The OSC and CI Financial: Turning an $8M payment into a $156M settlement

Did the Ontario Securities Commission overplay its hand if this told everyone around you that it had garnered “the largest amount 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 this is a big number but it should be noticed that neither the public company (CI Financial) nor the manager (CI Investments) is paying one penny of the $156.A million “settlement.”

Instead the instalments – that are being made because investors traded units in seven affected funds in an underestimated net asset value (NAV) – will 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 to the OSC last year.

The $156 million compensation equals the accumulated interest the funds earned but which hadn’t been included in the resolution of NAV. Accordingly, the money to pay for the investors for that miscalculation of NAV can come in the funds.

As CI Investments said in its release: “The accumulated interest rates are in bank accounts of the mutual funds and also at year ’round remained in those bank accounts as an asset of these funds and was never co-mingled with 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 company, were not sufficient to address the initial cash collateral feature of certain funds and also to make sure that interest earned in related accounts was recorded and contained in the NAV.”

What’s interesting about the OSC quote may be the mention of “outsourced company,” 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 help 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 of our client relationships,” it said in reply.

Next month the CI funds sends out cheques – with every cheque comparable to the clients’ share from the accumulated interest – to thousands of affected parties. CI has estimated 48 percent of clients will get less than $100.

But CI Financial is going to be affected. If this released its financial results last week it took a $10.75 million provision “for remediation of the administrative error the subject of the Settlement Agreement.” That provision includes the $8 million voluntary payment “CI Investments has agreed to make towards the Ontario Securities Commission.” CI can also be paying $50,000 towards investigation costs.

And CI Financial has already been affected as investors tried to make sense of the problem. News from the “settlement” was released just before the market 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. Over a three-day period the shares were down 10 %.

If investors were fully aware it had been $8 million – and never $156 million – the result might have been different.

The OSC said the “language” in its press release “is consistent with the OSC’s Statement of Allegations, Settlement Agreement and the firm’s own release.”

bcritchley@nationalpost.com