Advisory panel warns some proposed amendments could compromise regulators' ability to ensure investors are protected
In response to a wide-ranging consultation launched by the Ontario Capital Markets Modernization Taskforce, the Ontario Securities Commission’s Investor Advisory Panel (OSC IAP) praised certain proposals to help protect investors, but argued other suggested amendments fall short of significant progress or would represent a step backward.
“The Task Force report contains many thoughtful and worthy ideas,” said IAP Chair Neil Gross in a letter to Wallied Soliman, who heads the taskforce.
Among the proposals it backed, the panel cited a recommendation to empower the Ombudsman for Banking Services and Investments (OBSI) to make binding decisions in addressing valid consumer complaints.
That authority, which has been long sought by investor advocates, would “foster greater public confidence that Ontario’s capital markets are fair and aim to provide investors with appropriate protections,” the panel said. It also approved of a proposal to raise OBSI’s monetary award limit to $500,000, which would bring it in line with IIROC’s arbitration program.
The IAP agreed with the task force’s thinking that the OSC’s current administrative penalty limit is too low, but asserted that the recommended expansion to $5 million doesn’t go far enough. “[C]onsideration should be given to empowering the OSC to impose monetary penalties that exceed whatever financial benefit the firm derived from its non-compliance,” the panel said.
The panel also backed a call to increase investors’ access to independent investment product within the shelf system, as it would fortify what it saw as shortcomings in recently-adopted client-focused reforms (CFRs). However, to avoid singling out just one sector of the industry, it suggested that the proposal be expanded to include not just bank-owned dealers, but all dealers, or at least all the large independent ones as well as those owned by banks.
Among the areas it saw as problematic, the IAP highlighted a task force proposal to expand the mandate of the OSC to include capital formation and competition in the markets. While it acknowledged the importance of fostering market competitiveness and growth, the panel said making it an imperative for the OSC would potentially degrade or destabilize public trust in the regulator as a fair and objective watchdog of capital markets.
It also had reservations on another proposal, which sought to expand the categories of accredited investors (AIs). While it agreed that requirements to meet certainly financial thresholds should be waived for those licensed to dispense investment advice, the IAP suggested that AI status instead be based on a real benchmark for investment knowledge or financial sophistication.
“At most, income and wealth are merely indicative of capacity to withstand loss – which may be important in the exempt market, but loss capacity surely shouldn’t serve as a sufficient criterion for entry,” the panel said.
One proposal, which sought greater rights for persons or companies directly affected by an OSC investigation or examination, drew much harsher criticism. Citing that proposal’s “unprecedented” purpose and scope, the panel warned such a move could “compromise OSC investigations … through delays and premature exposure of investigative leads, objectives, strategies and evidence.”
The task force devoted part of its consultation report to comments on strengthening self-regulatory organizations’ (SROs) accountability and establishing a single SRO, which the IAP broadly agreed with. However, given the CSA’s ongoing SRO framework review along with the pan-Canadian scope of SRO operations, the panel suggested that it would be “premature for Ontario to proceed unilaterally on this front.”
The IAP also expressed qualified support for a proposal suggesting a retail investment fund structure whose investment objectives and strategies would involve investments in early-stage businesses.
“It is not clear whether the Task Force intended this proposal to channel funding only toward early stage businesses or also toward established small enterprises,” the panel said. “Support for both will be crucial to rebuilding Ontario’s economy in the wake of COVID-19, especially since the majority of private sector jobs are provided by small business.”