Emerge Canada Inc. Enforcement Case Raises Questions about IRC Obligations
Written By: Michael Holder, Kanchan Mehta, Rijja Baig
The Case Against Emerge Canada Inc.
The Ontario Securities Commission (“OSC”) enforcement action against Emerge Canada Inc. may mark a turning point in how the role of the Independent Review Committee (“IRC”) is understood and executed. While the case has garnered attention for Emerge Canada’s alleged misuse of investor funds, the OSC’s pointed criticism of the IRC’s response, or lack thereof, could reshape the future of IRC oversight in Canada.
A New Standard for IRCs?
At the heart of the OSC’s Application for Enforcement Proceedings (formerly called the “Statement of Allegations”) is a question that goes far beyond the actions of a single fund manager: What exactly are an IRC’s obligations when a serious conflict of interest arises?
Under National Instrument 81-107 (“NI 81-107”), IRCs are mandated to oversee conflicts of interest and provide independent recommendations. While section 3.11 of NI 81-107 gives IRCs broad discretionary powers, such as engaging legal counsel or reporting directly to regulators, those powers are framed as optional. In fact, the rule commentary makes clear that IRCs have “no obligation to report matters other than those prescribed by this instrument or elsewhere in securities legislation.”
Yet, in its allegations against the IRC for Emerge Canada’s funds, the OSC appears to be signalling that simply raising a concern is not enough – the IRC is expected to ensure that its concerns are meaningfully addressed. The OSC has alleged that the IRC failed to act with the diligence required by not following up on a material conflict, not seeking legal advice, not alerting regulators, and not resigning. It was alleged that rather than taking steps to confirm that the issue had been resolved or appropriately managed, the IRC accepted management’s assurances and took no further action. The Application for Enforcement Proceedings implies that IRCs may be expected to take a more proactive role in managing conflicts, with the OSC increasingly viewing regular, documented follow-up as a necessary part of fulfilling an IRC’s duties, especially where fund managers’ conduct puts unitholder interests at risk.
The Emerge Canada Background
Emerge Canada Inc. (“Emerge Canada”), a Toronto-based investment firm focused on exchange-traded funds, ceased operations in May 2023. In its case against the firm, the OSC alleges that Emerge Canada improperly used investors' assets, transferring millions of dollars from the funds it managed to support its own business operations. The Application for Enforcement Proceedings alleges that these amounts were recorded as “receivables” owed back to the funds but were neither promptly disclosed to investors nor appropriately addressed.
The OSC alleges that the receivables grew to approximately six million, or 6.1% of the funds’ net asset value, before the matter was referred to the IRC in October 2021, two years after the issue began. Although the OSC suggests that the IRC raised conflict concerns, it alleges that the IRC relied on assurances from management that the funds would be repaid and took no further action, including providing no notice to unitholders as required by NI 81-107, subsection 5.3(3), and made no effort to verify whether the funds were in fact repaid.
The facts and allegations outlined in the Application for Enforcement Proceedings against Emerge Canada have not yet been proven by the Capital Markets Tribunal.
Authority vs. Duty
This case demonstrates a need for a clearer interpretation of the regulatory expectations for IRC members. While IRCs are not explicitly obligated to escalate concerns outside of those in subsection 5.2(1) of NI 81-107 to regulators, they have the authority in subsection 3.11(3) to communicate with the regulator about any matter. The OSC’s enforcement stance implies that failing to do so in the face of serious misconduct may itself be a regulatory breach.
In assessing an IRC’s obligation to act in the best interests of the fund, parallels may be drawn to corporate directors’ duties under the Business Corporations Act (Ontario). Under section 115(1), directors have a statutory duty to manage or supervise the management of a corporation’s business and affairs, which under section 134(1) includes exercising the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances. This duty commonly includes following up on unresolved matters, maintaining appropriate records of discussions and decisions, and seeking professional advice where necessary. As noted in the commentary to section 3.9 of NI 81-107, IRC members are afforded similar protections as corporate directors; perhaps they will also be held to comparable standards of conduct, especially in matters where unitholder interests are at stake.
What Comes Next?
At minimum, the OSC’s approach in this case may lead to:
1. A re-evaluation of when and how IRCs should discuss various matters with the regulator, particularly in cases involving repeated or unresolved conflicts.
2. Stronger expectations around the diligence and independence of IRCs, including whether and when IRCs should retain independent legal counsel.
3. Greater emphasis on the need for IRCs to document and follow up on unresolved matters, with regular tracking and review, even where formal escalation to the regulator is not required.
4. Calls for regulatory reform or guidance to clarify the regulators’ interpretation of NI 81-107.
The next case management hearing is set for July 29, 2025, and may provide further insights into how the Tribunal views IRC responsibilities and whether the OSC’s evolving interpretation gains traction.