OSC has conflicts of interest in its crosshairs

“There needs to be more potential consequences arising from the client-focused reforms, where we see conflicts of interest arise or faulty advice being given,” Vingoe said. “I don’t think it’s enough that we simply have examination findings and tell people they need to do better. At a certain point, we really need to hold firms to account.”

That accountability could include “full-blown enforcement action, [imposing] terms and conditions, or other types of actions,” he said, “but I do think there needs to be more enforcement regarding conflicts of interest generally.”

A regulatory review conducted last year found that only about 20% of 172 firms met their conflict-of-interest obligations under the CFRs. At the time, the Canadian Investment Regulatory Organization and the Canadian Securities Administrators (CSA) stated they would use the findings to inform future rule-making.

The OSC will have a new face leading that enforcement charge.

Jeff Kehoe, the regulator’s head of enforcement since 2016, left that post in February. Also no longer with the OSC is the first head of its investor office, Tyler Fleming; the first head of its innovation office, Pat Chaukos; and the former director of its compliance and registrant regulation branch, Debra Foubert.

In March, the OSC began recruiting for an executive vice-president of enforcement, which is “among the very most important positions in the Canadian regulatory system,” Vingoe said.

The OSC wants to use this opportunity to strengthen enforcement, he said, which includes using more technological tools to increase global co-operation.

“We’re at an inflection point where [we’re looking for] renewed leadership in the enforcement area,” Vingoe said. “Elevating the position to the equivalent of, in our old system, an executive director who reports directly to me, shows our commitment.”

Enforcement isn’t just about catching the bad guys, Vingoe added: “If we have more rigorous enforcement, we don’t need an onslaught of additional rules because people are deterred.”

Another potential deterrent to wrongdoing could be an empowered Ombudsman for Banking Services and Investments (OBSI), as proposed by the CSA last year. Vingoe has been vocal about his desire for OBSI to be granted binding decision-making power.

However, the proposal has come under heavy criticism for allegedly being biased against firms and potentially increasing costs and unfounded complaints.

“The message to the objectors is to work with us to design a system that has both the confidence of investors and the confidence of the firms,” Vingoe said. “We’re open-minded about refinements and a potential reduction in complexity. But in every developed economy in the world, there’s an effective method of redress for the benefit of investors. It’s unfair to use financial power to force settlements or to [refuse compensation recommendations] just because of market power.”

The Ontario government expressed support for the CSA’s proposal, which will require legislative changes, in its 2024 provincial budget.

That budget also stated the OSC is developing rules governing the way disgorged funds would be distributed to harmed investors. Ontario’s Ministry of Finance consulted on the change last year, and stakeholders worried the pot of sanctions would be turned into a slush fund.

Vingoe said that won’t happen. “We’ll be really careful in using [the money] for projects that have an investor protection component,” he said.

For example, the OSC’s innovation office once studied ways to improve know-your-client processes. “If we can fund a test like that, it will produce better outcomes for investors. We’re not going to use the funds in a way that is disconnected from investor protection.”

Assigning the spoils of wrongdoing to a specific investor can be difficult, Vingoe said, but he acknowledged the OSC can improve how it returns money to harmed investors.

“We’re going to have to do more at the front end [of an enforcement process], knowing that if we’re successful, there are going to be funds available to be disgorged and distributed to investors,” Vingoe said. “With more authority from the government and a stronger internal process, we can do better at collecting and distributing to investors.”

Another area Vingoe is concerned about is that of banks restricting their branches’ product shelves to proprietary funds. “The combination of restrictions on shelves, limited proficiency and limitations on the quality of advice are really not in the best interests of Canadians,” he said.

Ontario Finance Minister Peter Bethlenfalvy directed the OSC to investigate these concerns in November 2021. The OSC submitted its report less than four months later, but no action was announced as a result. In December 2023, the federal Department of Finance asked in a competition-focused consultation whether large banks should be required or incentivized to offer third-party products and services.

Vingoe, like the federal government, has competition-related concerns.

“If we allow an oligopolistic practice, costs are going to go up and innovation is going to go down,” he said. “The banks have been a great source of stability, but we have to be vigilant that they don’t also dampen down competition.”

Vingoe said the OSC is prepared to act alone on the shelf issue, as well as in tamping down aggressive sales activity at the banks.

“Those areas are deeply integrated with the client-focused reforms,” he said. “If we don’t see the results we want and firms are not acting in the best interests of their clients, perhaps we have to move to a stronger standard or other reforms that will directly address these harms.”

Vingoe pointed out that another part of the OSC’s mandate is to foster competitive markets, which gives it jurisdiction to tackle the shelf issue. He also said the regulator has increased its focus on product shelves in its regulatory sweeps.

“That could very well lead to further regulatory action,” he said.

Prior to joining the OSC in 2015, Vingoe was a partner with international law firms in both Toronto and New York City. He said Canada and the U.S. have different strengths within their enforcement regimes.

“The U.S. can learn from [our] more collaborative process,” Vingoe said. “The Canadian community is small enough that we can have outreach on a continuous basis.” Meanwhile, in the U.S., “the contentious component is much more dominant, and you have much more regulation by enforcement.”

Vingoe said Canada, however, can learn from the close relationship between the U.S. Justice Department and the Securities and Exchange Commission. “The federal focus on white-collar crime is frankly somewhat absent in Canada,” he said.

In the States, “people are held to account with real consequences for serious wrongdoing,” although he acknowledged the U.S. system sometimes goes too far.

Vingoe volunteers with non-profits that keep him connected to his formative years in the U.S. He’s been both a board member and an advisor to Springboard Danse, a New York-based career development charity for professional dancers, and he is an advisor to Reach the World, a New York-based non-profit that arranges for students studying abroad to present their experiences to Grade 4s and 5s.

Last year, Vingoe slept outside overnight as part of a fundraiser for Covenant House, a Toronto-based charity supporting at-risk youth that he calls “impressive” for the breadth of social services it offers.

Vingoe is married to Nancy Matsumoto, a James Beard Award-winning author and journalist. They have a 29-year-old son who lives in Washington, D.C.

As a veteran of both Bay Street and Wall Street, Vingoe recognizes the challenges ahead as regulators confront deep-pocketed institutions.

“[Public] awareness is a key factor in taking on any powerful interests,” he said. “Being more influential as a result of our research and pronouncements, both directly to the firms and to the public, is incredibly important.”

This article appears in the May issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.