Month: March 2020
In this bulletin:
- You’ve Activated Your Business Continuity Plan. What’s Next?
- CSA and OSC Extend Certain Deadlines for Registrants and Investment Funds and Postpose Certain Initiatives
- FINTRAC Signals Flexibility to Reporting Entities Affected by COVID-19
- CSA Proposes Rules to Address Financial Exploitation of Vulnerable Investors
- IIROC Fines TD Waterhouse $4 Million for Deliberate Non-Compliance with RDI Requirements
- Corporations Canada Seeks Comments on Potential Regulations for Corporate Registers of Individuals with Significant Control
FAQ Corner: In light of the COVID-19 pandemic, what should we do with respect to our suitability determination and “know-your-client” (KYC) obligations?
In Brief: No Jail Time for Mr. Tiffin After All, But His Conviction Stands
News & Events: AUM Law Launched a New Website
Click the link to access a PDF of our full, monthly bulletin summarizing these recent developments. >> Monthly Bulletin | Spring Edition | March 2020
In light of the COVID-19 outbreak, many registered firms are implementing their business continuity plans (BCPs) and having their employees work from home, except where certain individuals need to access office facilities to ensure continued service to clients. In this article, we’ll address some issues for registered firms to consider in the short and medium term while operating in such conditions. We emphasize that firms and regulators are facing an unprecedented and constantly changing situation, and so our initial views on the issues below may change as circumstances evolve and regulators issue new or updated guidance or rules.
If my firm is covered by an “essential service” exemption from a government order to close businesses, why not carry on as usual from our office? Workplaces can contribute to the spread of the virus that causes COVID-19, and so a firm needs to evaluate the occupational health and safety, public health and litigation risks of having employees work from its offices or meet physically with clients, etc. The Government of Canada has published Risk-Informed Decision-Making Guidelines for workplaces and businesses during the pandemic. If you need legal advice on employment or occupational health and safety matters, AUM Law can source, evaluate and help you retain appropriate counsel and then manage the provision of that advice so that you can focus on running your business. From a securities regulatory compliance perspective, we think that a registered firm that requires all or most of its employees to work onsite instead of working from home could attract scrutiny from securities regulators due to concerns that the firm’s BCP is not functioning effectively.
Should my firm contact the securities regulator because we have activated our BCP? Activating your BCP does not, in itself, trigger an obligation to notify the Ontario Securities Commission (OSC). If, however, your firm finds that it might not be able to meet one or more of its regulatory obligations on a timely basis because of the pandemic, then that might trigger a filing obligation and we encourage you to speak to your usual lawyer at AUM Law as soon as possible. (See also our article in this bulletin on the blanket orders issued by members of the Canadian Securities Administrators (CSA) extending certain filing deadlines for registrants, investment funds and others.) We can advise you on your options and liaise with regulators on your behalf.
Do the home offices of registered individuals need to be approved as branch offices? Technically, having registered employees work from a location other than the address indicated on their Form 33-109F4 (Form F4), could be viewed as requiring an updated filing and/or approval of new “branch offices”. However, in light of the recent government orders and recommendations requiring or asking people to stay at home as much as practicable, we believe that at least in the short term, it is unlikely that OSC staff will expect registered firms to update Form F4s or seek approval for branch offices, provided that registered individuals are not meeting with clients in their homes or bringing home physical files that contain sensitive client information.
Cross-training: Are there functions at your firm that only one or two employees know how to perform? If you haven’t done so lately, we encourage you to review and update your list of key tasks and deadlines and the individuals responsible for performing those tasks. Identify a back-up person for each task and deadline (or group of related tasks and deadlines) and, if necessary, train that back-up person.
BCP considerations for “one-registrant” firms: If a registered firm has only one registered individual (One-Registrant Firm) to serve clients, we encourage the firm to have a plan to address a scenario where that individual is absent or incapacitated for weeks or months. We recommend that One-Registrant Firms, at a minimum, prepare standing instructions for the firm’s administrative staff and legal representatives to follow if the registered individual is absent or incapacitated for more than a brief period. Such firms also might wish to explore the feasibility of negotiating, in advance, a formal agreement with another registered firm (Temporary Successor). Such an arrangement could be a reciprocal one between two One-Registrant Firms seeking to address the same business continuity issue. Under such an agreement, the Temporary Successor would step into the shoes of the registered individual, for certain purposes, if that individual was unable to perform their duties for more than a brief period. The purpose of the agreement would only be to communicate with service providers and clients as the clients decide how best to address their account assets.
Technology risks including cyber-security and privacy risks: The rapid shift to remote work arrangements has resulted in some issues arising with respect to technology slowdowns, disruptions and hacking. Some firms are deploying new software or devices (including virtual meeting systems) that employees are having to become familiar with quickly, and many employees are dealing with the challenge of handling matters discreetly with family members or roommates present. There also are reports of some public, virtual meetings and conferences conducted over Zoom and similar systems being hacked. Finally, some employees are experiencing anxiety and confusion because of the pandemic. All these circumstances increase the risks of inadvertent cyber-security failures and opportunities for hacking. Maintaining robust cyber-security policies and procedures, adapting them as needed to address emerging or changing risks, reminding employees of the need to take precautions, and monitoring employees’ compliance with such policies and procedures are essential actions at this time both from a regulatory compliance and litigation risk perspective.
Communications with clients: Pandemic conditions and their knock-on effects in financial markets may result in a significant increase in customer call volumes or online account usage. Registered firms should review their BCPs and assess the effectiveness of their systems and processes to handle this level of increased activity. If your firm is experiencing difficulty serving customers in a timely way, please contact us to discuss measures you should undertake (including communication strategies) to address the situation. (On a related subject, please see our FAQ in this bulletin focused on ensuring that you’ve got current know-your-client (KYC) information for clients whose life situations may be changing dramatically.)
Supervision, compliance and internal controls during the new “work from home” normal: As we all adjust over the next month or so to the “new normal” of working remotely as much as practicable for an unknown period of time, we think that regulators will begin expecting to see registered firms consider whether they need to adapt their policies, procedures and controls to address any new or magnified regulatory compliance risks. AUM Law can help you assess whether your existing supervisory system, compliance manual, procedures and internal controls should be revised to ensure compliance while many employees are operating from remote locations.
We can help: At AUM Law, we are experienced in reviewing BCPs from a regulatory compliance perspective. We can draft or update your BCP to ensure that it addresses a scenario like this one. Please don’t hesitate to contact us.
March 31, 2020
In light of the COVID-19 pandemic, the Canadian Securities Administrators (CSA), including the Ontario Securities Commission (OSC), have been providing blanket exemptive relief and taking other steps to relieve burdens for market participants. The situation is fluid and additional actions are being taken as new challenges arise, so the summary below can only be a snapshot as of the publication date of this bulletin.
Compliance Reviews: In its March 16 news release, the OSC stated that its on-site compliance reviews have been postponed until further notice. Its normal course compliance activities are continuing as planned but the OSC has signalled its willingness to be flexible on deadlines for information.
CSA Extends Certain Filing Deadlines: On March 23, the OSC and other CSA members published blanket orders providing temporary relief from certain filing requirements. We have summarized below key provisions in the OSC blanket orders concerning registered firms and investment funds.
Fee Filings and Payments
- Who: Registered firms and unregistered capital markets participants that are required to pay capital markets participation fees to the OSC.
- What: If the firm paid its 2019 capital markets participation fee based on an estimate of its 2019 specified Ontario revenues, it ordinarily would have to re-calculate those revenues and the relevant participation fee based on its final 2019 financial information. If the recalculated fee exceeded the estimated fee paid at the end of 2019, the firm ordinarily would have to pay the balance owing and file an updated Form 13-502F4 Capital Markets Participation Fee Calculation or Form 13-503F1 (Commodity Futures Act) Participation Fee Calculation by March 30, 2020.
- Extension: The deadline has been extended for 45 days from the original deadline.
Financial Statements / Calculations of Excess Working Capital
- CSA members have issued substantially harmonized blanket orders providing registered dealers, advisers and investment fund managers (IFMs) with a 45-day extension from the original deadline for certain financial statements if the deadline originally fell between March 23 and June 1. The extension applies automatically, without any terms and conditions.
- Dealers: annual financial statements, completed Form 31-103F1 Calculation of Excess Working Capital (Form 31-103F1), and interim financial information;
- Advisers: annual financial statements and completed Form 31-103F1; and
- IFMs: annual financial statements, completed Form 31-103F1, completed Form 31-103F4 Net Asset Value Adjustments (Form 31-103F4), and interim financial information.
- IIROC and MFDA Firms: Firms that are members of the Investment Industry Regulatory Organization of Canada (IIROC) or the Mutual Fund Dealers Association of Canada (MFDA) have been granted similar relief in respect of the regulatory financial questionnaires coming due.
Investment Fund Filing, Delivery and Prospectus Renewal Requirements (Funds Blanket Order)
- Filing and Delivery Deadlines Extended 45 days: CSA members have issued substantially harmonized blanket orders providing investment funds with a 45-day extension on various filing and delivery deadlines for materials such as annual financial statements and auditor reports, interim financial statements, annual custodian compliance reports, annual mutual fund compliance reports, annual information forms, independent review committee (IRC) reports to securityholders, and annual and interim management reports of fund performance.
- Prospectus Renewals: An investment fund distributing securities under a prospectus with a lapse date that occurs between March 23 and June 1, 2020 may add 45 days to that lapse date.
- Fund Must Notify Regulator and Public: If an investment fund wishes to rely upon the Funds Blanket Order, it must, as soon as reasonably practicable and in advance the relevant delivery, filing or renewal deadline:
- Notify its regulator by email that it is relying upon the Funds Blanket Order and each requirement for which it is relying upon that order; and
- Post a statement on its public website or public website of its investment fund manager that it is relying upon the Funds Blanket Order and each requirement for which it is relying on upon that order.
Requests for Comment: The CSA indicated in their March 18 news release that all CSA proposals currently out for comment will have their comment periods extended by 45 days.
Risk Assessment Questionnaire (RAQ): In its March 16 news release, the OSC indicated that the RAQ is postponed until further notice.
Other Exemptive Relief: CSA members have also granted temporary relief to other categories of market participants (e.g. such as reporting issuers) and signalled regulatory flexibility regarding certain other requirements (such as the operation of annual general meetings).
Please contact us if you have any questions about the blanket orders described above, other requirements and temporary exemptions, and/or other operational changes adopted by CSA members that may affect your business. We can help you assess your options and, if necessary, engage with regulators on your behalf.
March 31, 2020
On March 25, FINTRAC issued a notice (Notice) indicating that it is committed to working constructively with businesses (Reporting Entities) subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) to minimize the impact of ongoing anti-money laundering and anti-terrorist financing (AMLTF) requirements while Reporting Entities are experiencing challenges due to the disruptions caused by COVID-19. FINTRAC had four main messages:
- Reporting: Reporting Entities should give priority to submitting suspicious transaction reports (STRs), as required.
- Verification of Identity: Some provincial governments are extending the validity of various identification documents to avoid in-personal renewal visits. If a person presents a document or information affected by such a decision, the Reporting Entity must still determine the authenticity of that document or information but can, until further notice, consider the document or information valid and current.
- Compliance Assessment and Enforcement: For now, FINTRAC does not plan to initiate any new examinations and plans to limit its other interactions with Reporting Entities to: (1) completion of existing examinations situations relating to reporting issues; and (2) requests for guidance.
- If Non-Compliance Is Unavoidable: In the Notice, FINTRAC stressed the importance for Reporting Entities of documenting the reasons for any situation where the Reporting Entity cannot meet a reporting or other regulatory obligation for reasons beyond its control. The Reporting Entity should document the reason for not meeting the obligation (g. employee responsible for fulfilling an obligation affected by COVID-19) and, where possible, any measures taken to mitigate the non-compliance. Firms are also encouraged to submit a voluntary self-declaration of non-compliance via email, when they can, and such a notification will be taken into account in future compliance activities.
If your firm is experiencing challenges complying with your obligations under the PCMLTFA or your monthly AMLTF reporting obligations to securities regulators, AUM Law can help. For example, we can prepare and file on your behalf your monthly AMLTF reports with securities regulators. And if you are facing an instance of potential or actual non-compliance with your obligations, we can advise you on how to document the issues, develop mitigation strategies and liaise with regulators on your behalf as needed.
March 31, 2020
Overview: On March 5, the Canadian Securities Administrators (CSA) proposed amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and the related Companion Policy (NI 31-103CP) to clarify how registrants can deal with situations involving clients with diminished mental capacity and/or vulnerable clients who may be experiencing financial exploitation (Proposed Amendments). If the Proposed Amendments are adopted, registrants will have to take reasonable steps to obtain:
- The name and contact information of a “trusted contact person” (TCP) from each of their individual clients; and
- The client’s written consent for the registrant to contact the TCP in certain circumstances.
NI 31-103 also will be amended to prescribe the steps that registered firms must take if they place a temporary hold on certain transactions in the client’s account because they reasonably believe that either a vulnerable client is being financially exploited or that the client does not have the mental capacity to make financial decisions with respect to an instruction.
More on the TCP Requirements: According to the Proposed Amendments to NI 31-103, registrants must take reasonable steps to obtain their individual clients’ consent to contact the TCP named in their account to confirm or make inquiries about any of the following:
- Possible financial exploitation of the client;
- Concerns about the client’s mental capacity in respect of the client’s financial decision-making or lack of decision-making; and/or
- The name and contact information for: (a) a legal guardian of, or any other personal or legal representative of, the client; or (b) an executor of an estate or trustee of a trust under which the client is a beneficiary.
New guidance to be included in NI 31-103CP describes the intended role of a TCP and emphasizes that the TCP doesn’t replace a client-designated attorney under a power of attorney (POA). Similarly, the TCP does not have authority to transact on the account or make any other decision on the client’s behalf as a result of being named a TCP. There is no prescribed form to complete but NI 31-103CP will be revised to describe the information that the registrant should provide to the client and request from the client regarding the TCP.
The proposed guidance also emphasizes that a registrant may still act for a client who refuses to provide a TCP, provided that the registrant took reasonable steps to obtain the TCP information and the client’s consent to contact the TCP in the circumstances described above. In addition, the guidance describes the circumstances when registrants should speak to the client and/or the TCP about the registrants’ concerns about financial exploitation or mental incapacity. It also outlines the CSA’s expectations with respect to registrants’ policies, procedures, and relationship disclosure information (RDI) concerning TCPs.
We have been advising clients for a while about the benefits of obtaining the name and contact details for a TCP as part of the account opening process, and the proposed guidance provides helpful confirmation about the role of TCPs.
What Do “Financial Exploitation”, “Mental Capacity”, and “Vulnerable Client” Mean? The Proposed Amendments will add the following definitions to NI 31-103:
- “Financial exploitation” means, in respect of an individual, the use, control or deprivation of the individual’s financial assets through undue influence or wrongful or unlawful conduct;
- “Mental capacity” means the ability to understand information or appreciate the foreseeable consequences of a decision or lack of a decision;
- “Temporary hold” means a hold that is placed on the purchase or sale of a security or withdrawal or transfer of cash or securities from a client’s account; and
- “Vulnerable client” means a client of a registered firm or a registered individual who may have an illness, impairment, disability or aging process limitation that places the client at risk of financial exploitation.
More on the Temporary Hold Provision: NI 31-103 will be amended to indicate that a registered firm or individual must not place a temporary hold:
- In relation to the financial exploitation of a vulnerable client unless the firm reasonably believes that the client is a vulnerable client and that financial exploitation has occurred, is occurring, has been attempted, or will be attempted; or
- In relation to the lack of mental capacity of a client unless the firm reasonably believes, with respect to an instruction given by the client, that the client does not have the mental capacity to make financial decisions.
If a temporary hold is placed on a client’s account, the registered firm must:
- Document the facts that caused the firm or individual to place and continue the temporary hold;
- As soon as possible after the temporary hold is placed, notify the client of the temporary hold and the reasons for doing so;
- As soon as possible after the temporary hold is placed and until the hold is terminated, further review the facts that caused the hold to be placed; and
- Within 30 days of placing the temporary hold, and within every 30 days thereafter until the hold is lifted, notify the client of the firm’s decision not to terminate the hold and the reasons for that decision.
The Proposed Amendments also will amend NI 31-103CP to provide guidance on, among other things, the purpose of a temporary hold, the scope of a temporary hold, and the CSA’s expectations regarding firms’ policies, procedures and RDI regarding temporary holds.
Clients dealing with vulnerable clients have asked us whether they are permitted to refuse a withdrawal or redemption request due to concerns about financial exploitation or the client’s mental capacity. The proposed, regulatory “safe harbour” for temporary holds provides comfort and helpful guidance on how to handle such scenarios consistently in these difficult situations.
Comment Deadline and Timeline for Implementation: In the Notice, the CSA asked for comments by June 3, 2020 and indicated that their goal was to adopt the Proposed Amendments and have them come into force at the same time as the know-your-client provisions in the client-focused reforms (CFRs) to NI 31-103 (i.e. December 31, 2021). As a result of the CSA’s March 18 news release on COVID-19 matters, the June 3 comment deadline has been extended to July 18. If you would like to discuss the potential impact of the Proposed Amendments on your business, please contact your usual lawyer at AUM Law.
March 31, 2020
On March 23, the Investment Industry Regulatory Organization of Canada (IIROC) released reasons (Reasons) for a hearing panel’s decision to fine TD Waterhouse Canada Inc. (TDW) $4 million for its failure to include position cost information in its quarterly account statements for about 8% of its accounts from January 2016 to mid-2017. In our view this case highlights the importance for registrants of communicating frankly with their regulator when they foresee difficulties complying with existing or new rules as written.
Background: As our Canadian readers are no doubt aware, the Canadian Securities Administrators (CSA), IIROC and the Mutual Fund Dealers Association (MFDA) adopted a set of regulatory amendments known as the Client Relationship Model (CRM), which were phased in over time. The requirement to provide retail clients with individual position cost information for the securities in their account was part of the second phase of CRM (CRM2). Effective December 31, 2015, IIROC required its members to provide retail customers with position cost information for all account positions held at quarter-end (Position Cost Requirements). The Reasons noted that the implementation date for these rules followed several years of discussion among IIROC members, IIROC and other regulators and was disclosed to IIROC members in January 2015.
TDW’s Calculated Risk: In the spring of 2015, TD Waterhouse identified what it considered to be potential litigation risks and client experience issues resulting from its planned approach to implement the Position Cost Requirements. After considering various options, management decided to accept the business risk that about 8% of client positions would not be compliance with the Position Cost Requirements for a period of time. The goal was to bring the non-compliant account position disclosures into compliance by mid-2016. The completion date was then delayed until 2017 and, as of the date of the hearing, the 2015 data still had not been supplied.
IIROC Learned of the Non-Compliance through a Customer Complaint: The Reasons indicate that the issue first came to IIROC staff’s attention when they received a complaint from a client about the non-compliance, after the client had complained directly to TDW.
Reasons for Sanction: In reaching its decision to impose a $4 million penalty on TDW, the hearing panel commented:
“[The] Respondent’s failure to consult or advise its regulator about the non-compliance is deeply concerning. Consultation with IIROC should have been the first step for TDW. Its failure to do so is damaging to the integrity of the regulatory regime.”
Other factors influencing the sanction include the hearing panel’s findings that, among other things;
- TDW’s failure to implement the Position Cost Requirements was intentional;
- TDW’s board and key committees were are aware, or should have been aware, that there was continuing non-compliance; and
- Although there were no complaints about harm, securityholders were deprived of information to which they were entitled.
The Hearing Panel rejected IIROC staff’s submission that the maximum penalty of $5,000,000 should be imposed, stating that the penalty should be seen as severe but also leave room for cases that involve “equally egregious” facts but also a significant harm component.
Our Takeaways: Especially in the current environment, where market participants are encountering unforeseeble situations as a result of the COVID-19 pandemic, it is important for registered firms to address potential compliance challenges promptly. AUM Law has substantial experience advising firms in difficult situations. We can help you identify and assess the potential deficiencies and compliance risks, help you develop plans for remediation, and liaise with regulators on your behalf. Please do not hesitate to contact us for assistance
March 31, 2020
As we discussed in our January 2019 bulletin, most private corporations organized under the Canada Business Corporations Act (CBCA) are now required to keep a register of individuals with significant control (ISC Register). Responding to feedback received since these requirements came into effect in June 2019, Corporations Canada and Innovation, Science and Economic Development Canada and Corporations Canada (the Departments) are considering whether regulations should be enacted to provide more guidance and clarity about the ISC Register regime. On March 9, 2020, they published a consultation paper on this subject.
The Departments are seeking feedback on the following questions, among others:
- What steps should a corporation follow if it determines that there are no individuals who qualify as ISCs? Should it note that conclusion in its register?
- Corporations subject to the ISC Register requirements must take reasonable steps to update their ISC Register at least once per year. What would constitute reasonable steps?
Comments are due by May 12, 2020. If you would like to discuss the Consultation Paper and its potential impact on your business, please contact us.
March 31, 2020
In 2018, we wrote twice about the saga of Daniel Tiffin, who had appealed his conviction for trading in securities without registration, distributing securities without filing a prospectus, and trading in securities while subject to a cease-trade order. As we wrote in May 2018, the Ontario Superior Court of Justice (Superior Court) concluded that the promissory notes issued by Tiffin Financial (TFC) to Mr. Tiffin’s clients were securities. Then, in September 2018, we reported that Mr. Tiffin was sentenced to six months in jail. (The Court also ordered him to pay restitution and serve 24 months of probation.)
He appealed the merits of the Superior Court’s decision and the sanctions. Earlier this month, the Ontario Court of Appeal ruled that the promissory notes were securities and that Mr. Tiffin’s conviction should be upheld, but that a jail sentence in these circumstances was disproportionate because the Court did not consider Mr. Tiffin’s conduct to be deceitful. The probation and restitution orders were upheld.
AUM Law has extensive experience in the interpretation of Ontario securities laws, as well as insight into how securities regulators have exercised their discretion to grant exemptive relief from broadly worded provisions such as the definition of “security”. Please do not hesitate to contact us if you wish to discuss how the laws apply to the activities you are contemplating.
March 31, 2020
Answer: The pandemic is likely to be a life event for many individual clients, who might experience, among other things, a loss or significant decrease in employment or business income, a significant decrease in the value of their investments, and/or become seriously ill. This means that such clients’ know-your-client (KYC) information could need updating and that transactions, holdings and/or accounts might no longer be suitable for them.
Remember that, for accounts subject to the suitability determination requirements in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), registrants must take reasonable steps to keep current the client’s KYC information. In addition, before making a recommendation, accepting a client’s instruction to buy or sell a security, or making a purchase or sale of a security for a managed account, the registrant must take reasonable steps to ensure that the purchase or sale of the security is suitable for the client.
The challenge, of course, is that a registrant may have hundreds or thousands of clients whose circumstances have changed, or are about to change, as the COVID-19 crisis continues to evolve. And the potential need to update KYC information is occurring while individual clients and registrants are coping with the dislocations caused by quarantine measures and the shift to work-from-home arrangements.
Given, however, the fundamental importance of the KYC and suitability requirements as investor protection mechanisms, we don’t expect securities regulators to take a lax approach to compliance in this area. Pandemic or not, registered firms should have policies and procedures for updating KYC information, including in situations like these where registrants might have reason to believe that clients’ circumstances have changed, or are about to change, significantly. We expect that in a compliance review or other inquiry, regulators will want to documentation showing that a registered firm has:
- Effective policies and procedures for updating KYC;
- If necessary to accommodate the need to update KYC information on a wide scale and rapid basis, the firm has revised its procedures;
- Pursuant to those policies and procedures, reached a well-reasoned decision on how to communicate with clients whose KYC information might need updating now;
- Executed on the firm’s plan to update KYC as needed; and
- Revised the plan, if necessary, and executed the revised plan if the changing circumstances warrant it.
AUM Law can help you develop a plan for updating clients’ KYC information in light of COVID-19. Please do not hesitate to contact us.
March 26, 2020
In light of the continued spread of COVID-19, we want our clients to know that we have business continuity plans in place that enable us to operate with as little disruption as possible as the situation changes. Our lawyers and clerks are working remotely, enabling us to provide uninterrupted service to our clients.
Clients should not hesitate to contact their primary lawyer or any of Kevin Cohen, Erez Blumberger or Kim Poster if they have any questions about these matters. At AUM Law, we remain focused on providing high quality, practical and efficient advice and services to address your business needs, including matters arising from COVID-19.
We appreciate that this is an extraordinarily challenging time and we are here to help in any way possible.