On December 10, 2024, the Ontario Securities Commission (the
OSC) issued Staff Notice 33-757 – Review of
Restricted Dealer Crypto Asset Trading Platforms’ Compliance
with the Account Appropriateness, Investment Limits and Client
Limits Requirements (the Staff Notice). The Staff Notice was
issued after carrying out a focused compliance review (a Sweep) of
the know-your-client (KYC), account appropriateness assessment and
Client Limit (defined below) practices of six crypto asset trading
platforms (CTPs) registered as restricted dealers in Ontario. The
Staff Notice outlines the results of the Sweep and offers guidance
to help CTPs meet their regulatory obligations.
The Sweep underscores the ongoing efforts of the Canadian
Securities Administrators (the CSA), a conglomerate of provincial
securities regulators, to enhance the regulatory framework for CTPs
through discretionary securities law compliance reviews of
registered and unregistered platforms. CTPs are encouraged to
familiarize themselves with the recommendations and potential
pitfalls highlighted in the Staff Notice to ensure they meet
regulatory expectations.
Key Takeaways
Sweep Findings
The findings revealed that CTPs often used an ineffective
approach in gathering client information that did not address
inconsistencies within the client’s account settings.
Information on the following “Account Appropriateness
Factors” should be adequately collected for CTPs to
remain compliant:
- the client’s experience and knowledge in investing in
crypto assets; - the client’s financial circumstances;
- the client’s risk tolerance; and
- the crypto assets.
It was also found that some CTPs failed to update client
information regularly, which led to inappropriate account openings
and maintenance.
The OSC found no instances of non-compliance with
“Investment Limits,” the maximum amount
of crypto assets (other than Specified Crypto Assets)1
that a client (except clients that are residents of Alberta,
British Columbia, Manitoba and Quebec, that are permitted clients
or registered CTPs) may buy and/or sell on the platform in the
preceding 12 months does not exceed a specified net acquisition
cost.2 This indicates that CTPs adhered to the
prescribed maximum amounts for crypto asset purchases on their
platforms.
However, the OSC identified issues with CTPs’
“Client Limits” (the appropriate limit
on the losses that a client can incur based on the Account
Appropriateness Factors) and noted that certain CTPs assigned
limits based solely on risk tolerance or arbitrary factors, which
did not adequately consider clients’ ability to tolerate
losses. Further, certain CTPs did not effectively monitor or act
upon Client Limits and allowed clients to exceed their limits
without intervention.
Guidance Provided by the OSC
To address the findings, the OSC’s Staff Notice recommends
several practices for account appropriateness assessments. These
include, but are not limited to, the following:
- Onboarding questions should capture all relevant factors (e.g.,
questions related to the Account Appropriateness Factors), and
follow-ups should address any inconsistencies. - Assessments of the platform should be comprehensive and updated
at least annually, or more frequently if significant changes
occur. - Policies and procedures should be established for collecting,
documenting, and reviewing client information, and measures should
be in place to prevent clients from gaming the onboarding
process.
For Client Limits, the Staff Notice advises developing an
onboarding process that collects sufficient information to set
appropriate limits based on all Account Appropriateness Factors.
Limits should reflect clients’ circumstances and be monitored
continuously. Clients should receive notifications when nearing
their limits and educational materials on the risks of excessive
trading. Adequate policies and procedures must be in place to
evaluate, monitor, and apply the Client Limit system
effectively.
The Sweep – Findings and Guidance Assessment
The Sweep was conducted for six registered CTPs whose principal
regulator is the OSC, to assess their compliance with the terms and
conditions of their respective exemptive relief decisions,
particularly as it relates to (1) account appropriateness
assessments, (2) Investment Limits, and (3) Client Limits. The
findings and corresponding recommendations of the OSC are outlined
below:
Account Appropriateness Assessments
During the Sweep, the OSC identified the use of a
“mechanical ‘tick box’ approach” by CTPs to
gather the Account Appropriateness Factors. Where inconsistencies
resulted, CTPs would not follow up with the client to address them.
Additionally, the OSC observed that certain CTPs failed to update
client Account Appropriateness Factors on an ongoing basis, which
resulted in subsequent assessments based on outdated information.
The OSC also noted that “[these] failures sometimes resulted
in accounts being opened or maintained for clients where the
account was not appropriate for the client.”
Given these findings, the Staff Notice recommends several
practices for conducting an account appropriateness assessment.
First, onboarding questions should be designed to capture the
Account Appropriateness Factors for each prospective client, and
follow-ups should be undertaken to address any inconsistencies in
the information collected. The assessment should be meaningful and
comprehensive, and it should consider Account Appropriateness
Factors at both the onboarding stage and on a continuing basis. The
Staff Notice further notes the importance of updating the account
appropriateness assessment for each client at least annually, or
more frequently if there are significant changes in the
client’s circumstances or market conditions. In the OSC’s
view, maintaining books and records that document any changes in a
client’s information is essential. Policies and procedures
should be established for collecting, documenting, and reviewing
the information required to conduct a proper assessment. Finally,
there should be policies and procedures in place for handling
situations where it is determined that it is not appropriate for a
prospective client to open an account, including measures to
prevent clients from “gaming the onboarding process.”
Investment Limits
During the Sweep, the OSC found no instances where CTPs failed
to comply with their obligation to limit clients’ purchases of
crypto assets to the prescribed maximum amounts on their platforms.
As such, no guidance on Investment Limits was provided in the Staff
Notice.
Client Limits
During the Sweep, the OSC identified several instances where
CTPs assigned Client Limits that were not adequately tailored to
individual client circumstances. For example, some firms relied
solely on risk tolerance as the Account Appropriateness Factor,
which would not provide a comprehensive view of the client’s
situation. Additionally, some Client Limits were based on
“arbitrary factors and dynamic factors” such as changes
in the trading price of crypto assets, fluctuations in the market
value of a client’s portfolio, or shifts in the market value
relative to the adjusted book value of their holdings. The OSC
concluded that these methods do not adequately consider the
client’s ability to tolerate losses and are not appropriately
customized to each client’s unique circumstances. Furthermore,
the OSC found that some CTPs did not effectively monitor Client
Limits or take meaningful action when these limits were met or
exceeded, which allowed clients to continue transactions without
intervention to prevent further losses.
Considering the above, the Staff Notice recommends developing an
onboarding process that collects sufficient information to set an
appropriate Client Limit for each client, which should consider all
Account Appropriateness Factors. The Client Limit should reflect
the client’s circumstances and be based on a dollar value to
monitor ongoing trading activity. Additionally, clients should
receive notifications when their trading activity nears the Client
Limit, and they should receive educational materials on the risks
of excessive trading. Finally, the OSC notes that adequate policies
and procedures must be in place to evaluate, monitor, and apply the
Client Limit system effectively.
Looking Ahead
The OSC’s continued focus on compliance and regulatory
oversight of crypto asset trading will be crucial in shaping the
future of CTPs in Ontario. As the regulatory landscape evolves,
CTPs should remain vigilant and proactive in adhering to the
guidelines and recommendations set forth in the Staff Notice and
other similar guidance. By doing so, they can ensure compliance and
contribute to a more secure and transparent market environment.
Footnotes
1. “Specified Crypto Assets” include, as of the
date of this Comment, Bitcoin, Ether, Bitcoin Cash, Litecoin, and
Value-Referenced Crypto Assets that comply with the conditions as
set out in the CTP’s exemptive relief decision.
2. This represents the Investment Limit under the account
appropriateness model, where the CTP does not plan to provide
trade-by-trade suitability determinations. For CTPs under the
suitability model, the limits are C$30,000 for non-eligible crypto
investors, C$100,000 for eligible crypto investors, and no limit
for accredited crypto investors.
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