On December 10, 2024, the Ontario Securities Commission
(“OSC“) released 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“) summarizing the findings
of their compliance review of six registered crypto asset trading
platforms (“CTPs“) related to: (i)
account appropriateness assessments; (ii) investment limits; and
(iii) client limits. The Staff Notice sets out the findings of
their compliance sweep and also sets out OSC Staff’s views on
“suggested practices” for CTPs, with the aim that CTPs
use the Staff Notice as a self-assessment tool to assist in
strengthening their compliance with Ontario securities laws. The
Staff Notice also sets out OSC Staff’s expectation that CTPs
comply with the “letter and spirit” of the requirements
applicable to their platforms.
A Brief Background on CTPs
Canadian securities regulators have taken the position that
Canadian securities laws apply to CTPs that facilitate or propose
to facilitate the trading of instruments or contracts involving
“crypto assets” (a general term commonly used by the
securities regulators to capture a wide range of digital assets,
such as Bitcoin and Ethereum). This is because the customer’s
contractual right to the crypto asset may constitute a security
and/or a derivative (referred to as a “crypto contract”
by the securities regulators) under Canadian securities laws.
Certain CTPs operating in Canada have been registered as a
restricted dealer and granted exemptive relief from certain
securities law requirements. As a condition of the exemptive
relief, among other requirements, CTPs are required to conduct
certain client assessments and apply investment and client limits.
For more general background information on the regulation of CTPs,
please see our bulletin here.
Findings Related to Account Appropriateness
Assessments
Section 13.3 of National Instrument 31-103 –
Registration Requirements, Exemptions and Ongoing Registrant
Obligation (“NI 31-103“)
requires registrants, including registered CTPs, to conduct
trade-by-trade suitability determinations for clients. CTPs either
conduct such suitability determinations or have obtained exemptive
relief from this requirement and instead perform account
appropriateness assessments. Of the six registered CTPs reviewed:
(i) four have obtained such exemptive relief and conduct account
appropriateness assessments (“account appropriateness
model“); and (ii) two conduct trade-by-trade
suitability determinations for clients, including the enhanced
suitability requirements as a result of the client-focused reforms
(the “suitability model“).
The Staff Notice sets out the OSC’s findings with respect to
the account appropriateness assessments conducted by the CTPs
subject to the review but does not set out any findings with
respect to the suitability assessments conducted by the CTPs
subject to the review.
CTPs that operate pursuant to the appropriateness model are
required to assess whether entering into crypto contracts with the
CTP is appropriate for a prospective client. The account
appropriateness assessment is required to take into account each of
the following factors (the “account appropriateness
factors“):
- 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 approved to be made available to a client on
the platform.
With respect to the conclusions of the OSC’s review, the OSC
recommended that CTPs implement the following practices:
- The development and design of onboarding questions that
meaningfully capture the account appropriateness factors and for
CTPs to follow up with clients where there are any
inconsistencies. - Updating account appropriate assessments at least annually or
more frequently if there is a significant change in a client’s
circumstances or market conditions. Assessments must also be
performed at account opening. - Maintaining books and records of any changes in a client’s
information (including confirmations that there are no
changes). - Establishing policies and procedures for collecting,
documenting, and reviewing information required to conduct
meaningful account appropriateness assessments. - Establishing policies and procedures for handling situations
where the CTP has determined that it is not appropriate for a
prospective client to open an account. These procedures should also
aim to prevent clients from “gaming” the onboarding
process.
Findings Related to Investment Limits
Except for clients resident in Alberta, British Columbia,
Manitoba, and Québec, and “permitted clients” (as
such term is defined under applicable securities legislation), CTPs
must limit a client’s purchases of crypto assets to a certain
maximum amount on the CTP’s platform (referred to as the
“investment limit“). The investment
limit varies depending on if the CTP is operating under the account
appropriateness model or the suitability model, and excludes
purchases and sales of “specified crypto assets” (as at
the date hereof, this consists of Bitcoin, Ethereum, Bitcoin Cash,
Litecoin, and USDC).
For CTPs operating under the account appropriateness model, the
investment limit for each client is a net acquisition limit of
$30,000 during a rolling 12-month period.
For CTPs operating under the suitability model, the investment
limit during a rolling 12-month period is:
- $30,000 for a client that does not meet the definition of an
“eligible crypto investor”; - $100,000 for a client that meets the definition of an
“eligible crypto investor”; and - No limit for a client that meets the definition of an
“accredited crypto investor”1.
During their review, OSC Staff did not identify any instances
where CTPs failed to discharge their obligations with respect to
the applicable investment limits.
Findings Related to Client Limits
In addition to investment limits, CTPs operating under the
account appropriateness model are required to impose client limits
(sometimes referred to as “loss limits”). The Staff
Notice clarifies the OSC’s view that the client limits are
meant to: (i) be an appropriate and tailored limit on the losses
that a client can incur; (ii) help clients understand the losses
they have incurred to date on their investments in crypto
contracts; (iii) initiate meaningful action to help limit further
losses the client can incur; and (iv) help deter
“gambling-like” or excessively risky actions taken by
clients when losses are experienced.
In their review, the OSC found that some CTPs only considered
one or a few of the account appropriateness factors to set the
client limit while others used factors viewed by the OSC as
arbitrary and unrelated to the specific client. In the view of the
OSC, these methods of setting client limits were not sufficient and
to comply with the conditions of the exemptive relief, CTPs should
be using all the account appropriateness factors in assigning
client limits that are tailored to each client.
Furthermore, the OSC found that some CTPs did not effectively
monitor client limits or perform any meaningful actions once the
client limit was met or exceeded. Clients continued to incur
further losses without any meaningful action on the part of the
CTPs. The OSC expects that as a client approaches, reaches, and
exceeds their limit, they should be notified by the CTP and such
notification should include tools to mitigate further losses, and
should not include messaging that could be construed as a
recommendation or advice. Additionally, OSC Staff provided that
notifications should be intermittently sent to the client but not
so frequently (e.g., daily) as to be easily disregarded by the
client. CTPs should also reassess the account to determine whether
it is still appropriate for the client.
In summary, the OSC suggested that CTPs implement the following
practices:
- Develop an onboarding process that will collect sufficient
information to allow the CTP to create an appropriate client limit
for each client. - Consider all the account appropriateness factors to understand
the client’s individual situation and establish an appropriate
client limit during the onboarding process to be assessed on an
ongoing basis. - Establish a client limit that considers the individual’s
situation and is based on a dollar value that can be used in
monitoring to the client’s trading activity. - Make sure the language in the client limit notifications makes
them aware that they are approaching their client limit and directs
them to educational materials on the risks of excessive trading,
while refraining from language that could be construed as a
recommendation or advice. - Monitor the client limit and trading activity of the client.
Take appropriate action when the client limit is being approached,
met, or exceeded, including issuing timely and meaningful
notifications and taking other actions proportional to the risk to
the client. - Ensure adequate procedures are in place to evaluate, monitor,
and apply the client limit to individual clients.
CTPs operating in Canada do so pursuant to a relatively novel
regulatory framework. The Staff Notice is welcomed guidance from
OSC Staff as it clarifies their expectations with respect to
several principal regulatory obligations imposed by the standard
conditions of exemptive relief and the form of Pre-Registration
Activities Undertaking.
About McMillan Crypto
McMillan has a comprehensive understanding of blockchain,
cryptocurrency, digital assets and other decentralized
technologies. We use an integrative, pragmatic, and proactive
approach when providing counsel in connection with an ever-changing
regulatory landscape. Our cross-disciplinary team brings together
specialists across many fields, including litigation, securities
regulation, capital markets, investment funds and asset management,
mergers and acquisitions, derivatives, technology, privacy and
cybersecurity, intellectual property, consumer protection,
anti-money laundering, financial services, tax, and bankruptcy and
insolvency.
Footnote
1 The terms “eligible crypto investor” and
“accredited crypto investor” refer to investors who meet
the definition of an “eligible investor” and
“accredited investor”, respectively, when including their
crypto assets in the calculation of the net financial assets under
the applicable securities legislation. See here for more
information.
The foregoing provides only an overview and does not
constitute legal advice. Readers are cautioned against making any
decisions based on this material alone. Rather, specific legal
advice should be obtained.
© McMillan LLP 2024
