An enforcement hearing launching next week against defunct fund manager Emerge Canada Inc. will test the responsibilities of independent review committees tasked with overseeing conflicts of interest at fund companies.
On Monday, the Ontario Securities Commission will begin its enforcement case against Emerge Canada, its founder Lisa Langley and chief financial officer Desmond Alvares over allegations that they improperly borrowed almost $6-million of investor money from funds they managed, to cover the company’s operating expenses.
For the first time, the OSC has also levelled allegations against three members of the independent review committee overseeing the Emerge funds: Marie Rounding, Monique Hutchins and Bruce Friesen.
Every investment fund in Canada is required to have an IRC, which is responsible for reviewing a fund manager’s potential conflicts of interest on behalf of unitholders.
The OSC alleges the Emerge IRC members’ response to the $6-million loan breached their duties to investors and other obligations under securities law.
“Through the IRC’s inaction, it deprived investors of safeguards designed to protect them from this type of harm,” the OSC said.
The proceeding, which is scheduled to last several weeks, will be heard by the Capital Markets Tribunal, an independent division of the OSC that handles adjudicative matters.
The outcome of the hearing could reset expectations and procedures for all IRCs in Canada, said John Kruk, a lawyer at Fasken Martineau DuMoulin LLP who specializes in advising fund companies, in a bulletin on Emerge.
After the OSC allegations in 2025, Mr. Kruk, along with a team of associates, published a report saying that while the enforcement proceedings were still in an early stage, the allegations are “likely to have an immediate impact on how IRC members interpret their responsibilities, and how managers and IRCs communicate with each other.”
Adam Chisholm, a lawyer with McMillan LLP and legal counsel for Ms. Hutchins and Ms. Rounding, said in an e-mail that the allegations against his clients “continue to be contested,” and both look forward to the public hearing as “a chance to be heard.”
He said the OSC allegation that there was a referral of a conflict-of-interest matter regarding the loan (known as a receivable) in October, 2021, will be the subject of the tribunal’s consideration.
“Our clients will be urging the Tribunal to find that there was never a referral of a conflict of interest matter made to the IRC about the receivable as alleged,” Mr. Chisholm said.
Rahul Shastri, a lawyer with Kagan Shastri DeMelo Winer Park LLP, said in an e-mail that his client, Mr. Friesen, will contest all allegations made against him.
“The IRC addressed promptly and appropriately every matter properly and fulsomely brought to it by the Emerge Manager,” Mr. Shastri said.
“In an unprecedented manner, the OSC now seeks to impose on Mr. Friesen, as a member of the Emerge IRC, responsibilities that properly belonged to the Emerge Funds Manager, its auditors, or the OSC itself.”
Both Ms. Langley and Emerge Canada are listed in filings as self-represented for the hearing. Ms. Langley did not respond to a request for comment.
Mr. Alvares could not be reached by The Globe and Mail.
Problems at Emerge were first made public on April 14, 2023, when the OSC imposed a temporary trading halt – known as a cease-trade order – on the company’s 11 exchange-traded funds.
Class-action lawsuit against Emerge ETFs abandoned because fund company has no money
The Globe initially reported that Emerge Canada, which managed about $118-million in assets, owed a total of $2.53-million to its six Emerge ARK funds. The funds were launched in partnership with U.S.-based ARK Investment Management LLC, which is run by prominent U.S. investor Cathie Wood.
A month later, the OSC suspended Emerge Canada’s operating licence. The regulator revealed that the amount owed was $5.5-million, and that Emerge Canada was short of cash because it hadn’t collected money owed to it by U.S.-based Emerge Capital Management Inc. Both companies are led by Ms. Langley.
At the end of 2023, Emerge Canada disclosed it still had not been able to pay back a remaining balance of $4.7-million to fundholders, including accrued interest, and it shut down the ETFs on Dec. 29 that year.
The money remains unpaid, leaving investors as unsecured creditors.
In its statement of allegations, the OSC revealed that Emerge Canada began to transfer investor money from the investment funds’ bank accounts into its own bank accounts and those of its U.S. affiliate shortly after launching the ARK funds in 2019.
The transfers continued for four years until December, 2022, when the company’s auditor, BDO Canada LLP, resigned. Over that time, the loans had grown to $6-million, about 6.1 per cent of the funds’ total net asset value.
Emerge Canada did not notify the funds’ independent review committee prior to setting up the loans.
The OSC revealed it wasn’t until about two years after the start of the loans that the investment manager referred the loan arrangement to the IRC for review as a conflict-of-interest matter. When the IRC had concerns, the manager replied that it was flagging the loans “for informational purposes” only.
At that time, the IRC dropped its review of the loan arrangement.
Fasken’s Mr. Kruk wrote that the “fundamental error” allegedly made by the IRC was that it accepted the manager’s recharacterization of the communication.
“The IRC cannot unsee a conflict of interest matter,” he noted, adding the IRC should not “abandon that responsibility at the request of the manager.”
The OSC alleged the IRC members should have continued their review of the conflict of interest.
And, if the IRC was impeded by the investment manager, the OSC suggested the members should have considered one or more of the following actions: continue to ask questions, retain independent counsel, disclose the matter to unitholders, contact the OSC, or resign from the IRC and disclose the reason for resignation.
The outcome of the hearing may have long-lasting outcomes, Mr. Kruk said. He suggested IRCs may end up broadening their reviews beyond conflicts of interest, and could discontinue the practice of discussing matters for informational purposes only.