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  • Laura Bewick Howitt, CFA, CIPM, MBA

The OSC publishes Statement of Priorities for 2023-2024

On April 18, 2023, the Ontario Securities Commission (OSC) published its 2023-2024 Statement of Priorities (SOP), which sets out the four strategic goals the OSC intends to focus on this fiscal year.


In its final SOP, included in the OSC’s Business Plan for fiscal years ending 2024-2026, the OSC establishes forward-looking goals aimed at being responsive to fast-paced innovation and evolving securities markets. This article summarizes the OSC’s priorities, while exploring the implications of specific priorities in greater detail.



GOAL 1: Building Trust and Fairness in Ontario’s Capital Markets


The OSC’s first goal is to “promote trust and fairness in Ontario’s capital markets among market participants and investors” through:

  • advanced work on environmental, social and governance disclosures of reporting issues,

  • enhanced fee transparency though total cost reporting,

  • broader diversity on Boards an Executive roles at reporting issuers, advanced cooperation with indigenous peoples,

  • development of over-the counter derivatives regulatory framework,

  • implementation of a single enhanced self-regulatory organization and Investor Protection Fund and enhancing sharing with the Canadian Public accountability board.

With regards to fee transparency and total cost reporting, the OSC refers to the Canadian Securities Administrator (CSA) and Insurance Regulator’s (CCIR) jointly developed harmonized proposals to enhance reporting requirements to include embedded fees paid by investment funds, in respect of all investment funds, including foreign funds and prospectus exempt funds, and will apply to all registered dealers, PMs, and IFMs.


The proposed amendments to NI 31-103 were released for comment in April 2022. As part of its priorities, the OSC intends to publish its final amendments to implement total cost reporting in April 2023.


The Derivatives Registration and Business Conduct Rules were released for comment in January 2022, and are intended to implement a comprehensive derivatives regime for firms and individuals regulated under NI 31-103. The Derivatives Registration Rule contains both firm and individual categories of registration, a business trigger test to determine whether a firm is required to register, obligations and requirements applicable to registered firms and individuals trading and advising on OTC derivatives, and exemptions from the requirement to register. The proposed rule has not been published in its final form and completed the third round of comments in 2022. Final form is anticipated for 2023 calendar year.



Implications:

The enhanced cost reporting will make it easier for clients to understand the total costs associated with their mutual fund and segregated fund investments when making investment decisions. There is currently no requirement to provide ongoing reporting of these types of costs after the initial sale. For investment advisors, the added fee transparency will certainly mean more questions from clients about product recommendations. However, this requirement aligns closely with the Client Focused Reforms and more specifically, the relationship disclosure requirements that came into force December 31, 2021.


Depending on the final form of the amendments. There is expected changes to the account reporting requirements under part 14 of NI 31-103 for registered dealers and advisers. Registered investment fund managers will also be required to provide dealers and advisers with the required information on embedded fees. Firms will need to include in client reporting, the fee as a percentage for each fund on the client’s quarterly account statements.


In addition, the aggregate dollar amount of fund expenses for all investment funds and the aggregate dollar amount of any direct investment fund charges (e.g., redemption fees or short-term trading fees) held in the client’s account during the year would also be required to be included on the client's annual cost and compensation report.



GOAL 2: Strengthening Investor Safeguards


The OSC aims to expand efforts to strengthen investor protection with changing investor attitudes and needs including:

  • expanding the focus on retail investors through specific education, policy, research and behavioural science activities

  • strengthening investor redress and the Ombudsman for Banking Services and Investments (OBSI)

  • monitoring and responding to the impacts of the deferred sales charges ban and order-execution-only ban.

Strengthening independent dispute resolution includes a proposal to give the OBSI binding authority in compensation decisions. Currently, the OBSI can only recommend compensation. While the OBSI makes public refusals to accept recommendations (often referred to as a naming and shaming provision), clients likely end up not receiving compensation when a firm refuses. This has led to circumstances where clients have accepted a settlement for less than the OBSI recommended due to feeling pressure to accept an offer that may be better than receiving nothing.


Implications:

Canadian Regulators have considered giving OBSI binding authority for a number of years. Investment firms have been resistant to this change based on concerns that they may not always agree with OBSI’s analysis, conclusions or financial harm calculations. In addition, OBSI currently makes decisions based on balance of probabilities, which is a lower bar than the preponderance of evidence required for enforcement actions.


It remains to be seen whether OBSI will be granted binding authority and how this would be implemented. However, any binding authority would likely include added levels of review and oversight of OBSI decisions and increased ability for firms to escalate or appeal decisions.


While this has been under consideration for some time, it seems that some proposal for giving OBSI binding authority is likely imminent. Firms should be prepared to comment on whatever proposal is put forward.


GOAL 3: Adapting Regulation to Align with Innovation and Evolving


The OSC’s goal is to continue to adapt and evolve the regulatory framework in line with Ontario’s changing capital markets including:

  • strengthening oversight and enforcement in the Crypto Asset Sector

  • streamlining periodic disclosure requirements for corporate finance and investment fund reporting issuers

  • modernizing delivery options of regulatory and continuous disclosure filings for issuers

  • completing the transition to SEDAR

  • facilitating financial innovation

  • implementing further initiatives that promote capital formation and foster competition

As stated in the OSC’s business plan “There has been a proliferation of crypto asset trading platforms with different business models that offer a broad range of crypto assets to their clients in Ontario, including retail investors”. Crypto trading is a high-risk investment category that had been under-regulated in the past, leaving little protection for investors from misleading marketing practices and potentially manipulative or fraudulent investment schemes. Recent enforcement actions indicate that the OSC is enforcing the requirement for investment firms, including those trading in crypto-currencies, to be duly registered prior to providing trading advice and services to Ontario Investors.


Implications:

While ongoing enhancements increase the regulatory obligations and costs for cryptocurrency trading platforms, regulatory oversight of these firms is attempting to place them in the same playing field as other regulated investment dealers. Meanwhile, strengthening investor protection enhances investor confidence in general, which is good for the market overall.


GOAL 4: Enabling the Organization to Deliver Effective Regulation


The financial sector is ever-changing and increasingly complex. As such, the OSC intends to strengthen its long-term capabilities “through investments in its people, internal policies and processes, systems and data capabilities to enable the organization to deliver on its regulatory mandate” including:

  • attracting, developing and retaining talent

  • executing the OSC’s inclusion and diversity strategy

  • integrating data and processes to support effective decision making and risk monitoring

As outlined by the OSC, “increasing market complexity is generating greater reliance on data, analytics and streamlined operations”. The OSC is investing in the technology and infrastructure to improve access to data and information and allow for better identification of trends and risks.


Implications:

Regulators are increasing to rely on technology and machine-learning for data analysis. Meanwhile, firms remain responsible for supervising their registrants and complying with regulations. In order to supervise effectively firms will need to continue to look for solutions to increase their ability and capacity to address their regulatory obligations in an efficient manner.


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