Earlier this month, the Ontario Ministry of Finance released a proposed new regulation under the Securities Commission Act, 2021 which would expand the purposes for which the Ontario Securities Commission (OSC) can utilize enforcement money collected as a result of enforcement orders or settlements.
Current rules allow the OSC to allocate enforcement monies: (i) to or for the benefit of third parties; (ii) for use by the OSC or third parties to educate investors or promote or enhance knowledge and information of persons regarding the operation of the securities and financial markets; or (iii) for any other specified purposes in the regulations.
The two new proposed purposes for enforcement monies are: (i) to enhance the OSC’s capabilities in information technology, data acquisition and data analytics to address matters relating to investor protection, the reduction of systemic risk or the integrity of the capital markets; and (ii) to fund activities of the OSC’s Office of Economic Growth and Innovation that are intended to foster innovation, capital formation and competition in Ontario’s capital markets.
The Ministry provides one example of an enhancement under the first new proposed purpose; that is, the development of software or hardware or the implementation of special projects for data integration or risk modelling. The Ministry further explains that this does not include ongoing operating costs.
The current practice of prioritizing the allocation of enforcement monies to investors who incurred financial losses as a direct result of misconduct would not change, in that funds will continue to be allocated to other purposes only if distribution to a harmed investor cannot be reasonably carried out.
It is proposed that internal controls would be established to ensure that enforcement monies are used appropriately and not for ongoing expenditures, which controls would include documentation, review and an approval process for eligible expenditures. As with other expenses, the OSC will be required to include information respecting the allocation and expenditure of money under these new purposes in its annual financial statements.
A number of potential benefits are set out in the notice accompanying the proposed regulation, including new technology and data abilities to strengthen the OSC’s oversight and early detection of securities violations, and avoiding fee increases on market participants that would otherwise have been necessary to achieve the desired outcomes.
Comments on the proposal will be accepted by the Ministry until September 18, 2023.
August 31, 2023