Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
In a care[...]
Sep 23, 2021: CSA and IIROC Issue Joint Guidance (Staff Notice 21-330) for Crypto-Trading Platforms Related to Advertising and Social Media
CSA and IIROC | Staff | Sep 23, 2021
Staff notice 21-330 issued today - Select summary below:
Summary of securities legislation and IIROC Rules in relation to false or misleading advertising
A number of provisions in securities legislation and IIROC rules apply to prohibit false or misleading statements in advertising or marketing materials. These prohibitions can apply to the making of statements
- that suggest that a CTP [Crypto Trading Platform] is registered under securities legislation where this is not the case
- that suggest that a securities regulatory authority or regulator has approved or endorsed the CTP, any products offered on the CTP or any disclosure or other representation made by the CTP; or
- about any matter that a reasonable investor would consider relevant or important in deciding whether to enter into or maintain a trading or advising relationship with the CTP if the statement is untrue or omits information necessary to prevent the statement from being false or misleading in the circumstances in which it is made.
See: Crypto in Canada: Where are we today, and where are we heading?
In addition, registered CTPs should consider their advertising and marketing strategies in the context of their obligation to treat their clients fairly, honestly and in good faith under securities legislation and, if applicable, IIROC rules. Moreover, a registered CTP should consider how the advertising and marketing affects its obligations under Part 13 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and, if applicable, equivalent requirements in IIROC rules relating to:
- know-your-client, know-your-product and assessing suitability, and
- identifying and responding to conflicts of interest in the best interest of the client.
Concerns over improper "gambling style" promotions and schemes
We have recently noted some CTPs using advertising or marketing strategies that include contests, promotions, bonuses and time-limits to encourage investors to engage in trading and to act quickly for fear of missing out on an investment opportunity or a reward. For example, a promotion involving a bonus scheme may offer a financial reward or a bonus interest in a particular type of crypto asset for the first 500 investors who take an action within the next 24 hours.
We are concerned that some of these strategies may inappropriately encourage investors to engage in excessively risky trading, taking on risks that they would normally avoid.
See: Crypto fraud and breaches on pace to exceed $3 billion in 2021
We wish to remind CTPs that registered dealers have an important role as gatekeepers of the integrity of the capital markets. They should not, by act or omission, engage in or facilitate conduct that brings the market into disrepute. Advertising and marketing strategies designed to encourage excessively risky trading may, depending on the circumstances, violate the registrant’s obligation to treat clients fairly, honestly and in good faith.
Compliance and supervisory expectations for firms using social media
We expect registered CTPs to consider compliance and supervision when using social media websites and platforms (social media sites) as a means of communicating with clients and the general public for business purposes. They must maintain records of their business activities, financial affairs and client transactions. The use of social media sites increases the risk that registered CTPs may not be retaining adequate records of their business activities and client communications. This is the result of interactive social media web sites that include the posting of both real time and static content. Registered CTPs must design systems that allow for compliant record retention as well as retrieval capability.
See: Decentralized Finance—Risks, Regulation, and the Road Ahead
The use of social media web sites is also challenging in terms of supervision, and CTPs must determine the level or extent of supervision necessary, particularly considering the provisions in securities legislation relating to the use of misleading and false statements. This may include the use of a risk-based approach to determine whether a CTP’s review of electronic communications is sufficient to meet its supervisory obligations. These supervisory obligations are not just restricted to social media use by the CTP but also by its directors, officers, employees, shareholders and other third-parties acting on behalf of the CTP.
View the joint staff notice 21-330 --> here
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