CSA Reports on its Challenges and Plans for the Next Year
The CSA’s Report for 2022-2023 describes the progress made by Canada’s securities regulators in terms of the six strategic goals set out in its 2022-2025 business plan, a few of which are variations on fundamental principles of securities regulation.
Connected to each strategic goal, the CSA spotlights one or two specific items that advance the goal. We discuss a number that may have significant consequences on your operations below.
1) Systemic Risk
Systemic risk in the financial services industry is not limited or siloed to one sector. The links between banking and securities markets are such that regulators of one sector must be aware and ready to address systemic problems and concerns in the other to mitigate damage to both. The recent failures of two US banks arising partly from liquidity problems highlight the importance of the CSA’s comprehensive systemic risk program, the results of which are shared with provincial and federal regulators. The CSA members and federal regulators continue to enhance their efforts to identify and address systemic risk through participation in the Systemic Risk Surveillance Committee. The CSA proposes enhancing collaboration and information sharing with interested parties, including the RCMP and its Integrated Market Enforcement Teams, OSFI, and FINTRAC.
How may this affect you?
Broader Audits and Focus on Liquidity: Addressing systemic risk concerns will justify increased collaboration, and the renewed focus on systemic risk may result in more comprehensive reviews and audits in areas not strictly within the purview of the regulator undertaking the review or audit. We anticipate that liquidity risk will be a central focus of all regulators in the future and would not be surprised if capital and insurance requirements were tightened.
2) MFDA and IIROC Merger
It’s been ten months since the MFDA and IRROC merged to form the Canadian Investment Regulatory Organization (CIRO).
How may this affect you?
Improved efficiency, consolidated operations, and harmonized regulatory approach. The merger of the MFDA and IIROC will hopefully lead to reduced costs and improved regulatory efficiency, especially for those market participants whose affiliates are members of both SROs. One can hope that CIRO will treat all dealers and registered representatives identically, save where there is a material and significant reason for different treatment.
3) Vulnerable Investors
The need to protect vulnerable investors, particularly seniors, from abuse was formally recognized by CSA in 2021 with the enactment of NI 31-103 amendments. Practical problems with the application of these amendments have led to a large number of questions and concerns as dealing with inter-relationships between investor and their family and advisors of different types is fraught with traps and pitfalls for those who report suspected elder abuse. The CSA is considering these questions, concerns, and other policy developments and will consider additional amendments to improve efficacy. We believe that additional Staff guidance in the interim would be helpful.
How may this affect you?
We all must continue to monitor vulnerable clients for abuse while avoiding unjustifiable reactions that damage your relationship with your clients and their trusted contact person(s).
4) OBSI
The recent decision by the Federal Government to designate OBSI as the sole dispute resolution service indicates its support for the CSA’s stated goal of giving OBSI the authority to make binding decisions, including monetary awards to firms. The CSA is developing a proposal, which will likely be published in draft form for comment.
How may this affect you?
Many valid concerns have been raised regarding OBSI’s technique in assessing investor losses, both actual and potential.
In most cases, investor claims are triggered by a registered advisor’s alleged acts or omissions. Any proposed grant of binding decision-making authority should expressly include the ability for firms to assert due diligence or other types of defence to either eliminate or share liability with those at fault.
Hopefully, the techniques used by OBSI to determine awards, assign partial liability, and create an effective and efficient appeals process will be set out in the CSA’s proposal.
A few questions to consider:
Will OBSI be able to make awards against individuals in such circumstances?
As investors will have easy access to obtaining OBSI’s binding awards, often without the need for legal representation and accompanying expense, will they become more litigious and/or less willing to settle their claims?
5) Client Focused Reforms
After conducting 172 reviews of procedures and practices regarding conflicts of interest, the CSA found widespread deficiencies, including failure to identify material conflicts of interest, inadequate controls, and insufficient and outdated written policies and procedures. In response, the CSA and CIRO issued notices setting out the findings and guidance on how to comply.
How may this affect you?
If you have not been reviewed or if your review had findings, you should expect additional reviews and a review of the COI regulations published in 2021. Now is the time to review your practices and procedures and test their effectiveness.
6) RegTech Use of Artificial Intelligence
CSA members increasingly use artificial intelligence to identify bad actors, take pre-emptive action to shut down illegal activities, and support enforcement actions. Social media data mining analyzes content to identify illegal activities, including market fraud.
How may this affect you?
We believe dealers’ and issuers’ Social media use policies should be robust and tested regularly. The ease by which an individual can spread misleading or fraudulent information to investors and consumers necessitates strong internal controls.
The CSA’s Report, while not overly long, covers many topics. We have covered only a few above that we thought were particularly interesting.
If there are other topics in the Report you want to know more about, don’t hesitate to contact us.
We are here to help.
North Star Consultants, Solutions and Legal expressly states that this publication is not intended to constitute legal advice. No one should act on it or refrain from acting on it without consulting with a lawyer.
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