Lawyers made closing arguments Friday in Canada’s first major securities enforcement hearing about environmental, social and governance claims, a case that could define how far Canadian regulators will go in scrutinizing investment firms’ ESG strategies and marketing. 

The hearings in downtown Toronto, between the Ontario Securities Commission (OSC) and Purpose Investments CEO Som Seif, ended with sharp fault lines remaining between the regulator and the firm, starting a tense countdown to final deliberations on the landmark case.

OSC lawyers alleged that Purpose made misleading statements that implied all its funds included ESG components, and it should have disclosed that some funds were exceptions. OSC counsel Alvin Qian told a panel of adjudicators that dissecting Purpose’s ESG claims is an effort to protect investors.

“This is a case where they actively, extensively marketed to investors, that they were unique among the countless money managers in the world as one of the only firms to have seemed practical to integrate ESG across the board,” Qian said. “The statements that they made were not just missing some footnotes; they were fundamentally untrue and misleading.”

Seif’s lawyer, Joseph Groia, accused the OSC of undertaking a “smear” campaign to make a prominent investor a “poster boy,” and send a message to capital markets about its anti-greenwashing sweep. In a move that chief adjudicator Tim Moseley said was “unprecedented” in his experience, Seif himself spoke at the final hearing, defending his firm’s ESG approach, which was designed before Canadian securities regulators issued formal guidance on the issue.

“Innovators move ahead of policy; regulators catch up. I understand and respect this,” Seif said. “But when leadership is judged years later by the standards that did not exist at the time, it sends a powerful and negative message to innovators.”

Seif, a high-profile investor credited with helping to start Canada’s active ETF industry and co-founding fintech Wealthsimple, has been fighting the OSC’s allegations for the past year. The clash between the regulator’s view that Purpose’s marketing gave investors a misleading picture—and the firm’s argument that it was being judged retroactively—was at the centre of the hearing’s final hours.

Fasken lawyer David Hausman, representing Purpose, argued that while Purpose did not integrate ESG into every single fund, it had a “pervasive” strategy that considered ESG wherever possible. Certain products, like index funds, do not give investment managers discretion to include or exclude certain securities, and in those cases, investors knew what they were getting, Hausman said. Purpose’s approach, he argued, included actively discussing how to apply ESG measures to other funds, citing internal debates over whether recycled gold was a “gimmick.”

“That’s precisely what you would expect to see” from a company committed to ESG, he argued.

OSC lawyers Robin McKechney and Qian, however, argued that a “reasonable investor” might hear Purpose’s claims that it incorporated ESG across its “entire investment process” and take that to mean every fund. Qian argued that firms cannot play “a game of two truths and a lie: investor edition.”

Still, McKechney acknowledged that one of the most difficult parts of the case was defining what ESG integration actually means in investing. Bay Street has closely watched the case since hearings kicked off in May, when the regulator’s lawyers asked the tribunal to consider banning Seif from securities trading and from acting as a CEO of any investment fund.

In closing arguments, Groia argued that the punishments were overly harsh attempts to grab headlines, comparing it to 1950s-era McCarthyism and saying Seif had been treated “as though he’s engaged in the worst possible conduct” imaginable.

During the hearings, adjudicators pressed both sides on one particular issue: whether an investment firm providing quotes and reposting a hyperlink to a news article on its website was equivalent to a “sales communication” used to entice buyers.

Purpose Investments defended its decision to link to articles about its ESG strategy written by outlets like The Globe and Mail, arguing that it did not have final control over the published materials. Statements that help readers understand an investment manager’s corporate identity or expertise, the firm argued, aren’t sufficient to induce someone to buy a particular fund. On the OSC’s side, Qian argued that reposting the news articles was tantamount to endorsing them, including the articles’ claims about the breadth and depth of Purpose’s ESG integration.

Groia rebutted that the OSC’s standard would “turn the capital markets on its head,” forcing every company to go through its web postings and remove any link unless they “have absolute assurance” it is “perfect.”

The OSC is far from the only regulator that’s tightening enforcement on ESG issues. The U.S. Securities and Exchange Commission stepped up pursuit of “greenwashing” cases in 2024, and the European Union is currently trying to implement a new policy around sustainability claims.

But Groia warned that while policy discussions have their place, the OSC should not “legislate through an enforcement case.” Hausman said that the OSC was at risk of setting a “Kafka-esque” trap for investment firms that could damage the relationship between firms and regulators going forward if it punishes Purpose over 2019 ESG claims, when the regulator itself did not release ESG guidance until 2022.

The panel of adjudicators adjourned Friday before announcing a final decision. The Capital Markets Tribunal typically aims to decide complex cases within 90 days.