OSC Burden Reduction Initiative – Revisiting the 2003 Regulatory Burden Task Force

This is the third in a series of blog posts examining the Ontario Securities Commission’s (“OSC”) Burden Reduction Initiative. Click here to read the first post which summarized the OSC’s three roundtables held in spring 2019, and here to read the second post which focused on the differences between principle versus rule-based regulation.

As the OSC continues to embark on its Burden Reduction Initiative, we think it is a worthwhile exercise to look back at the Commission’s 2003 burden reduction initiative. At that time, the Regulatory Burden Task Force (“2003 Task Force”) made 108 recommendations [PDF] related to issues such as commission governance, policy development, registration, compliance, and enforcement.

Despite the sixteen-year gap between these initiatives, the recommendations, focus, and follow-through from the 2003 Task Force holds important lessons for those with an interest in the current Burden Reduction Initiative.

Common themes in the 2003 and 2019 Burden Reduction Initiatives

There are several themes from the 2003 Task Force which continue to inform the discussion around the current Burden Reduction Initiative.

First, both initiatives have emphasized principle-based regulation. The 2003 Task Force recognized the complexity of the regulatory requirements faced by market participants and stated that “[i]ssuers and registrants have difficulty in understanding their obligations and often must resort to costly and time-consuming legal advice. Even experienced senior securities lawyers expressed concerns regarding the increasingly prescriptive nature of securities regulation.” The 2003 Task Force recommended that in “the formulation of new regulations and the amendment of existing regulations, the Commission should attempt to achieve an appropriate balance between complicated, detailed prescriptive rules and principle-based proscriptive rules.”

Second, the OSC continues to focus on the experience of those it interacts with. A key focus of the 2003 Task Force was to improve the experience for market participants. Many of the recommendations sought to achieve a “customer friendly” approach with more transparent communication and more timely responses. This same focus has been raised in the 2019 initiative, with a specific focus on improvements to communication between the OSC and market participants.

Third, there is continued focus on innovation. The 2003 Task Force underscored the importance of OSC staff taking innovative approaches and supporting new products and proposals to increase market efficiency. The current Burden Reduction Initiative continues to emphasise innovation and has focused on technologically improved filing and communication methods and the importance of the OSC supporting and promoting innovative approaches within industry.

The recurrence of these themes highlights that crafting regulation which balances investor protection, innovation, and the vibrancy of the capital markets is an on-going process which requires constant adaptation and fine-tuning.

Progress in achieving the 2003 Task Force recommendations

In light of the Burden Reduction Initiative’s focus on principle-based regulation, the OSC’s implementation of two of the 2003 Task Force’s recommendations are a reminder that industry has an important role to play in compliance.

Changes to Self-Regulatory Organizations

The 2003 Task Force made several recommendations to reform the Investment Dealers Association of Canada (“IDA”). These recommendations stemmed from the perception that the IDA was not responsive to retail investors and was “seen as a trade association catering more to the interests of its members than to the interests of investors”.

The 2003 Task Force suggested changes to ensure the IDA’s independence from industry by removing its trade association and lobbying functions and setting independence requirements for its leadership. The recommendations also suggested merging the IDA with the Mutual Fund Dealers Association of Canada (“MFDA”) and the Market Regulation Services Inc. (“RS”) to create a single self-regulatory organization.

These recommendations were implemented in a series of changes from 2006 to 2008. Today, the Investment Industry Regulatory Organization of Canada (“IIROC”) regulates investment dealers and debt and equity market trading activities. IIROC’s Board of Directors has an even number of independent members and industry members, in accordance with the 2003 Task Force’s recommendation. The IDA’s former trade association role was passed off to a new entity, the Investment Industry Association of Canada.

The history of these changes to the IDA highlight that a core focus of the OSC’s mandate is investor protection. If industry is seen as failing its regulatory obligations in favour of its own self-interest, the OSC has demonstrated that it will step in. This reminder is particularly pertinent given the current emphasis on principle-based regulation, which, as we discussed previously, will require industry to actively engage with compliance issues.

Whistleblower Protections

The 2003 Task Force recommended that the OSC establish an appropriate legislative framework to protect whistleblowers. Whistleblower programs have been a major initiative meant to enhance the OSC’s enforcement program.

In May 2016, the Ontario government enacted Part XXI.2 of the Ontario Securities Act, which prohibits reprisals against employees for (i) providing information about a possible contravention of Ontario securities law, by-law, or other regulatory instrument of a recognized self-regulatory organization, or (ii) being involved in an investigation or proceeding related to the information provided.

The OSC has since moved beyond simply protecting whistleblowers. In July 2016, the OSC launched its new Whistleblower policy and program [PDF] which offers whistleblowers financial rewards in an attempt to incentive individuals with information on securities-related wrongdoing to come forward. In February 2019, the OSC announced that the first three whistleblower awards were made and together totaled $7.5 million.

While applauding the enhancement of whistleblower protections, we have questioned some aspects of the OSC’s program, including the challenges it poses to internal compliance programs. Similarly, we are concerned about a lack of transparency concerning to whom, and in what matters, whistleblower bounties have been made, which distinguishes the OSC program from its American counterpart. That said, whistleblower initiatives appear to be an effective means of obtaining tips for regulators, assisting them in their investor protection efforts.

Going Forward

The similarities between the 2003 and 2019 themes demonstrate that the OSC has previously taken a balanced approach to burden reduction which attempts to ensure that regulatory changes are consistent with its mandate to protect investors and the vibrancy of the capital markets. We expect that the current Burden Reduction Initiative will be no different.

All those with an interest in the Burden Reduction Initiative should keep this history in mind and expect that going forward the OSC will continue to balance its duties. To the extent industry and market participants want to see regulatory changes made, they should be prepared to articulate how the proposed changes will continue to ensure that investors and the capital markets are protected.