Provincial Auditor-General Bonnie Lysyk answers questions during her Annual Report news conference at the Ontario Legislature in Toronto on Dec. 7, 2020.Frank Gunn/The Canadian Press
Ontario’s securities regulator is vulnerable to political interference and has seen its independence undermined on multiple occasions by the province’s Ministry of Finance, a new report by the Auditor-General says.
The 2021 report from provincial Auditor-General Bonnie Lysyk, which was released on Wednesday, outlines several instances in which the Finance Ministry 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 states that the OSC’s decisions must be made in an “independent and impartial manner.”
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The report said that in September, 2018, just months after Doug Ford’s Progressive Conservative government came into power, the OSC and other provincial securities regulators formally proposed regulatory changes that would ban deferred sales charges (DSCs), an early withdrawal fee on mutual funds that is often hidden from consumers.
On the same day, Ontario’s then finance minister, Vic Fedeli, released a statement that took issue with the proposal. The ministry blocked the implementation of the reform.
It was only in May, 2021, that the OSC announced it would join the other provinces in banning DSCs, after getting the green light from the province to do so.
“We found that both the original intervention by the Ontario government and its later reversal illustrated the minister’s ultimate authority and power regarding rule changes, even when in direct conflict with the OSC’s judgment and related evidence on the matter,” the report stated.
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 OSC and all other applicable regulators” after years of studying the issue.
The report said current and former OSC staff who were interviewed described facing “intense” lobbying from the investment industry over the proposal. Ministry staff met with industry stakeholders – many of whom opposed ending deferred sales charges – leading up to September, 2018, when the ministry abruptly intervened in the decision, the report found.
“Political staff in the government ... involved in these activities included a past lobbyist for the investment industry,” the report said.
Lobbying by industries is “a significant contributing factor” that has slowed investment protection reforms in Ontario, the report said, including a proposed restriction on trailing commissions, a fee that mutual fund companies pay dealers for encouraging their clients to hold investments in their funds.
The auditor’s office found that the Finance Ministry tended to support industry positions, and that many stakeholders were “pleased at how watered-down” the OSC’s proposals on these fee-focused reforms were.
In another example, the auditor’s office found that the Finance Ministry under Mr. Fedeli did not follow an established consultative process that the regulator and the ministry had agreed on regarding who sits on the OSC’s board.
In April, 2019, Mr. Fedeli overruled the OSC’s chair’s recommendation to reappoint five board members for another term, instead choosing four new directors who were not proposed. Staff at the agency who were interviewed by the auditor’s office indicated the board shuffle resulted in the loss of experienced members, which “reduced the quality of policymaking and adjudication.”
The auditor’s office called on the Ministry 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 matters of investor protection. The ministry said it will consider the recommendations.
The annual audit also took aim at the agency itself, particularly on enforcement in the case of unregulated companies. It reviewed 2,029 cases where the OSC investigated, but took limited or no action, and analyzed 35 of those cases, concluding the OSC had sufficient information in 49 per cent to alert investors on its website of harmful activity, but failed to do so.
The OSC has also fallen short on investigating and taking action against “less egregious” cases of abusing capital markets, the report found, mostly because it does not have adequate legal authority to act on them.
The report said Quebec’s securities regulator can block or remove fraudulent websites marketing unregulated securities, for example, but the OSC cannot. British Columbia’s securities regulator was given the authority last March to immediately impose fines of between $100,000 and $500,000 on companies or insiders who violate the provincial Securities Act. But the OSC can only issue a warning letter.
When the OSC does impose fines – usually in more straightforward 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 collected only 28 per cent of that amount.
Ontario’s regulator also lacks the authority to use tactics such as freezing assets or restricting a person’s ability to get a driver’s licence to force payment of fines, the report said.
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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