Inside the OSC’s registrant conduct team

The OSC is intensifying its effort to weed out delinquent dealers from the securities industry. To show it means business, the regulator has created a dedicated registrant conduct and risk analysis team, which operates within the larger compliance and registration regulation branch of the commission.

Members of this team recently spoke to a group of industry stakeholders about the inner workings of this new compliance machinery at the Strategy Institute’s Registrant Regulation Compliance Strategies Summit, in Toronto.

George Gunn, manager of the registrant conduct and risk analysis team explained how the team uncovers and responds to registrant misconduct.

“The main source for us is the compliance field reviews that our staff is conducting,” said Gunn, adding that SRO investigations and civil suits are sources. “[We’re] still finding cases where the Accredited Investor Exemption is being abused.”

According to OSC Staff Notice 33-735: “In Ontario, issuers and registered dealers are permitted to sell exempt securities without a prospectus if they sell to individual investors who meet minimum asset or income thresholds, referred to as Accredited Investors.”

However, many dealers have failed to collect adequate know-your-client (KYC) information to reasonably determine whether the investor is a legitimate accredited investor.

Having identified misdeeds by a registrant, then team then assesses the degree and nature of the misconduct.

“If we feel there’s a risky registrant out there, we will use our own staff or a forensic accountant to go out and do [an assessment],”he said. “We do interviews of investors of the registrants and [others].”

The process also entails a close scrutiny of the AI forms that may contain such red flags as 75-year old retirees claiming to be accredited investors. “We will make phone calls to verify the veracity of many new client’s application forms; that was not something we used to do. That’s a new tool for us.”

Once the misconduct is identified, a range of potential remedies are considered by the risk analysis team of the OSC.

Strict or close supervision is another effective deterrent to registrant misconduct, as are warning letters. “We’re not big on it [but] we do send a lot more warning letters than we did [in the past].”

“The biggest, most important remedy is suspension [but] we have to use it carefully,” said Gunn. “You can’t use it for all firms. If there’s money under management, we can’t just suspend them; we need to look at who’s going to look after the clients assets.”

The OSC takes a “very prescriptive” approach to regulation. The decision to suspend a registrant becomes relatively easier when dealing with exempt market dealers (EMDs) who don’t have any asset under management, he added.

“When we see evidence of fraud or misappropriation we are going to be recommending suspension,” said Gunn. “Some firms treat investors’ money as their personal kitty cash. When we see that we’re going to be moving very quickly.”

Suspension can come quickly for other reasons, though, such as failure to adequately respond to identified compliance deficiencies.

“The old days of writing a letter to say ‘please respond to deficiency report’ are gone,” he warned. “That’s not going to happen anymore; if we do not get any response, we will move to suspend.”

Occasionally, the OSC decides to bar a registrant from the industry under the provision of term-limited suspension. It is done largely for conduct that weighs significantly on registrant’s integrity, but causes no direct harm to its clients.

“Rather than waiting for and reacting to the harm caused to clients, we can prevent it before it occurs and achieve a great regulatory outcome,” said Michael Denyszyn, senior legal counsel on the registrant conduct and risk analysis team.

When assessing a registration application, the OSC looks at a variety of factors that might raise red flags about an applicant. One tool is the complexity spreadsheet; if the information from the complexity spreadsheet reaches a certain threshold, the registrant is subject to further vetting.

Denyszyn justifies the use of this spreadsheet as a measure “to ensure that similarly situated applicants are treated consistently.”

Disciplinary proceedings from SROs, other CSA jurisdictions or international regulators will also attract a closer look.

“We will take any misrepresentation on the registration application very seriously,” said Denyszyn. “Criminal and civil proceedings implicate an applicant’s integrity; if an individual has a past conviction of fraud, forgery, theft, break-and-enter, smuggling [then] we obviously have serious concerns about that individual’s ability to act [with integrity] in the securities industry.”