As we close out 2021, we highlight some of the recent trends we
have seen in securities litigation and enforcement which we
anticipate will continue in the new year.
2021 saw an explosion of activity in the global crypto asset
market, with crypto market capitalization doubling in 20211. Accompanying
this increase in market activity has been heightened attention from
Canadian regulators. The OSC, IIROC and CSA have all indicated that
regulating crypto trading is among their priorities for the coming
Crypto asset trading platforms are now required to be registered
in Ontario. In 2021, the OSC took a firm stance on the registration
requirement and initiated enforcement actions against non-compliant
firms. The OSC also brought proceedings against four international
crypto-asset trading platforms, and settled with numerous firms,
collecting over $10 million in settlements relating to crypto
offerings or trading.
Registered platforms will need to be careful to follow evolving
rules as regulators continue to refine their stances toward crypto
trading; for example, guidance has been published about advertising
and marketing expectations for platforms. To date, registered
platforms in Ontario have been restricted as to the type of crypto
currency they can offer.
2. Going “viral”: meme stocks and short selling
Several stocks saw their prices ??substantially in 2021 due to
sudden internet popularity, leading to the moniker, “meme
stocks”. Online campaigns that spurred the rise in popularity
often highlighted short selling practices around these stocks. Some
of the companies impacted saw over 60% of their outstanding shares
Both the purchase and shorting of shares without an investment
purpose trigger regulatory scrutiny. The OSC is looking into
misleading, manipulative and self-interested statements made on
social media. The British Columbia Securities Commission has
proposed new rules related to the promotion of stocks on social
media and video platforms. The meme stock phenomenon has also had
the effect of bringing certain short selling practices—an
area of regulation where Canada lags behind the United States and
Europe—into the spotlight.
Two forms of short selling conduct that have been a concern are
“short and distort” campaigns and naked short selling.
Short and distort campaigns involve a short seller publishing false
information publicly to try and get a stock price to decrease.
Naked short selling is the practice of shorting a stock without
borrowing the underlying security. Currently, short sellers are
only required to have a reasonable expectation that they could
borrow the security3.
We expect rising focus in Canada on the regulation of short
selling to emerge as a result of these trends. This year the
Ontario Capital Markets Modernization Task Force made
recommendations aimed at curtailing short and distort campaigns and
naked short selling. The Task Force recommended creating a
prohibition on misleading or untrue statements and requiring short
sellers to confirm they can borrow the securities they are
attempting to short.
Registrants engaging in short selling activities or, in the case
of dealers, permitting their clients to sell short, should ensure
compliance with the current requirements. We expect that regulators
will increase enforcement as more attention is drawn to the issue
of suspect short selling practices.
3. Client-focused reforms
The last of the CSA’s new client-focused reforms will be
implemented at the end of 2021 after being delayed due to COVID-19.
These reforms are significant for registrants.
On June 30, 2021, changes to the conflict of interest provisions
came into effect. Now, firms and individual registrants must
address material conflicts of interest in the “best
interest” of the client and, where conflicts are material,
simply ensuring these conflicts are disclosed will no longer be
sufficient. The conflict of interest provisions are broad and seek
to capture a range of conduct. Registrants should keep abreast of
regulatory guidance on conflicts and be proactive in
On December 31, 20214, the remaining client-focused reforms will
come into effect. These reforms expand registrant obligations, with
a revised suitability threshold requiring registrants to put the
clients’ interest first while recognizing that there is not
always one best course of action. Other reforms include changes to
know-your-product and know-your-client requirements. Relationship
disclosure information may also have to be revised to reflect the
As these new standards are implemented, we expect to see
enforcement action as regulators look to define and enforce the
scope of these new rules. There is also a risk of class action
liability for registrants found in violation of these rules.
Plaintiffs may try to ground class action claims in the wake of
these heightened requirements—and as conflict of interest
claims were already emerging as the basis for novel securities
class actions, we anticipate that plaintiffs will continue to
assert them moving forward.
4. Civil cases rely heavily on regulatory obligations to assess
While individual investor loss lawsuits continue to occur with
less frequency than in the 1990s and 2000s, the few civil cases
that have been reported send important messages to registrants.
Paramount among these messages is that the ever-increasing
regulatory obligations and standards (as referenced in 3 above)
will be used by courts to impose legal duties upon dealers when
assessing liability for investment losses5. Importantly, case law
from 2021 shows an inclination of judges to balance out the heavy
onus on registrants by making clear that an advisor’s duty to
her client is not independent or separate from the actions and
decisions of the client, and that clients have important
obligations in the advisor-client relationship that must be
fulfilled if the client is to have a successful claim for
5. Financial Consumer Agency of Canada
After maximum penalties in the Financial Consumer Agency of
Canada Act were increased for violations committed by
financial institutions, the FCAC has made good on its intention to
deploy these new maximum penalties as we continue to see large
penalties imposed on financial institutions. We expect this trend
to continue and that FCAC will be actively engaged in enforcement
activities in the coming year.
Increased enforcement is always accompanied by an increased
class action risk. Since the FCAC’s Supervision Framework
requires remediation, to date, we have not seen a substantial
increase in class actions. However, financial institutions should
remain mindful of the potential for class action risk as they
develop and evolve their remediation plans.
The new financial consumer protection framework is scheduled to
come into force on June 30, 2022. This framework provides new
consumer protection rules for federally regulated financial
institutions (you can read more about the latest consumer
protection rules here). The FCAC is currently seeking feedback
on proposed guidelines for complaint-handling procedures and
appropriate products and services, and intends to seek feedback on
its proposed guidelines on whistleblowing. Financial institutions
should monitor these guidelines as they are finalized to ensure
they are compliance-ready on June 30.
Securities litigation takeaway trends for 2022:
- Evolving regulations. Regulatory changes are
on the horizon that will impact crypto trading, consumer protection
rules and client-focused obligations. These changes may affect
compliance requirements and lay the groundwork for new civil
litigation for crypto trading platforms and other market
- Increased regulatory action. We anticipate
enforcement action in new areas, as regulators focus on suspect
short selling practices and newly-implemented client-focused
regulatory reforms. We also anticipate that 2022 will bring
continued enforcement action by the FCAC, with higher
administrative monetary penalties.
- Emerging litigation risks. Increased
enforcement is routinely accompanied by increased class action
risk. Areas of potential risk include litigation liability for
registrants involving allegations of non-compliance with new
regulatory obligations, and for financial institutions in breach of
the Financial Consumer Agency of Canada Act.
1.Vingoe, Grant (OSC Chair & CEO), “Change:
Accelerated” Canadian Club Toronto (May 19, 2021).
2. United States Securities and Exchange Commission,
“Staff Report on Equity and Options Market Structure
Conditions in Early 2021” (October 14, 2021).
3. UMIR 2.2 Part 2(h).
4. CSA Notice 31-357.
5. See for example, Miller, 2021 BCSC
1811; Fattal, 2021 QCCS 1471.
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.
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