to have remained silent on this concern in its Notice of Publication, only noting – albeit helpfully – that: “If the Tribunal has ordered an administrative penalty, disgorgement and/or costs against a respondent, the Commission’s practice is to apply any amount received in respect of the orders first to amounts owing under the disgorgement order.” As the IIRC observed, the distribution of administrative penalties to harmed investors remains subject to the OSC’s discretion.
Final Assessment
Overall, the new Rules are to be welcomed. The OSC observed that all commenters on the Proposed Rules expressed support for the proposals, the new Rules provide investors with a new transparent means of obtaining compensation for violations of securities and commodity futures laws, and the new statutory framework undoubtedly strengthens the OSC’s toolkit for compensating harmed investors.
About Ghahhary Thomas LLP
At Ghahhary Thomas LLP we have long-standing experience in securities enforcement matters before the OSC and the provincial securities regulators. We are dual qualified UK and Ontario lawyers with significant experience in cross-border advice and disputes with a UK-element.
