Regulation - LGIC
Proposed new Regulation made under sections 19(2)(b)(iii) and 36(0.1) of the Securities Commission Act, 2021 that prescribes additional purposes for which the Ontario Securities Commission (OSC) can use enforcement money
Regulation Number(s):
N/A
Instrument Type:
Regulation - LGIC
Bill or Act:
Securities Commission Act, 2021
Summary of Proposal:
• Currently, the OSC can allocate money it receives from enforcement orders or settlements ("enforcement money") for one of the purposes specified in section 19(2)(b) of the Securities Commission Act, 2021:
i. To or for the benefit of third parties;
ii. For use, by the Commission or third parties, for the purpose of educating investors or promoting or otherwise enhancing knowledge and information of persons regarding the operation of the securities and financial markets; or
iii. For any other purpose specified in the regulations.
• The Ministry of Finance is proposing to make a new regulation that would prescribe two new purposes for which enforcement money (both newly collected and previously designated) can be used:
1. For use by the Commission to enhance its capabilities in information technology, data acquisition and data analytics in order to address regulatory matters relating to investor protection, the reduction of systemic risk or the integrity of the capital markets. For example, the enhancements may consist of the development, purchase, installation or deployment of software or hardware or the implementation of special projects relating to data integration or risk modelling. Ongoing operating costs are not included in this purpose.
2. For use by the Commission to fund activities of the Commission's Office of Economic Growth and Innovation that are aimed at fostering innovation, capital formation and competition in Ontario's capital markets.
• The OSC's existing practice is to prioritize distributing amounts received from respondents in a particular enforcement matter to those investors who incurred financial losses as a direct result of the misconduct that gave rise to the payment, where a distribution can be reasonably carried out in the circumstances. Funds are allocated for other purposes set out in the SCA if a distribution to harmed investors cannot be reasonably carried out. This practice would continue if the proposed regulation is approved.
• It is contemplated that the OSC Board would establish internal controls governing technology/data capabilities expenditures to ensure that enforcement money is appropriately used for the proposed new purpose, and do not constitute expenditures that are ongoing. Similarly, internal controls would be developed for expenditures related to the Office of Economic Growth and Innovation. These controls would include a documentation, review, and approval process for eligible expenditures and associated criteria for assessing proposed expenditures.
• For example, eligible technology/data expenditures would have to be identified in a Board- approved implementation plan and budget describing: (a) the regulatory issue being addressed by the technology and/or data capability, (b) the new functionality that the expenditure contributes to and how it would lead to an outcome that directly protects investors, market integrity and/or mitigates systemic risk, (c) activities associated with the implementation of the technology and/or data capability; and (d) all project costs that are proposed to be funded from enforcement money.
• To ensure that there is no operational dependency on the receipt of future enforcement money, approved expenditures would be limited to enforcement money on hand at the time and periodically earmarked by the Board for this purpose.
i. To or for the benefit of third parties;
ii. For use, by the Commission or third parties, for the purpose of educating investors or promoting or otherwise enhancing knowledge and information of persons regarding the operation of the securities and financial markets; or
iii. For any other purpose specified in the regulations.
• The Ministry of Finance is proposing to make a new regulation that would prescribe two new purposes for which enforcement money (both newly collected and previously designated) can be used:
1. For use by the Commission to enhance its capabilities in information technology, data acquisition and data analytics in order to address regulatory matters relating to investor protection, the reduction of systemic risk or the integrity of the capital markets. For example, the enhancements may consist of the development, purchase, installation or deployment of software or hardware or the implementation of special projects relating to data integration or risk modelling. Ongoing operating costs are not included in this purpose.
2. For use by the Commission to fund activities of the Commission's Office of Economic Growth and Innovation that are aimed at fostering innovation, capital formation and competition in Ontario's capital markets.
• The OSC's existing practice is to prioritize distributing amounts received from respondents in a particular enforcement matter to those investors who incurred financial losses as a direct result of the misconduct that gave rise to the payment, where a distribution can be reasonably carried out in the circumstances. Funds are allocated for other purposes set out in the SCA if a distribution to harmed investors cannot be reasonably carried out. This practice would continue if the proposed regulation is approved.
• It is contemplated that the OSC Board would establish internal controls governing technology/data capabilities expenditures to ensure that enforcement money is appropriately used for the proposed new purpose, and do not constitute expenditures that are ongoing. Similarly, internal controls would be developed for expenditures related to the Office of Economic Growth and Innovation. These controls would include a documentation, review, and approval process for eligible expenditures and associated criteria for assessing proposed expenditures.
• For example, eligible technology/data expenditures would have to be identified in a Board- approved implementation plan and budget describing: (a) the regulatory issue being addressed by the technology and/or data capability, (b) the new functionality that the expenditure contributes to and how it would lead to an outcome that directly protects investors, market integrity and/or mitigates systemic risk, (c) activities associated with the implementation of the technology and/or data capability; and (d) all project costs that are proposed to be funded from enforcement money.
• To ensure that there is no operational dependency on the receipt of future enforcement money, approved expenditures would be limited to enforcement money on hand at the time and periodically earmarked by the Board for this purpose.
Analysis of Regulatory Impact:
There is no regulatory impact or compliance costs associated with the proposed regulation for the Province, market participants or for Ontarians. The proposed regulation may have a theoretical financial implication for the Province as the SCA provides that enforcement money is to be paid into the CRF unless it is allocated for one of the prescribed purposes. Additional purposes may be seen as diverting funds away from the CRF, however, the OSC has, in practice, allocated all enforcement money that it collects for one of the prescribed purposes and would continue to do so even if additional purposes were not prescribed. The proposed regulation would affect the internal operations of the OSC as it relates to enforcement money that the OSC is authorized to collect.
The proposed regulation would allow the OSC to use money that it has collected as a result of non-compliance with securities laws, to invest in technology and/or innovation-related initiatives to better fulfill its mandate.
Additional benefits of the proposed regulation include the following:
• Supports enhanced technology and data capabilities to help strengthen the OSC's oversight and early detection of securities violations to protect investors through timely and impactful enforcement action. This responds to comments made by the Auditor General of Ontario in the 2021 Annual Report that the OSC lacks the necessary technology and analytical tools to conduct efficient oversight; enhance its case assessment, disruption, and investigation capabilities; and effectively monitor and analyze compliance securities laws.
• Allows the OSC to make better use of its existing enforcement money by drawing down its accumulated balance and may help prevent future accumulation of a large balance; and
• Reduces burden on market participants by avoiding fee increases that otherwise would have been imposed to achieve the same outcomes.
The proposed regulation would allow the OSC to use money that it has collected as a result of non-compliance with securities laws, to invest in technology and/or innovation-related initiatives to better fulfill its mandate.
Additional benefits of the proposed regulation include the following:
• Supports enhanced technology and data capabilities to help strengthen the OSC's oversight and early detection of securities violations to protect investors through timely and impactful enforcement action. This responds to comments made by the Auditor General of Ontario in the 2021 Annual Report that the OSC lacks the necessary technology and analytical tools to conduct efficient oversight; enhance its case assessment, disruption, and investigation capabilities; and effectively monitor and analyze compliance securities laws.
• Allows the OSC to make better use of its existing enforcement money by drawing down its accumulated balance and may help prevent future accumulation of a large balance; and
• Reduces burden on market participants by avoiding fee increases that otherwise would have been imposed to achieve the same outcomes.
Further Information:
Consultation Draft_GENERAL Regulation (SCA)
Proposal Number:
23-MOF013
Posting Date:
August 4, 2023
Comments Due Date:
September 18, 2023
Contact Address:
Ministry of Finance
Agency Relations and Regulatory Policy Unit
Frost Bldg N 4th Flr
95 Grosvenor St
Toronto, ON
M7A 1Z1
Agency Relations and Regulatory Policy Unit
Frost Bldg N 4th Flr
95 Grosvenor St
Toronto, ON
M7A 1Z1