FSRA continues to observe situations where mortgage professionals become involved in promoting, issuing or facilitating promissory notes, including notes that reference real property as security and those that are entirely unsecured. Both types of arrangements can expose you to serious legal and regulatory consequences.
A promissory note is not a mortgage under Ontario’s mortgage brokering legislation, regardless of whether it references real estate or is unsecured. The nature of the lending instrument matters.
In many cases, promissory notes meet the definition of a security under Ontario securities law. This includes situations where funds are raised from investors with the expectation of profit, where investors rely on the efforts of others, or where funds are used to finance business or development activity.
Activities such as identifying investors, promoting returns, distributing offering materials, making referrals or otherwise participating in capital raising may constitute trading or acts in furtherance of a trade. These activities typically require registration with the Ontario Securities Commission (OSC) and compliance with securities law requirements.
Recent FSRA enforcement actions illustrate the severity of the consequences when these lines are crossed. In one real estate matter involving unsecured promissory notes, the OSC concluded that individuals engaged in unregistered securities dealing made misleading representations to investors and failed to comply with registration and prospectus requirements. As a result, the OSC banned the broker and imposed other sanctions. FSRA also took enforcement action connected to the same activity and imposed $600,000 of administrative monetary penalties for mortgage sector licensing and conduct failures. These outcomes demonstrate that enforcement across both regulatory regimes can be significant and potentially career-ending.
Promissory notes are sometimes presented to clients as simple or low risk investments, particularly when linked to real estate projects. In practice, they can expose investors to substantial harm. This is especially true where notes are unsecured or where repayment depends on the success of a business venture. Investors may face limited legal protections, unclear recovery prospects and increased risk of loss.
FSRA expects MBLAA licensees to carefully assess proposed concurrent business activities that may have bearing on their licensed activities before getting involved. This includes confirming whether an activity is permitted by their authorizing brokerage’s or administrator’s policies and procedures and whether they are undertaking that activity lawfully (e.g., conforming with applicable requirements under securities legislation). Business activities which are not approved by the brokerage or require securities registration should not be undertaken without appropriate registration and due attention to the compliance obligations under the securities legislation.
Protecting consumers and maintaining confidence in Ontario’s mortgage brokering sector requires sound judgment. Understanding where mortgage regulation ends, where securities regulation begins and the serious consequences of crossing that line improperly is essential.