Artificial Intelligence Activity On The Enforcement Front – Technology – Canada – Mondaq News Alerts

Artificial Intelligence ("AI") is clearly on thehorizon of the regulatory landscape. Alongside the use oftechnology to assist with navigating the regulatory process,regulators are now digitizing their enforcement efforts. TheCanadian Securities Administrators ("CSA")1have approached this challenge head-on.

In 2018, the CSA put the capital markets on notice that theywere strengthening their technological capabilities to assist infighting securities misconduct.2 The CSA confirmed theywould rely on AI technology to analyze large data sets, allowingthem to detect misconduct faster and earlier, through the MarketAnalysis Platform ("MAP"), an automated centralizedsolution that the CSA believed could handle the size of the currentmarket practices.

The CSA's 2019 Enforcement Report, released in June 2020,confirmed that it was preparing to launch the MAP in the nearfuture.3 It has been two years since the CSA selectedKx, a division of First Derivatives plc, to build and manage theMAP platform. The Kx platform provides some insight into theCSA's potential uses for the MAP. Kx allows for customreal-time and historical data analysis that features redundancy,alerting, and reporting for stock market analysis and algorithmictrading.4

The role of big data and the ability to process massive datasetswill allow CSA Members to focus limited staff resources onreviewing possible violative conduct in the market. The CSA haveconfirmed that alongside emerging technology, CSA Members willdeploy dedicated teams with established new roles, including datascientists, analysts, and blockchain specialists.5

The allocation of these dedicated teams indicate that CSAMembers are planning on relying more heavily on AI in enforcingregulatory compliance. Although the power of AI is obvious, itseffective use requires experienced staff to examine and evaluatethe output of the advanced analytics.

In November 2018, the Ontario Securities Commission("OSC"), a CSA Member, formed the Burden Reduction TaskForce ("Task Force"). The Task Force focused onimplementing initiatives to keep Ontario's capital marketscompetitive, but also took note of the importance of collectinggood data over more data. In November 2019, the OSC released theTask Force's report.6

Among other things, the Task Force's report considered thepotential use of Regulatory Technology ("RegTech") in theOSC's regulation of Ontario's capital markets. RegTech isthe use of machine-learning software or other technology in themanagement of regulatory processes. It has been seen as a disruptorto the current regulatory landscape and an influencer in themodernization of securities regulation. Ultimately, the TaskForce's report did not recommend incorporating RegTech basedsolutions into the OSC's regulatory enforcement processes.

Where regulatory processes were considered burdensome, the OSCopted to consider technology-based solutions to simplify theregulatory requirements. For example, the OSC was willing toconsider technological alternatives to the delivery of noticesunder sections 11.9 and 11.10 of NI 31-1037 where itcould reduce the burden without compromising the underlyingobjective of that national instrument.8

The Task Force also discussed the expansion of FinTech firms andthe concerns raised with their novel business models. The TaskForce reinforced the use of initiatives such as the OSC Launchpad(discussed below) to assist in navigating compliance with terms andconditions imposed with registration.

In Canada, regulators have created a number of initiativesincluding the OSC Launchpad and the CSA Regulatory Sandbox,allowing registrants to operate innovative business models thatdon't fit the traditional mould.

The two initiatives are distinct. The OSC Launchpad is an arm ofthe OSC; the CSA Regulatory Sandbox is a pilot environment wherefirms can operate in a limited commercial setting - often on atime-limited basis. Some recent firms to use the OSC Launchpad andthe CSA Regulatory Sandbox are TokenGX Inc. ("TokenGX")and Wealthsimple Digital Assets Inc.("Wealthsimple").

In late 2019, TokenGX was granted time-limited exemptive relieffrom the OSC to pilot test a secondary trading marketplace forcrypto-assets (tokens). The trading marketplace is powered byblockchain technology and allows investors to buy and sell privatemarket securities between themselves.9 The OSCrestricted the annual investment limit ($10,000 to $30,000) and hassignificant oversight of the firm while the pilot test isongoing.

Wealthsimple obtained OSC registration in August 2020 (subjectto numerous conditions) to operate a platform where clients couldbuy, hold, and sell crypto-assets. Wealthsimple filed anapplication for time-limited relief from certain registrantobligations, including prospectus and trade reportingrequirements.10 Similar to TokenGX, the OSC has cappedthe amount investors can fund at $30,000.00 per annum.

The approvals of TokenGX and Wealthsimple signal the beginningof a new framework whereby Canadian regulators are able tosimultaneously promote innovation and market confidence whilekeeping Canada competitive in global financial markets.

Footnotes

1 The members are the securities regulatoryauthorities in Alberta, British Columbia, Manitoba, New Brunswick,Nova Scotia, Ontario, Qubec, and Saskatchewan ("CSAMembers").2 CSA, "Canadian SecuritiesRegulators Announce Agreement with Kx to Deliver AdvancedPost-Trade Analysis", September 13, 2018, online: (https://www.securities-administrators.ca/aboutcsa.aspx?id=1735).3 Collaborating to Protect Investorsand Enforce Securities Law, FY2019/2020, at p. 5, online: (http://www.csasanctions.ca/assets/pdf/CSA-Enforcement-Report-English.pdf).4 Kx Platform, online: (https://code.kx.com/platform/).5 Evolving Securities Enforcement fora Digital World, CSA, FY2018/2019, at p. 11, online: (https://www.securities-administrators.ca/uploadedFiles/General/pdfs/CSA-Enforcement-Report_FINAL201819.pdf).6 Reducing Regulatory Burden inOntario's Capital Markets, OSC, 2019, online: (https://www.osc.gov.on.ca/documents/en/20191119_reducing-regulatory-burden-in-ontario-capital-markets.pdf)[Reducing Regulatory Burden].7 NI 31-103, Registration Requirements,Exemptions and Ongoing Registrant Obligations, ss.11.9-11.10.8 Reducing Regulatory Burden atp. 68.9 TokenGX Inc., Re, 41 OSCB8511, online: (https://www.osc.gov.on.ca/documents/en/ord_20191023_tokengx.pdf).10 Wealthsimple Digital Assets Inc.,Re, 43 OSCB 6548, online: (https://www.osc.gov.on.ca/documents/en/ord_20200807_wealthsimple-digital-assets.pdf).

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Artificial Intelligence Activity On The Enforcement Front - Technology - Canada - Mondaq News Alerts