Ontario’s securities regulator is vulnerable to political interference and has had its independence repeatedly undermined by the province’s finance ministry, according to a new auditor general’s report.
Provincial Auditor General Bonnie Lysyk’s 2021 report, which was released Wednesday, outlines several instances in which the Ministry of Finance has opposed the independent, evidence-based decisions the OSC is required to implement to protect Investors.
The OSC is accountable to the Minister of Finance, but a memorandum of understanding between the two entities stipulates that OSC decisions must be made “independently and impartially”.
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The report says that in September 2018, just months after Doug Ford’s Progressive Conservative government took office, the OSC and other provincial securities regulators formally proposed regulatory changes that would prohibit fees. deferred sales charge (DSF), an early withdrawal charge on mutual funds that is often hidden from consumers.
That same day, then-Ontario Finance Minister Vic Fedeli released a statement challenging the proposal. The ministry blocked the implementation of the reform.
It wasn’t until May 2021 that the OSC announced it would join other provinces in banning DSCs, after getting the green light from the province to do so.
“We found that the Ontario government’s initial intervention and subsequent overthrow illustrated the Minister’s ultimate authority and power over rule changes, even when in direct conflict with OSC judgment and evidence. related on the matter,” the report said.
It also called into question the timing of Mr. Fedeli’s opposition to the DSCs, especially as the ministry provided “no new evidence to counter the weight of reasons and evidence amassed by the CSO and all other applicable regulators” after years of consideration.
The report says current and former OSC employees who were interviewed described facing “intense” lobbying from the investment industry over the proposal. Department staff met with industry stakeholders — many of whom opposed the removal of deferred sales charges — until September 2018, when the department abruptly intervened in the decision, the report said.
“Government political staff … involved in these activities included a former investment industry lobbyist,” the report said.
Industry lobbying is “a significant contributing factor” that has slowed investment protection reforms in Ontario, the report says, including a proposed restriction on trailing commissions, fees that mutual fund companies pay brokers to encourage their clients to hold investments in their funds.
The auditor’s office found that the Department of Finance tended to support industry positions and that many stakeholders were “pleased to see how watered down the OSC’s proposals on these fee-driven reforms were”. .
In another example, the auditor’s office found that the Ministry of Finance under Mr. Fedeli did not follow an established consultation process agreed upon by the regulator and the ministry regarding persons who sit on the OSC’s Board of Directors.
In April 2019, Fedeli rejected the OSC chair’s recommendation to reappoint five board members for another term, choosing instead four new directors who had not been nominated. Agency staff who were interviewed by the auditor’s office indicated that the reshuffling of the board had resulted in the loss of experienced members, which “reduced the quality of policy development and arbitration”.
The auditor’s office has asked the Department of Finance to make public the criteria it uses to make decisions that contradict those of the OSC and to disclose from whom it takes advice on investor protection issues. The ministry said it would review the recommendations.
The annual audit also targeted the agency itself, particularly on enforcement in the case of unregulated companies. He reviewed 2,029 cases where the OSC investigated but took little or no action, and analyzed 35 of those cases, finding that the OSC had enough information in 49% of cases to alert investors on its website of harmful activities, but did not.
The OSC has also failed to investigate and take action against “less egregious” cases of capital markets abuse, according to the report, mainly because it lacks adequate legal authority to act on them. .
The report says Quebec’s securities regulator can block or remove fraudulent websites selling unregulated securities, for example, but the OSC cannot. British Columbia’s securities regulator was authorized last March to immediately impose fines ranging from $100,000 to $500,000 on companies or insiders who violate provincial securities law. But the OSC can only issue a warning letter.
When the OSC imposes fines — usually in simpler cases of securities fraud — the Auditor General found that the regulator often failed to collect the money. Between 2011 and 2021, the OSC imposed $525 million in fines, but only collected 28% of that amount.
Nor does the Ontario regulator have the authority to use tactics such as freezing assets or restricting a person’s ability to obtain a driver’s license to force payment of fines, according to the report.
The auditor’s office recommended that the ministry follow the lead of other provinces and give the OSC greater authority to take action against securities violations.
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