On October 11, the Ontario Securities Commission (OSC) approved a settlement between OSC Enforcement staff and eToro (Europe) Limited (eToro) regarding its illegal trading activities in Ontario. eToro is a brokerage firm resident in Cyprus and regulated by the Cyprus Securities and Exchange Commission (CSEC). Beginning in 2008, it operated an online trading platform (eToro Platform) that allowed Ontario investors to trade contracts for differences (CFDs) based on exposure to underlying assets that included cryptocurrencies. eToro was the counterparty to the CFDs and earned revenues of over USD 1.79 million from 2,500 accounts that it opened for Ontario investors during the relevant time. It did not register as a dealer in Ontario and never filed a prospectus or preliminary prospectus with the OSC even though the OSC had published guidance to the effect that staff considered CFDs to be “investment contracts” and “securities”, so that offering CFDs to Ontario investors involved a “trade” and a “distribution” of a security.
Staff inquiries / eToro assurances: In 2010, OSC staff raised concerns with eToro that it was in breach of Ontario securities law because Ontario residents were participating in the eToro Platform. eToro agreed to ensure that its sales and support team understood that eToro could not accept trades from Ontario residents. In response to further queries in 2011 and 2015, eToro again assured OSC staff that its sales and support team were familiar with its policy of not accepting trades from Ontario residents. In fact, however, eToro’s sales and support team played no role in screening prospective new clients to determine if they were Ontario residents, and eToro had no written policies about Ontario residents or meaningful controls to prevent Ontario residents from opening accounts with eToro. In 2017 alone, it opened over 2,000 new accounts for Ontario investors.
eToro’s corrective actions: To resolve the enforcement proceedings, eToro closed all of its Ontario accounts, returned any remaining funds to account holders where possible, and gave an undertaking to the OSC to periodically contact any account holders with funds remaining in their accounts to get instructions about the remaining funds. eToro also developed enhanced procedures and controls to prevent Canadian residents from opening accounts with it, including the following:
- Automatically blocking access to eToro’s website by any user with a Canadian IP address;
- Revising its online account opening process to reject automatically any applicants who indicate that they reside in Canada;
- Informing eToro’s “KYC Verification Department” that Canadian residents are not permitted to open accounts;
- Adopting a written policy that eToro does not accept clients from Canada;
- Automatically rejecting applicants with Canadian phone numbers or email domains ending in “.ca”; and
- Making further inquiries where a deposit is made using a Canadian-based credit card or wire transfer from a Canadian financial institution to ensure that the holder resides outside Canada.
Admissions, penalties and commitments: The Settlement Agreement also provided for an admission by eToro that it had breached Ontario securities law and acted contrary to the public interest, an administrative penalty of CDN $550,000, disgorgement of USD $1,791,163 (representing the revenues it had earned from Ontario accounts), and costs of CDN $25,000. eToro’s admissions in this case can be contrasted with the no-contest settlement that we wrote about in our June 2018 bulletin regarding IPC Corporation and IPC Investment Corporation.
The Settlement Agreement also provided for a reprimand. In addition, eToro committed to give OSC staff an affidavit from a senior officer of eToro each year until June 30, 2021 confirming, among other things, that eToro did not have any accounts open for Ontario residents in the prior twelve-month period and that the enhanced procedures and controls described above remain in place.
In accepting the proposed Settlement Agreement, the OSC took into account, among other things, the facts that eToro did not put OSC Staff to the task of bringing a foreign respondent to a contested hearing, that it had implemented most of the enhanced procedures and controls described above before the hearing date, that it had closed the Ontario accounts in an orderly way and had returned or was seeking to return the remaining funds to investors, and that all amounts payable to the OSC had been paid before the hearing date.
Past penalties not indicative of future (enforcement) results: The OSC accepted that in light of the history of penalties for non-registration cases, the proposed penalty in this case was within a reasonable range. However, it warned market participants to expect tougher sanctions in future cases:
“We are concerned that this case involves repeated, unwarranted assurances to Staff concerning the verification measures that were being taken. We are also aware that this case involves a brokerage firm operating in multiple jurisdictions that should be expected to have robust compliance systems to ensure that it is authorized to deal with its customer base. Notwithstanding the result in this settlement and prior similar cases, firms that are found to have ignored these obligations in the future should expected to be considered on notice and can reasonably expect to face more stringent consequences.”