Did the Ontario Securities Commission overplay its hand if this told the world that it had garnered “the largest amount of investor compensation up to now within an OSC no-contest”?
Last week the OSC said hello 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 noticed that neither the general public company (CI Financial) nor the manager (CI Investments) is paying one penny from the $156.A million “settlement.”
Instead the payments – which are being made because investors traded units in seven affected funds at an underestimated net asset value (NAV) – can come from the funds themselves.
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And the total amount is big because the problem persisted for six years until CI discovered it and reported it towards the OSC last 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 the investors for that miscalculation of NAV can come in the funds.
As CI Investments said in its release: “The accumulated interest is in bank accounts owned by the mutual funds and also at year ’round remained in those bank accounts as an asset of these funds and was never 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 it is monitoring and oversight of an outsourced service provider, weren’t sufficient to address the unique cash collateral feature of certain funds and also to ensure that interest earned in related accounts was recorded and included in the NAV.”
What’s interesting concerning the OSC quote is 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 or not this could be making a payment to assist CI. “In the eye of client confidentiality, as well as 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 will be sending out cheques – with each cheque comparable to the clients’ share of the accumulated interest – to a large number of affected parties. CI has estimated 48 percent of clients can get less than $100.
But CI Financial is going to be affected. When it released its financial results last week it took a $10.75 million provision “for remediation from the administrative error the subject from the Settlement Agreement.” That provision includes the $8 million voluntary payment “CI Investments has decided to make to the Ontario Securities Commission.” CI is also paying $50,000 towards investigation costs.
And CI Financial has already been affected as investors attempted to make sense of the problem. News from the “settlement” was launched just before the marketplace closed last Wednesday and before CI reported its financials. The shares fell immediately and continued to fall the next day on five-times normal daily volume. Over a three-day period the shares were down 10 %.
If investors were fully aware it was $8 million – and not $156 million – the result may have been different.
The OSC said the “language” in its press release “is in conjuction with the OSC’s Statement of Allegations, Settlement Agreement and also the firm’s own release.”
bcritchley@nationalpost.com
