OSC aces audit follow-up, government needs work

The Ontario Securities Commission (OSC) and the provincial government have taken action on most of the recommendations from a recent audit of the regulator, according to a follow-up report from the Office of the Auditor General of Ontario (OAG) — but key items, such as a decision on fully banning trailers or adopting best-interest standards, remain outstanding.

The report, released Wednesday alongside the OAG’s annual report, finds that as of Nov. 14, the OSC and the provincial Ministry of Finance have fully implemented 44% of actions it recommended in its 2021 value-for-money audit, and made some progress on another third (35%).

In total, the OAG audit recommended 57 specific actions (within 26 formal recommendations) to both the OSC and government.

The follow-up found that “the OSC had updated its compliance-review programs to test registrants’ compliance with the revised requirements such as conflicts of interest, referral arrangements, relationship disclosure information and misleading communications under the client-focused reforms (CFRs).”

Additionally, the OSC — along with the rest of the Canadian Securities Administrators (CSA) — have finalized total-cost reporting requirements, which won’t be fully implemented until January 2026 as regulators have decided to give the industry an extended transition period to implement the requirements.

However, of the 26 overarching recommendations in the audit, five of them (representing 10 specific actions) haven’t seen any progress, according to the OAG.

Four of the five recommendations that have seen no action were among the nine recommendations specifically made to the Ministry. The fifth was among the 17 recommendations specifically made to the OSC itself.

The follow-up report that the government has made little progress on recommendations

• to curb political meddling in regulatory policymaking;
• to give the OSC the power to issue “speeding tickets” for lesser instances of misconduct, and greater authority to collect enforcement sanctions (such as restricting access to drivers’ licenses for people with unpaid regulatory fines); and
• to facilitate information sharing between the OSC and the Canadian Public Accountability Board (CPAB) with potential legislative changes.

On a recommendation to address the threat of political interference that could undermine the OSC’s operational independence and impartiality, the follow-up report found “the Ministry has made little progress on this recommendation.”

And in the wake of reforms to the OSC’s structure, “the Ministry has not yet made public how its involvement in the new decision-making process would be transparent and free of perceptions of overt political interference,” it said.

The report also highlighted two actions within the recommendations that haven’t seen much progress. One was a recommendation that it consider further action to protect investors if it finds that the client-focused reforms are not doing the trick — such as a complete ban on trailing commissions, or introducing an overarching best-interest standard on advisors.

“In our follow-up, we found that the OSC is awaiting the results from the client-focused reforms,” it said.

If those results indicate that the reforms aren’t working as intended, the OSC “will consider further policy options to protect investors, such as the complete elimination of trailing commissions and the introduction of an overarching best-interest standard,” the report said, adding that the OSC plans to make a decision on that by December 2025.

The report also noted little progress on a recommendation that the OSC evaluate the efficacy of its efforts to disrupt misconduct that doesn’t rise to the level of prompting full-scale enforcement actions.

However, it said that the regulator has indicated that it has a process for following up on its disruption actions in certain circumstances — such as misconduct that originates in Ontario and impacts many investors, where there’s evidence of ongoing misconduct, and other cases that meet certain criteria.