When the Ontario Securities Commission (OSC) conducts a compliance review, registrants must demonstrate adherence to Ontario securities law and maintenance of effective internal controls. At the conclusion of the review, the OSC will issue a compliance report, outlining any deficiencies and identifying areas requiring corrective action.
Understanding the OSC Compliance Report and Its Implications
An OSC compliance report serves as the regulator's formal assessment of whether a firm is meeting its obligations under National Instrument 31-103 – Registration Requirements, Exemptions, and Ongoing Registrant Obligations. These reports typically identify one or more of the following:
- Minor Deficiencies – Issues that require corrective action but do not raise immediate regulatory concerns.
- Significant Deficiencies – Compliance failures that may impact investor protection, market integrity, or financial solvency.
- Repeat Deficiencies – Prior issues that were not adequately addressed, signaling a pattern of non-compliance.
In cases where significant deficiencies are found, registrants are generally expected to submit a written response outlining remedial measures within approximately 30 days, although timelines can vary depending on the circumstances. In some situations, particularly where the deficiencies are severe or raise immediate regulatory concerns, registrants may not be given the opportunity to remediate, and the matter may instead be referred directly to the Registrant Conduct Team to consider the imposition of terms and conditions, suspension, or revocation of registration.
How to Respond to an OSC Compliance Report Effectively
1. Conduct a Detailed Internal Review
Before drafting a response, firms must conduct an internal assessment of the identified deficiencies. This involves:
- Reviewing OSC findings to determine the root cause of each issue.
- Assessing whether deficiencies result from gaps in policies, lack of training, or weaknesses in supervision.
- Gathering documentation to support corrective actions and demonstrate compliance.
An objective and thorough review allows firms to craft a response that directly addresses the OSC's concerns while reinforcing a commitment to regulatory compliance.
2. Draft a Structured and Strategic Response
When responding to significant deficiencies in an OSC compliance report, firms are typically required to submit a written plan using a structured format, often provided by OSC Staff, outlining the corrective actions taken or planned for each deficiency. For example, registrants may be asked to respond using a standardized template that includes:
- A description of actions taken or to be taken for each significant deficiency.
- The expected date of completion for each remedial step.
- Supporting documentation, such as updated policies, training logs, internal audit reports, or evidence of enhanced supervision or controls.
A persuasive response should not only meet the OSC's requirements but demonstrate the firm's commitment to meaningful and lasting compliance improvements. It should also reflect the following qualities:
- Clear and Professional – Responses should be well-organized and follow the OSC's requested format closely, typically addressing each deficiency in turn.
- Evidence-Based – Attachments demonstrating actual implementation (not just plans) bolster credibility. This could include revised procedures, compliance checklists, or training session materials.
- Demonstrably Proactive – Where possible, firms should highlight steps already completed, not just those planned, and frame the response as part of a broader effort to enhance the compliance program.
For example, if the OSC identifies deficiencies in Know Your Client (KYC) practices, an effective response might include:
- A revised KYC and suitability review process aligned with the firm's business model.
- Firm-wide training materials reinforcing updated regulatory expectations.
- Documentation for enhanced monitoring or testing.
By taking ownership of deficiencies and delivering a comprehensive and well-supported response, firms demonstrate regulatory maturity and reduce the likelihood of escalation.
3. Address Repeat Deficiencies
If a compliance report identifies repeat deficiencies, the OSC will expect a stronger response than in prior reviews. Registrants should:
- Explain why previous corrective measures were ineffective and outline enhanced solutions.
- Provide data-driven evidence of improved compliance practices.
- Engage a third-party compliance consultant, if necessary, to validate reforms.
Ignoring or downplaying repeat deficiencies significantly increases the risk of escalation to Registrant Conduct, which may result in registration restrictions or enforcement actions.
4. Maintain Open Communication with the OSC
Transparency and proactive engagement with the OSC can help mitigate risks. If a registrant requires additional time to implement corrective measures, it is advisable to communicate this before any deadline. Seeking clarification on compliance expectations can also demonstrate good faith efforts to comply with securities law.
If a registrant believes the OSC's findings are incorrect or disproportionate, they should clearly articulate their position in the response, supported by regulatory analysis and factual evidence. Legal counsel can assist in preparing a strategic rebuttal, ensuring that registrants are not unfairly penalized.
Avoiding Escalation to Registrant Conduct and Enforcement
The Registrant Conduct Team handles cases where a registrant's compliance issues warrant further regulatory scrutiny. Matters that escalate to Registrant Conduct may result in:
- The imposition of terms and conditions, such as enhanced supervision, external compliance monitoring, or capital requirements.
- Suspension or revocation of registration, preventing the firm or individual from continuing operations.
- Referral to OSC Enforcement, leading to potential monetary penalties or market bans.
To prevent escalation, firms must demonstrate immediate and effective remediation efforts. If necessary, negotiating proactive solutions with OSC Staff can sometimes lead to a more favorable outcome.
The High Stakes of Non-Compliance
Failure to properly respond to an OSC compliance report can have serious business and reputational consequences. Regulatory sanctions can:
- Restrict a firm's ability to conduct business.
- Trigger investor confidence concerns and client loss.
- Result in regulatory disclosure obligations in other jurisdictions.
However, with a strong compliance response, firms can mitigate risks, maintain good regulatory standing, and demonstrate a commitment to best practices in securities compliance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
