Canadian Securities Administrators’ 2023–2024 annual Year in Review

Accountability of capital markets regulators, or any regulator, is essential to fostering legitimacy and confidence that regulators’ priorities and approaches are consistent with their statutory mandates and meet stakeholder needs and expectations. One of the most valuable tools used to advance this accountability imperative is the publication of annual reviews.

The Canadian Securities Administrators (CSA) published its 2023–2024 annual Year in Review [PDF] (the report). The report discusses the collaborative activities of Canadian provincial regulators over the past year and highlights initiatives undertaken by the CSA in response to emerging issues and changing market conditions. The report also outlines the CSA’s progress towards achieving the strategic goals set out in its 2022–2025 Business Plan [PDF].

Key initiatives

The report highlights the CSA’s key initiatives from the past year, which include the following.

Binding independent dispute resolution for individual investors

On November 30, 2023, the CSA shared a proposed regulatory framework which designated the Ombudsman for Banking Services and Investments (OBSI) as an independent dispute resolution service with binding decision-making authority for the investment industry. The stated purpose of this proposed framework is to offer investors and firms with an alternative dispute resolution process that may be less costly than seeking redress through the courts.

Assessment of risks in Canadian capital markets

In January 2024, the CSA’s Systemic Risk Committee (SRC) published its 2023 Annual Report on Capital Markets [PDF], a flagship publication on key trends and vulnerabilities in Canadian capital markets. Since the SRC was established in 2009, it has analyzed and monitored systemic and emerging risks in the capital markets. This year marked the first time the SRC’s findings were made public.

The SRC’s report provides analysis of key trends and vulnerabilities and outlines the CSA’s efforts to mitigate those vulnerabilities and associated risks. The SRC made several key observations relating to the rise in interest rates and the consequential pressure on market participants, noting that the rise in interest rates has put significant pressure on household finances, forcing retail investors to reassess investment strategies. However, while the future of interest rates remains uncertain, major stock market indices rebounded following significant declines in 2022.

Over-the-counter (OTC) derivatives framework

On September 28, 2023, the securities regulatory authorities of all the provinces and territories except Manitoba and British Columbia adopted Multilateral Instrument 93-101 Derivatives: Business Conduct and Proposed Companion Policy 93-101 CP Derivatives: Business Conduct, which came into force on September 28, 2024. This regime establishes obligations related to fair dealing, conflicts of interest and record-keeping for dealers and advisors in the OTC derivatives market.

Value-referenced crypto assets (VRCAs)

On October 5, 2023, the CSA published CSA Staff  Notice 21-333 Crypto Asset Trading Platforms: Terms and Conditions for Trading Value-Referenced Crypto Assets with Clients (Staff Notice 21-333), which expanded the CSA’s oversight of VRCA trading. The Staff Notice set out terms and conditions, including a requirement that the issuer of a VRCA must maintain an appropriate reserve of assets with a qualified custodian. The Staff Notice also outlined disclosure requirements for VRCA issuers and CTPs trading in them, such as disclosing certain information related to governance, operations and asset reserves.

The CSA has taken the position that fiat-backed crypto assets are a type of VRCA that do not comply with the interim terms and conditions imposed by Staff Notice 21-333. Therefore, the CSA has set a deadline of October 31, 2024, for CTPs to discontinue allowing clients in Canada to buy, deposit or enter into crypto contracts to buy or deposit fiat-backed crypto assets.

Launch of the Financial Innovation Hub

As part of its effort to support innovation in the Canadian capital markets that benefits investors, the CSA launched the Financial Innovation Hub (FinHub). The stated purpose of the FinHub (previously the Regulatory Sandbox) is to take a proactive and coordinated approach to building regulatory capacity for emerging digital business models. Dealers, financial institutions and startups that have developed an innovative business model or are using a new technologies may be eligible to participate in FinHub activities.

Through the FinHub, the CSA will consider how firms are leveraging new technologies and innovative business models and assess how to modernize the securities regulatory framework for such innovations. The FinHub is also exploring how artificial intelligence may be deployed in the capital markets.

ESG-related investment fund disclosure

On March 7, 2024, the CSA published Staff Notice 81-334 (Revised) ESG-Related Investment Fund Disclosure, which provided investment funds with updated guidance on disclosure practices related to environmental, social and governance (ESG) considerations. Through the publication of this updated guidance, the CSA has stated that it sought to bring greater clarity and consistency to ESG-related fund disclosure and sales communications. The Staff Notice provides guidance on requirements regarding written ESG-related policies and procedures, as well as the different levels of disclosure expectations for funds that do not reference ESG factors in their investment objectives but that use ESG strategies, depending on the degree of significance of ESG factors in the fund’s investment process.

Modernization of the CSA’s national IT systems

On July 25, 2023, the CSA launched SEDAR+, a new system for market participants to file, disclose and search for issuer information in Canada’s capital markets. Previously, issuers were required to provide disclosures through SEDAR, the national Cease Trade Order (CTO) database, the Disciplined List (DL) database and certain provincial electronic filing portals. SEDAR+ consolidates these various disclosure processes.

The CSA has stated that it is continuously implementing enhancements to the SEDAR+ platform based on feedback from market participants.

Enforcement statistics

In 2023–2024, there were 36 matters commenced and 55 matters concluded. These figures are part of a downward trend over the past few years. While the number of proceedings has decreased, there has been an upward trend in the severity of sanctions:

• Fines and administrative penalties and payments made pursuant to settlement agreements amounted to $27.6 million, increasing from $18.5 million in 2022–2023.
• Restitution and disgorgement (including investor compensation pursuant to settlement agreements) amounted to $75.7 million, increasing from $20.9 million in 2022–2023.
• Market participation bans were imposed on 64 individuals and 39 companies, as compared to 81 individuals and 23 companies in 2022–2023.
• Three criminal proceedings were commenced against three individuals, as compared to six criminal proceedings against 10 individuals in 2022–2023.
• 1,054 investor alerts, cautions and warnings were issued, alongside 23 interim orders and 17 asset-freeze orders. This represented an increase from 758 investor alerts, 17 interim cease-trade and 15 asset-freeze orders in 2022–2023.

Future developments

The report also highlights several proposals the CSA intends to introduce in the coming year.

Developing regulatory regime for crypto assets

The CSA will soon commence the third phase of its process to introduce a new regulatory framework for public investment in funds holding crypto assets. The first phase began in July 2023, when the CSA published Staff Notice 81-336, which set out guidance regarding compliance with securities law requirements for fund managers of funds holding crypto assets.

As discussed in a previous Osler Update, the second phase commenced in January 2024 when the CSA published a set of proposed amendments to National Instrument 81-102 Investment Funds Pertaining to Crypto Assets. The CSA published a request for comment in relation to these proposed amendments, and the consultation period expired April 17, 2024.

The third phase will involve the CSA seeking public consultation on a broader regulatory framework.

Modernization of mutual fund sales practices

The CSA has stated that it will propose amendments to National Instrument 81-105 Mutual Fund Sales Practices with the aim of modernizing the principal distributor model.

Additionally, the CSA is conducting a review of chargebacks as a result of concerns that chargebacks may cause a misalignment between the interests of dealing representatives and their clients. Chargebacks are a compensation practice where a dealer or dealing representative is paid upfront commissions and/or fees when their client purchases securities and, when an investor redeems their securities before a fixed schedule, the dealing representative is required to pay back all or part of the upfront commission and fees.

The CSA stated in a news release that their assessment on the use of chargebacks is part of their holistic review of “whether further regulatory reform is needed to align certain mutual fund practices with the interests of clients.”

Climate-related disclosure

The Canadian Sustainability Standards Board (CSSB) published its Canadian Sustainability Disclosure Standards 1 and 2. The CSA has stated that it is monitoring this process and the feedback the CSSB receives to inform revisions to the CSA’s own climate-related disclosure requirements. Once the CSSB standards are finalized, the CSA expects to seek comments on its own revised proposed climate-related disclosure requirements.

Diversity disclosure

The CSA had previously published proposed amendments to Form 58-101F1 Corporate Governance Disclosure and proposed changes to National Policy 58-201 Corporate Governance Guidelines relating to diversity, director nomination processes and board renewal.

The consultation period for these proposed amendments ended September 29, 2023. The CSA is in the process of reviewing the comments received and is working towards publishing final amendments.

Conclusion

Canadian capital markets continue to expand and adapt to new technological innovations, evolving market conditions and shifting investor preferences. We will continue to monitor and provide updates on key developments impacting the securities regulatory landscape.