OSC reports downward trend in compliance actions

Regulatory compliance actions by the Ontario Securities Commission (OSC) against investment dealers, fund managers and other registered firms continued to decline in fiscal 2020.

According to the latest annual report from the OSC’s Compliance and Registrant Regulation (CRR) branch, the regulator took 93 compliance actions — such as issuing warnings, imposing registration conditions and levying suspensions — in fiscal 2020 (the 12-month period ended March 31), down from 105 actions in fiscal 2019.

The decline continued a trend that started the previous year. The CRR branch took 135 actions in 2018.

The number of instances in which registration was denied continued to decline. There were 34 denials in 2020, down from 45 in 2019 and 63 in 2018.

The CRR report pointed to added regulatory guidance on registration disclosure as a key reason for the decline in registration refusals over the past couple of years.

The report also noted that early-stage interventions with firms “has led to firms reviewing and, in 17 cases this year, withdrawing a number of applications that might otherwise have resulted in denial of registration.”

The report also said that the CRR made six referrals to enforcement — the most serious compliance action — in 2020, down from 10 in 2019, but up from 2018, when there were four referrals.

The most common deficiencies identified in the report stemmed from weaknesses in firms’ compliance systems, which accounted for 40% of the total issues uncovered by CRR, including 9% that amounted to “serious” shortcomings.

The other top areas where serious issues were found continued to be know-your-client (KYC) and know-your-product requirements, suitability (8%) and conflicts of interest (7%).

Regulators found that compliance with KYC and suitability obligations had generally improved compared with previous years, but there were continued deficiencies in areas such as the collection and documentation of up-to-date KYC information, failing to properly evaluate concentration risk and inappropriate use of client-directed trade instructions.

“Registrants are encouraged to use the summary report as a self-assessment tool to strengthen systems of compliance, internal controls and supervision,” said Debra Foubert, director of the CRR branch.

For the 2021 fiscal year, the CRR branch’s priorities will include assessing the fallout from Covid-19 on industry firms.

For the time being, those reviews are taking place remotely, as both industry and regulatory staff are largely still working from home due to the pandemic.

In addition to studying the effects of Covid-19, CRR also signalled that its reviews will focus on firms’ complaint-handling processes, marketing practices (including ESG offerings) and suitability (including concentration risk), among other things.

The report also details the work of the OSC’s LaunchPad unit with innovative businesses, provides a status update on measures to reduce firms’ regulatory burdens and reviews ongoing policy work that impacts firms, such as the implementation of the client-focused reforms.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.