OSC Regulatory Update: UDP Suspension Reinforces Role is Not Symbolic

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by

Asad Akhtar
in , ,

A recent Director’s decision of the OSC[1] to suspend the registration of a CEO from acting as the UDP for multiple registered firms should serve as a reminder that CSA staff do not consider this role to be merely symbolic.

While the designation of the UDP is generally limited to the registered firm’s CEO (or an individual acting in a similar capacity), a UDP has defined responsibilities and obligations under Canadian securities legislation.[2] These responsibilities include overall supervision of the firm’s compliance with securities legislation and promoting a culture of compliance from the top.

Furthermore, this decision reinforces that integrity concerns with a registered individual will not be viewed in isolation and may have implications on that individual’s fitness for registration with another registered firm. 

A closer look at the decision and other key take aways below.

Background on the Decision

Firm 1 is registered as an investment dealer and is a CIRO dealer member. The CEO of Firm 1 (“C”) also serves as its Ultimate Designated Person (“UDP”), director, controlling shareholder, and acting Chief Compliance Officer (“CCO”). Firm 2 is registered as an exempt market dealer and mutual fund dealer, where   C is also the CEO, UDP and CCO.

Over the past decade, Firm 1 has been subject to multiple regulatory actions by OSC and IIROC (now CIRO) staff, including having terms and conditions placed on its registration and being sanctioned with monetary penalties.    

In 2021, over concerns identified by IIROC staff (now CIRO), OSC staff imposed new terms and conditions on Firm 1’s registration.  These additional terms and conditions required Firm 1, including C, to sign and submit monthly attestations to the OSC and CIRO certifying that Firm 1 was in full compliance with Canadian securities legislation.

In May 2024, CIRO staff conducted an examination that identified several significant deficiencies– including across the key areas that were to be covered by the monthly attestations. Following this, OSC staff identified inconsistencies between the submitted attestations and CIRO’s examination. 

Failure to Set “Tone at Top”

OSC staff alleged that C failed to effectively supervise and establish the proper tone of compliance at the top. This included the following actions:

  • Avoiding Paper Trails: Instructing employees to not commit to a “paper trail that can be viewed [sic] later and can have consequences or other obligations”. The Director agreed with OSC staff that this act alone is sufficient to disqualify C from acting in a registered compliance role under Canadian securities legislation.
  • Rewarding Misconduct and Penalizing Compliance Staff: C failed to respond to compliance and misconduct concerns identified by compliance staff. Rather, C protected and rewarded this behaviour while allowing compliance staff to be “hectored and abused”.
  • Failure to Report Regulatory Sanctions: As required under Canadian securities legislation, C failed to report that Firm 1 was fined by FINTRAC for failing to develop and apply appropriate AML policies and procedures.

Integrity Is Broader than Dishonesty and Not Viewed in Isolation

OSC staff argued that C’s approach towards compliance at Firm 1 demonstrated compromised integrity which supported his registration being suspended.   

Reckless or Lackadaisical Conduct Raises Integrity Concerns

The term integrity is not defined under the Securities Act (Ontario), but various OSC panels have held that integrity requirement as a matter of “honesty and character”. In Sterling Grace, it was established that the concept of integrity under the registration regime is broader than dishonesty because a registrant who is not otherwise dishonest may in fact “be reckless or lackadaisical over whether they comply with applicable regulatory rules or requirements”.

As a result of C repeatedly failing to promote and prioritize compliance, he demonstrated a sustained disregard for regulatory responsibilities. The Director held this conduct went beyond an isolated error of judgement and reflected a reckless disregard approach to compliance that is not consistent with the integrity required of a registrant. 

Integrity is not Viewed in Isolation

In consideration of prior director decisions, the Director reasoned that a registrant cannot lack integrity in one area of securities industry and possess the requisite integrity in another. Integrity is a fundamental suitability requirement associated with the person, regardless of their category of registration. Concurring with OSC staff, the Director suspended C’s registration with Firm 2.

Directing Mind not Necessarily Fatal for a Registered Firm

While OSC staff were also seeking that the registration of Firm 1 be suspended, the Director found that the conduct and suitability of Firm 1’s registration can be separated from the actions of C.  This is despite C being the directing mind of Firm 1 and his family continuing to hold all of its shares.

The Director distinguished the current facts from Sterling Grace[3] where the Commission held the actions of an individual acting as UDP, CCO, dealing representative, sole shareholder and directing mind were indistinguishable from the registered firm. Here, the Director accepted that Firm 1 had several other employees (e.g., eight registered representatives and seven non-registered individuals), including other registered individuals, and that it is a well-capitalized investment dealer (in contrast to the other issues identified in Sterling Grace).

The Director held that while Firm 1’s compliance record identified serious concerns, the evidence did not establish a firm-wide lack of honesty, competence or compliance capability. Rather, Firm 1’s compliance staff have demonstrated the ability to identify, document, and escalate significant issues.

Additional terms and conditions were placed on Firm 1’s registration which required insulating C from Firm 1’s ongoing compliance function, appointing an independent UDP and CCO, and maintaining a minimum number of independent directors.

Admissibility of Hearsay at an OTBH

Some of the materials obtained by OSC staff included the transcript of an interview of an anonymous whistleblower who was a former employee at Firm 1. This individual did not attend the hearing, despite the record indicating he was available, and OSC staff did not provide an explanation for his failure to appear for cross-examination.

In considering whether to admit this interview, the Director applied the framework established by the Capital Markets Tribunal (“Tribunal”) in Cormark.[4] In Cormark, the Tribunal found that procedural fairness required witness’ evidence to be tested on cross-examination–particularly where the evidence was expected to be controverted by the evidence of other witnesses.

The Director was not bound to follow Cormark and the procedures that govern an OTBH do not prohibit the admission of hearsay evidence.[5] However, the Director considered the fairness concerns from admitting the interview transcript to be compelling, particularly given the potentially significant impact of the regulatory action sought by OSC staff. Ultimately, she ruled that no weight would be given to this evidence. 

Key Take-Aways:

  • UDP Role Is Not Symbolic and Carries Regulatory Risk: A UDP has defined responsibilities and obligations under Canadian securities legislation which includes effectively supervising the activities of a firm that are directed towards compliance, and promoting a culture of compliance from a “top-down approach”.
  • Integrity Is Broader than Dishonesty and Will Not Be Viewed in Isolation: Integrity is a fundamental criterion used by CSA staff to assess whether an individual is, or remains, fit for registration.  A registrant cannot lack integrity with one registered firm and possess the requisite integrity with another. 
  • Misconduct By a Directing Mind Is Not Necessarily Fatal: Concerns identified with a directing mind of a firm (e.g., a single individual acting as the CEO, UDP, CCO, director and controlling shareholder) may not necessarily be fatal to a registration firm if the compliance, governance and risk management functions can be isolated from this directing mind.    

[1] This is a decision, dated September 8 2026, arising from an opportunity to be heard (“OTBH”) by the director of the OSC Registrant, Inspections and Examinations Division Branch.

[2] Please refer to subsection 5.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.

[3] Please refer to Sterling Grace & Co. Ltd. et al. (Re), 2014 ONSEC 24 (“Sterling Grace”).

[4] Please refer to Cormark Securities Inc (Re), 2024 ONCMT 26 (“Cormark”).

[5] Please refer to subsection 8(b) of Ontario Securities Commission Policy 19-501 Procedures for Opportunities to be Heard Before Director’s Decisions on Registration Matters.