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6 | INVESTMENT EXECUTIVE NEWS September 2020 Ontario’s proposals could prompt change at the national level
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the province’s securities legis-
lation in 17 years. In July, the task force issued a consultation paper with 47 proposals aimed at promoting “growth and com- petition in Ontario’s capital mar- kets, while upholding investor protection.”
Proposals such as boost- ing the collection powers of the Ontario Securities Commission (OSC) and giving binding deci- sion-making authority to the Ombudsman for Banking Services and Investments (OBSI) could prompt change at the national level, advocates say.
“If Ontario says [OBSI deci- sions] are going to be binding, that will put a lot of pressure on the other provinces to come along,” says Ermanno Pascutto, executive director of the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada), which has long advocated giving OBSI the power to make binding decisions.
Under OBSI’s current struc- ture, registered firms can reject the ombudsman’s recommen- dations or offer lower settle- ment amounts, leaving investors with no further alternative but the courts. The task force pro- posed a framework that it says “would increase investor confi- dence in the capital markets by assuring that investors are com- pensated, when warranted, for financial losses that relate to the trading or advising activity of a registered firm.”
The task force recommended developing an independent
internal appeals process for OBSI and raising the limit on OBSI’s compensation recom- mendations to $500,000 from the current $350,000. The new limit would be indexed to inflation.
Neil Gross, president of Toronto-based Component Strategies Consulting and chair of the OSC’s Investor Advisory Panel, says appeals of OBSI deci- sions should be available only in cases involving higher compen- sation amounts.
“It would be tragic to see the vast majority of these disputes that involve sums under $5,000 be weighed down with a lot of [appeals and review processes],” Gross says.
Pascutto agrees, noting that a right to appeal would turn OBSI “into a much more legalistic system” and make it tougher for investors to achieve redress.
“The whole system [would get] bogged down,” Pascutto says. “Let’s stick with the way [OBSI] works now, [give] it binding authority and get that important milestone achieved.”
Ian Russell, president and CEO of the Investment Industry Association of Canada, says the industry is “quite supportive” of giving OBSI binding powers and believes the task force has the political heft to “break the log- jam” on the issue. He suggests
a more powerful OBSI must have board representation from across the retail markets and a balance of member independ- ence and market expertise.
“You want to make sure you’re coming up with the right num- ber” when determining com- pensation amounts in binding decisions, Russell says.
Pascutto says he supports the proposed increase to OBSI’s compensation limit, but adds he “wouldn’t want to see people use [it] as a way to oppose the bind- ing authority [proposal],” not- ing that the vast majority of OBSI cases involve modest amounts. “If you get into really large amounts, you’re probably going to see a lawyer,” Pascutto says.
The task force also proposed providing the OSC with the power “to freeze, seize or other- wise preserve property” when collecting monetary sanctions, especially in cases involving firms and individuals who are not market participants. This power would cover property transferred to family or friends at prices below fair market value to shield that property from the OSC.
Furthermore, the proposal would allow Ontario to refuse to issue or renew driver’s licences or licence plates to people who have failed to pay monetary sanctions.
“It’s important that the regu- lators put energy into collection, and find creative ways [to do so],” Pascutto says. He adds that while regulators’ efforts at collections improved in recent years, the enforcement system remains “pretty weak.”
“We impose administrative penalties and fines that aren’t paid, and we don’t get convic- tions in the criminal courts,” Pascutto says.
The task force’s report also acknowledged that harmed investors have had challenges in receiving disgorged amounts. It recommends that courts be responsible for distributing these amounts to investors in cases “where there is sufficient evidence that [investors] have suffered direct financial harm.”
Poonam Puri, professor at Osgoode Hall Law School at York University in Toronto and co-founder and director of the Investor Protection Clinic, says this proposal would make getting money back easier for wronged investors.
“While [investors] welcome an OSC order sanctioning a bad actor, they [often] cannot afford the expensive civil litigation needed to get money back on their own,” Puri says. “The task force’s proposal will provide an easier path.”
The OSC recently used a court-appointed receiver to dis- tribute disgorged funds in two test cases, although the regula- tor is not required to do so under the Ontario Securities Act.
Gross says there “is a compel- ling case” to be made for requir- ing disgorged funds go to harmed
investors: “Disgorgement by its nature suggests ill-gotten gains. Where that has happened, jus- tice cries out that the money be returned to the people who have been deprived.”
Other enforcement propos- als included raising the max- imum administrative penalty for failure to comply with secur- ities law to $5 million per fail- ure from $1 million; creating a new, more specific prohibition on making misleading or untrue statements about public com- panies; and making it easier for OSC staff to obtain documents and data.
The task force proposed cur- tailing other OSC enforcement powers, including limiting the regulator’s use of contempt proceedings.
The report also included many proposals that are in line with the Ontario government’s long-stated goal of reducing regulatory burden, such as streamlining reporting require- ments and transitioning to full digital delivery of documents.
Puri sees no inherent con- flict between burden reduction and investor protection, noting that regulators need to strike a balance: “Businesses requiring public capital cannot and should not be overburdened by the regu- lator. But, at the same time, there cannot be a Wild West with- out any protections for inves- tors — and, in particular, retail investors.”
Comments on the task force’s recommendations are due Sept. 7, and the task force plans to issue its final recommenda- tions by the end of the year. IE
Regulators’ efforts at collections improved in recent years, but the enforcement system remains weak
Wealthsimple is testing a cryptocurrency trading platform
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to regulate crypto trading, and
released a joint consultation paper on the matter in March 2019. The CSA and IIROC plan to publish an update this autumn, but progress is already being made elsewhere.
In early August, the Ontario Securities Commission (OSC) issued a decision permitting Toronto-based Wealthsimple Digital Assets Inc. to operate the first regulated cryptoasset trad- ing platform via the CSA’s regula- tory sandbox. The sandbox allows companies to test ideas without having to meet the full set of trad- itional regulatory requirements.
Among other measures, the OSC ruling exempts Wealthsimple from trade reporting, prospec- tus requirements and certain other obligations for up to 24 months. These measures will allow Wealthsimple to test its plat- form while working toward IIROC registration.
With this ruling, the OSC gave the first green light to regulated crypto trading in Canada, and indicated the operating model that may get regulatory approval.
Regulators are concerned about the added risks to inves- tors posed by the crypto mar- ket. One of the key risks is the
security of clients’ cryptoassets. The crypto sector’s brief history is already littered with exam- ples of investors losing money to hacking and other misconduct.
According to the OSC deci- sion, Wealthsimple will not hold any client assets in its own crypto wallets. Instead, Gemini Trust Company LLC — which is licensed and regu- lated by the New York State Department of Financial Services and meets the require- ments of a “qualified custodian” under the CSA’s rules — will have custody of Wealthsimple clients’ assets.
In addition, Wealthsimple will operate a “closed loop” sys- tem. Clients won’t transfer their assets to a personal wallet and won’t be able to transfer assets into their Wealthsimple account from another crypto platform. This approach is expected to “significantly reduce the like- lihood of fraud, money laun- dering or client error in sending or receiving cryptoassets to incorrect wallet addresses,” the OSC’s decision states.
The OSC ruling also dem- onstrates that regulators increasingly view crypto trad- ing as falling under securities regulation unless clients take
immediate delivery of their crypto purchases.
In January, the CSA issued new guidance that states crypto trading platforms won’t fall under secur- ities regulation if three conditions are met: the cryptoasset is not a security or derivative; a client’s trade creates an immediate deliv- ery obligation; and the cryptoasset is delivered to the client.
Absent immediate deliv- ery, regulators decided that an investor’s claim to the cryptoas- sets held by a firm on the invest- or’s behalf amounts to a security (or derivative) — meaning the crypto trading is subject to secur- ities law, even if the cryptoassets involved aren’t defined as secur- ities or derivatives.
For example, under the OSC’s decision, investors will enter into “crypto rights contracts” with Wealthsimple, allowing them to trade Bitcoin and Ethereum on the platform. That trading will constitute securities trading as far as regulators are concerned.
This same concept came up in an enforcement case brought forward by the OSC in mid- July regarding Toronto-based Coinsquare Ltd., a crypto trading platform, and a couple of its execu- tives. In that case, the OSC alleged that Coinsquare engaged in wash
trading in an effort to pump up its reported trading activity; the OSC argued such action amounts to market manipulation.
In a settlement with the OSC, Coinsquare and the exec- utives admitted to breach- ing securities law by engaging in manipulative trading that accounted for about 90% of Coinsquare’s reported volume; lying to investors who were skeptical of the reported trading activity; and retaliating against a whistleblower who raised con- cerns about the trades.
The case begins a series of firsts for Canadian regulators. It marked the OSC’s first use of provisions to protect industry whistleblowers; its first settle- ment with a crypto trading platform; and the first case to establish that fake crypto trad- ing could be considered market manipulation under securities law — even though the securities being manipulated were not the crypto itself, but the clients’ con- tractual rights to cryptoassets held by Coinsquare in its wallets on behalf of clients.
The findings in the Coinsquare settlement follow a higher-profile case — the OSC’s investigation into QuadrigaCX, the failed crypto platform run
by Quadriga Fintech Solutions. That case also touched on some of the same concerns about the lack of security and transparency in the crypto sector.
The OSC’s investigation of QuadrigaCX concluded that the platform was essentially a trad- itional fraud wrapped in crypto clothing — involving unauthor- ized trading, misappropriation and Ponzi scheme tactics — that ultimately cost $169 million of investors’ money.
The Quadriga case was “an extreme example” and “not necessarily representative of the broader cryptoasset trad- ing platform industry,” an OSC report, released in June, stated. “However, these events serve to highlight for investors the risks that can arise in relation to crypto asset trading platforms, particu- larly those that are not registered.”
Since the downfall of QuadrigaCX, regulators have determined that crypto trading platforms that hold assets on behalf of clients are likely to be subject to securities regulation. Now, with the decision to permit Wealthsimple to play in the CSA sandbox, the OSC has begun set- ting the terms for crypto trading platforms getting registered as securities dealers. IE