The Ontario Securities Commission’s compliance branch increased the number of regulatory actions it took in the past year — such as denying registration, or imposing conditions to address novel risks — while grappling with a growing crop of crypto firms under its supervision.
The regulator published the annual report for its newly named “Registration, Inspections and Examinations” division, previously known as the Compliance and Registrant Regulation branch.
Among other things over the past fiscal year (to March 31), it undertook compliance reviews of newer firms identified as “high risk,” and it carried out a sweep of crypto trading platforms.
The review of riskier firms found some critical compliance failings at over half of the firms, including inadequate compliance systems, top compliance personnel not meeting their responsibilities, and insufficient disclosure to clients about conflicts of interest.
The report noted that the division’s review of crypto firms also found failings with identifying, addressing and disclosing material conflicts of interest.
Most of the platforms only identified “a limited number” of material conflicts, the regulator said. It advised that crypto firms should be dealing with a broader set of possible conflicts, including employees’ personal trading, insider trading, referral fees, trading compensation, related-party conflicts, crypto pricing and trading in proprietary tokens.
All of these kinds of conflicts need to be identified, disclosed, and addressed in clients’ best interests, it said.
The report also noted that regulators continue to have concerns about crypto firms’ misleading disclosures in advertising and marketing, and their use of social media, along with concerns about “improper” gambling-style promotional schemes.
These kinds of client engagement strategies “may encourage investors to engage in excessively risky trading, taking on risks that they would normally avoid,” the report noted.
The report also called out some crypto firms’ use of mandatory arbitration clauses, which, it noted, have been found to be void and unenforceable by courts in Ontario.
“Staff takes the view that the use of mandatory arbitration clauses may constitute a breach of the obligation to deal fairly, honestly and in good faith with clients,” it said.
The report also noted that the regulator’s compliance division carried out a review of firms’ compliance with certain provisions of the client-focused reforms — including the know your client, know your product and suitability requirements — alongside the Canadian Investment Regulatory Organization.
The results of that review will be set out in a future report, along with added guidance to the industry, it said.
The report also detailed an increasing number of regulatory actions taken by the division during the year, such as denying, suspending or revoking registration; imposing conditions on registration; and issuing warnings.
In fiscal 2024, the division took 86 of these kinds of actions, up from 65 in the previous year, led by an increase in the imposition of terms and conditions on registration, with 53 in the year, up from 39 the previous year. It also denied registration more often (in 18 cases, up from 13).
The report indicated that the increase in compliance action was due, at least in part, to “previously undisclosed reportable events [that] came to light as firms completed their filing updates required” by revisions to certain registration rules.
“We also took action in response to an increased number of matters in which individuals were not truthful or cooperative with their former sponsoring firms,” the report noted.
Some of the increased use of registration conditions also came from the regulator’s effort to address novel and complex compliance deficiencies.
“These terms and conditions were drafted to increase the likelihood of compliance remediation to the benefit of present and future clients of the firm, while promoting fairness in the capital markets,” it said.
Other issues covered in the report include ensuring compliance with the rules around advisor rankings and awards to ensure that investors are not being misled, and the regulator’s review of real estate/mortgage issuers suspending investor redemptions amid increased strains in financial markets.
“In the coming year, we anticipate looking further into the role and responsibilities of [exempt market dealers] in the distribution of real estate and mortgage products,” the report said, adding that it will also be working with firms engaged in real estate investment “to understand their plans for managing portfolio liquidity and resuming redemptions.”
Also, in the year ahead, “we plan to prioritize reviews of firms identified as high-risk, as well as large firms with significant assets under management and specialized dealers,” said Sonny Randhawa, executive vice president, regulatory operations, in a release.