The proposal relates to the current inability of the New SRO to release disgorged funds to investors that have suffered a loss, even if a disciplinary proceeding has ordered disgorgement. Disgorgement aims to ensure that respondents, who are found to be liable for breaching regulatory requirements, do not keep any funds they had obtained (e.g. incorrect fees), or benefit from losses avoided, as a result of their contravention. Based on an internal working group recommendation, the New SRO proposes to enhance its existing enforcement process (which already includes disgorgement and collection) to add a mechanism to distribute these funds to harmed investors. Under the proposal, an eligible investor would be a person who suffered direct financial loss because of the contravention giving rise to the disgorgement directly linked to the enforcement findings. A potential class of investors would be identified at the investigation stage. Once the enforcement process is complete and funds are disgorged and collected, notice would be provided to all known eligible investors, and claimants would need to opt in within a prescribed time frame and declare any recovery obtained elsewhere. Claims for payment would be made and assessed by a separate branch of the New SRO. Harmed investors would not be prevented from bringing civil claims or seeking compensation elsewhere for loses arising from the same conduct. Specific questions posed relate to the proposed restraints on eligibility and the potential for investor confusion with respect to their redress options.
Overview of the Council’s Comments:
The Council is supportive of measures that aim to redirect ill-gotten gains to harmed investors and advocate for cost-benefit analysis and improved outcomes for investors. However, we raised concerns about the necessity, effectiveness and justification of the proposed policy. Further, we questioned whether the benefits of the policy outweigh the costs, citing the limited success of prior collection efforts on disgorgement orders. We noted the need for additional details on the program’s implementation, including the adjudication process for investor claims and the identity of the program administrator.
Additionally, we raised concerns that member firms may alter their harmed investor compensation behaviors due to the proposed policy. We queried the priority of claims when a disgorgement order is made alongside a regulatory fine, and questioned whether the New SRO will and should pursue all disgorgement orders regardless of their collectability. We requested clarity on the mechanics of the distribution of funds among claimants and the inclusion of de minimis thresholds for claim recognition and payment.
The Council cited the increased potential for investor confusion due to the addition of another program in the investor compensation/claims resolution landscape. Investors will need to navigate multiple confusing options at the risk of overlapping processes and potential limitations on claims.