Did the Ontario Securities Commission overplay its hand when it told everyone around you that it had garnered “the largest quantity of investor compensation to date within an OSC no-contest”?
Last week the OSC said it has reached a “no-contest settlement with CI Investments Inc.,” noting the “settlement involves approximately $156.A million being returned to harmed investors.”
By any measure that’s a big number however it should be pointed out that neither the general public company (CI Financial) nor the manager (CI Investments) is paying one penny of the $156.1 million “settlement.”
Instead the instalments – which are being made because investors bought and sold units in seven affected funds in an underestimated net asset value (NAV) – will come in the funds themselves.
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And the total amount is large because the problem persisted for six years until CI discovered it and reported it towards the OSC this past year.
The $156 million compensation equals the accumulated interest the funds earned but which hadn’t been included in the determination of NAV. Accordingly, the cash to pay for the investors for that miscalculation of NAV will come from the funds.
As CI Investments said in the release: “The accumulated interest is in accounts of the mutual funds and also at year ’round remained in those bank accounts as an asset of those funds and never was co-mingled using the property of CI Investments.”
In its release, the OSC said the “settlement follows allegations by OSC Staff that CI’s system of controls and supervision, and its monitoring and oversight of the outsourced service provider, were not sufficient to address the initial cash collateral feature of certain funds and to ensure that interest earned in related accounts was recorded and included in the NAV.”
What’s interesting concerning the OSC quote may be the mention of “outsourced service provider,” the entity that determines NAV. That entity is RBC Investor & Treasury Services, formerly referred to as RBC Dexia Investor Services Trust.
RBC Investor & Treasury Services was asked whether it could be making a payment to help CI. “In the eye of client confidentiality, and in line with our policies, we don’t discuss individual clients or even the nature in our client relationships,” it said in reply.
Next month the CI funds sends out cheques – with every cheque equal to the clients’ share from the accumulated interest – to a large number of affected parties. CI has estimated 48 percent of clients can get under $100.
But CI Financial will be affected. When it released its financial results last week it took a $10.75 million provision “for remediation from the administrative error which is the subject from the Settlement Agreement.” That provision includes the $8 million voluntary payment “CI Investments has agreed to make to the Ontario Securities Commission.” CI can also be paying $50,000 towards investigation costs.
And CI Financial has already been affected as investors attempted to make sense of the situation. News of the “settlement” was released just before the marketplace closed last Wednesday and before CI reported its financials. The shares fell immediately and continued to fall the following day on five-times normal daily volume. On the three-day period the shares were down 10 per cent.
If investors were fully aware it was $8 million – and not $156 million – the effect may have been different.
The OSC said the “language” in its pr release “is in conjuction with the OSC’s Statement of Allegations, Settlement Agreement and also the firm’s own release.”