Month: June 2020

Bulletin | Staycation Edition | June 2020

In this bulletin:

  1. CSA Consults on Potential Reforms to SRO Framework
  2. CSA Members Say They’ve Made It Easier to Register Client Relationship Management Specialists
  3. Federal Court of Appeal Rules on Constitutionality and Application of Canada’s Anti-Spam Legislation
  4. OSC Publishes 2020-2021 Statement of Priorities and 2019-2020 Report Card
  5. IOSCO Consults on Regulatory Measures for Asset Managers’ and Market Intermediaries use of Artificial Intelligence

In Brief: Temporary Relief from Certain Requirements for Registrants and Unregistered Capital Markets Participants Extended ▪ IOSCO Consults on Revised Principles for Outsourcing ▪ CSA Publishes interim Progress Report on Its 2019-2022 Business Plan

News & Events: Correction to Last Month’s Article on PMAC’s Spring Regulatory and Compliance Webcast

Click the link to access a PDF of our full, monthly bulletin summarizing these recent developments. >> Monthly Bulletin | Staycation Edition | June 2020

IOSCO Consults on Revised Principles for Outsourcing

On May 28, the International Organization of Securities Commissions (IOSCO) published for comment revised Principles on Outsourcing (Revised Principles). Previously, IOSCO had issued outsourcing principles for market intermediaries (2005) and markets (2009). The proposed Revised Principles consolidate and build on this earlier work, expand the scope of coverage (e.g. to include credit rating agencies, market participants acting on a proprietary basis and financial market infrastructures), and update the content to reflect technological and market developments. We think that market participants may find the proposed, Revised Principles a helpful source of guidance on evolving standards for outsourcing in the securities industry.

The seven Revised Principles and related implementation guidance cover:

  • Due diligence in selecting and monitoring service providers;
  • Contracts with service providers;
  • Information security, business resilience, continuity and disaster recovery;
  • Confidentiality issues;
  • Concentration of outsourcing arrangements;
  • Access to data, premises, personnel and associated rights of inspection; and
  • Termination of outsourcing arrangements.

The consultation deadline is October 1. If you have any questions about the proposed, Revised Principles, please do not hesitate to contact us.

June 30, 2020

Temporary Relief from Certain Requirements for Registrants and Unregistered Capital Markets Participants Extended

On May 30, the Canadian Securities Administrators (CSA) announced that most member regulators including the Ontario Securities Commission (Participating Jurisdictions) had issued temporary blanket relief (Temporary Relief) from certain financial statement and information delivery requirements for periodic filings normally required to be made between June 2, 2020 and September 30, 2020. The blanket relief extends the deadlines for 60 days. It applies to registrants and, in Ontario, unregistered capital markets participants (such as unregistered investment fund managers and unregistered, exempt international firms) that rely upon certain registration exemptions. The conditions of the Temporary Relief are substantially the same as the temporary relief granted on March 23 (Prior Relief), as we described in our March 2020 article on this topic. Firms cannot rely on the Temporary Relief to extend any deadline previously extended under the Prior Relief.

Separately, the Manitoba Securities Commission and Québec Autorité des Marchés Financiers (AMF) issued temporary blanket relief from certain financial statement and information delivery requirements for registrants whose principal regulator is one of the participating jurisdictions.

Please contact us if you have any questions about the Temporary Relief, other requirements and temporary exemptions, and/or other operational changes adopted by CSA members regarding COVID-19 that may affect your business. We can help you assess your options and, if necessary, engage with regulators on your behalf.

June 30, 2020

IOSCO Consults on Regulatory Measures for Asset Managers’ and Market Intermediaries’ Use of Artificial Intelligence

On June 25, the International Organization of Securities Commissions (IOSCO) published a draft report and proposed guidance (Report) regarding asset managers and market intermediaries’ use of artificial intelligence (AI), including machine learning (ML). It’s a useful reference document to help you stay informed on evolving firm practices, as well as regulatory concerns and approaches, in this area.

The Report is based on IOSCO’s survey of and discussions about AI and ML with asset managers and market intermediaries. It analyzes how firms are using the relevant technologies, outlines the potential benefits and risks, and describes how firms are addressing those risks. The report also includes appendices describing how various regulators (including Canadian securities regulators) are addressing AI and ML risks and summarizes guidance in this area published by international organizations such as the Financial Stability Board.

IOSCO is seeking feedback on six proposed regulatory measures (Measures). Three of the measures are framed as proposed requirements that IOSCO believe regulators should adopt:

  • Test and monitor algorithms: Regulators should require firms to test and monitor the algorithms to validate the results of any AI and ML technique on a continuous basis. Testing should be conducted in an environment that is segregated from the live environment before deployment to ensure that AI and ML behave as expected in stressed and unstressed market conditions and operate in a way that complies with regulatory obligations.
  • Competence: Regulators should require firms to have adequate skills, expertise and experience to develop, test, deploy, monitor and oversee the controls over the AI and ML that the firm uses. Compliance and risk management functions should be able to understand and challenge the algorithms that are produced and conduct due diligence on any third-party provider, including on the level of knowledge, expertise, and experience present.
  • Oversight of third parties: Regulators should require firms to understand their reliance upon, and manage their relationship with, third party providers, including monitoring their performance and conducting oversight. This includes having clear service-level agreements and contracts that clarify the scope of any outsourced functions and the third party’s responsibilities and that specify clear performance indicators and “sanctions” for poor performance.

The other proposed Measures are framed in softer language, which may indicate a lack of consensus among IOSCO members regarding the universal necessity for such requirements:

  • Senior management responsible for AI/ML and its controls: Regulators should consider requiring firms to have designated senior management responsible for overseeing the development, testing, deployment and monitoring of, and controls for, AI and ML. This includes having a documented internal governance framework and having appropriately senior individuals with relevant skills and knowledge sign off on the technology’s initial deployment and any substantial updates.
  • Disclosure and regulatory reporting: Regulators should consider what level of disclosure they should require firms to provide about their use of AI and ML. Among other things, regulators should consider:
    • Requiring firms to disclose meaningful information to customers and clients around their use of AI and ML that impact client outcomes; and
    • What information the regulators may require from firms using AI and ML to ensure they can have appropriate oversight of those firms.
  • Data quality controls: Regulators should consider requiring firms to have appropriate data quality controls so that data on whose performance the AI and ML depends is of sufficient quality to prevent bias and sufficiently broad to ensure a well-founded application of AI and ML.

Although the Measures won’t be binding on IOSCO member regulators, we expect that the Ontario Securities Commission (OSC) and other Canadian securities regulators likely will take the final version of the Measures into account when they interpret existing rules and consider regulatory reforms.

The comment deadline is October 26, 2020. If you have questions about the Report or are interested in discussing how evolving regulatory expectations in this area might affect your business, please contact us.

June 30, 2020

OSC Publishes 2020-2021 Statement of Priorities and Its 2019-2020 Report Card

A.  Priorities for the Coming Year

On June 25, the Ontario Securities Commission (OSC) published its annual Statement of Priorities (SOP). As we mentioned in our April bulletin, COVID-19 and the related market uncertainty caused the OSC to forego its usual substantive consultation on priorities. Instead, the OSC used last year’s SOP, its plans flowing from its burden reduction initiative and its routine engagements with stakeholders to develop its 2020-21 priorities. Consequently, there are very few surprises in this year’s final SOP. We’ve summarized below key initiatives that we believe will be of interest to our readers.

Client-focused Reforms: The OSC will work with other members of the Canadian Securities Administrators (CSA) and the self-regulatory organizations (SROs) to help registrants operationalize the amendments.

Seniors Strategy: The OSC will continue to implement its Seniors Strategy, including continuing with its consultation on proposed changes to the regulatory framework to address financial exploitation and cognitive decline among older and vulnerable investors. (See our March 2020 article on this consultation.)

Leverage in the Asset Management Industry: Working with other members of the International Organization of Securities Commissions (IOSCO), the OSC plans to design and implement enhanced data collection to monitor vulnerabilities associated with the asset management industry’s use of leverage.

OTC Derivatives: The OSC plans to:

  • Publish (with Ministry pre-approval) amendments to the business conduct rule for over-the-counter (OTC) derivatives, limiting the rule’s scope and outlining jurisdictions that will be granted equivalency;
  • Work with the CSA on the next version of the proposed OTC derivatives dealer registration rule;
  • Conduct compliance reviews of the OTC derivatives rules on trade reporting, clearing, segregation and portability; and
  • Develop and implement a framework to analyze OTC derivatives data for systemic risk and market conduct purposes.

Continue Policy Work on Embedded Commissions: The OSC will continue working within the CSA and on its own regarding rule reforms affecting mutual fund deferred sales charges (DSCs) and order execution-only embedded commissions.

Retrospective Reviews of Rulemaking: As part of its efforts to enhance its economically-focused rulemaking, the OSC plans to conduct restrospective reviews of past regulatory changes to see if the intended objectives were achieved.

Re-Consider the SRO Framework: As discussed elsewhere in this bulletin, the CSA has launched a consultation on the SRO framework. The OSC also plans to work on clarifying and streamlining the SROs’ recognition orders and memoranda of understanding.

Office of Economic Growth and Innovation (OEGI): The OSC plans to have the OEGI fully operational and delivering on its mandate by fiscal year-end 2021. This includes having the OEGI conduct outreach with market participants to identify further, potential burden reduction opportunities.

CSA National Systems: The OSC will support the CSA in its implementation of revised national systems (i.e. SEDAR, SEDI and NRD) under the name SEDAR+. It also will work with CSA members to amend the operational and fee rules governing CSA systems.

Modernize the OSC’s Technology Platform: The OSC will continue redeveloping its website, implementing its information security program, and adding more tools and technology to enable to staff to work more effectively and efficiently from home.

B.  2019-2020 Report Card

The OSC also published its 2019-2020 OSC Statement of Priorities Report Card (Report Card). Chief Compliance Officers (CCOs) may find it useful to skim the Report Card because it consolidates into a single document status reports on the OSC’s regulatory and operational initiatives from the past fiscal year. It also highlights some “in progress” initiatives that the OSC expects to deliver in the coming year. Notably, the Report Card indicates that the OSC expects proposed reforms to the regulatory framework governing registrants’ other business activities (OBAs) to be published for comment in the fall of 2020.

C.   Be Prepared for the OSC to Shift Its Stated Priorities

Market participants should always be prepared for the OSC to adjust its priorities in light of significant emerging issues. This year more than ever, however, market participants should be prepared for surprises. The OSC has also indicated that it expects to adjust and re-align its priorities throughout the coming year to accommodate changes resulting from the impact of COVID-19 as well as the outcomes of the Ontario Government’s Capital Markets Modernization Task Force.

Please contact us if you would like to discuss how the OSC’s priorities and goals for the coming year might affect your business.

June 30, 2020

Federal Court of Appeal Rules on Constitutionality and Application of Canada’s Anti-Spam Legislation

Earlier this month, the Federal Court of Appeal (Court) dismissed CompuFinder’s appeal of two related compliance and enforcement decisions by the Canadian Radio-Television and Communications Commission (CRTC) under Canada’s Anti-Spam Legislation (CASL). The CRTC had fined the company $200,000 for breaching CASL’s requirements to: (1) obtain prior consent from recipients of its commercial electronic messages (CEMs); and (2) include in those CEMs an unsubscribe mechanism that could be readily performed.

This case is significant for several reasons. First, it addresses the constitutionality of CASL’s regulatory framework governing CEMs. Second, it provides insight into the meanings of the “business-to-business” exception from CASL’s consent requirements for CEMs, the “implied consent” provision, and the requirement for CEMs to have an effective unsubscribe mechanism.

Background: CompuFinder, a company that offered training services, sent 317 CEMs to various individuals in 2014 without first obtaining their express consent to receive the CEMs. The company received a Notice of Violation in 2015 indicating that it had violated CASL and was subject to a $1.1 million penalty. In proceedings before the CRTC later in 2015, CompuFinder challenged the constitutionality of CASL’s CEMs regime, the merits of the Notice of Violation, and the penalty amount. The CRTC rejected most of CompuFinder’s submissions, except for lowering the penalty to $200,000. CompuFinder appealed that decision.

Constitutional Rulings: We will spare you the details of the Court’s ruling on CompuFinder’s constitutional challenge, except to highlight  the Court’s conclusions that:

  • CASL falls within the scope of the Canadian Parliament’s trade and commerce power; and
  • CASL’s infringement of section 2(b) of the Canadian Charter of Rights and Freedoms (Charter) is justified because the prevention of harm to Canada’s e-economy outweighs the effects of CASL on freedom of commercial expression.

We have summarized below the Court’s other key conclusions that we think will be relevant to our readers:

Business-to-Business Exception: CASL includes an exception from the pre-approval requirement for CEMs if:

  • The CEM is sent from one employee of an organization to an employee of another organization;
  • The CEMs concern the activities of the receiving organization (Relevance Requirement); and
  • The two organizations have a relationship (Relationship Requirement).

CompuFinder had argued, in effect, that its CEMs satisfied the Relationship Requirement because it had previously contracted with the organizations whose employees received the CEMs to provide training to at least one of the organization’s employees. Therefore, it could send CEMs to any the organization’s employees without obtaining their prior consent. The Court disagreed with CompuFinder and agreed with the CRTC that contractual relationships involving a very limited number of transactions affecting very few employees do not constitute relationships for purposes of the business-to-business exception.

Conspicuous Publication/Implied Consent Exception: CASL provides that consent to receive CEMs can be implied if:

  • The recipient has conspicuously published or caused to be conspicuously published their electronic address (Conspicuous Publication Requirement);
  • The publication is not accompanied by a statement that the recipient does not wish to receive CEMs; and
  • The CEM is relevant to the recipient individual or organization’s business, role, functions or duties.

The Court ruled that the CRTC did not err when it found that CompuFinder’s documentation, which included a table listing email addresses with links to where each address was found, did not satisfy the Conspicuous Publication Requirement. For example, some of the email addresses came from third-party directories that didn’t specify that the addresses were user-submitted. The Court also held that, in many situations, simply listing a recipient’s job title will not be enough to prove that the CEM is relevant to the person’s role, functions or duties.

Unsubscribe Mechanism: Some of CompuFinder’s CEMs had contained two “unsubscribe” links, one that worked and one that didn’t. The Court found no error in the CRTC’s conclusion that the existence of a faulty link meant that the CEM failed to satisfy the requirement to have an unsubscribe mechanism that could be “readily performed.” The Court noted that the existence of two alternatives, with no indication of which one is the correct one, could cause delay, as well as confusion and frustration if the non-functioning link was selected first.

Our Takeaways: Although this case concerned the provision of business-to-business training services, the Court’s ruling is relevant to a wide range of communications between representatives of organizations, including firms in the asset management sector. The Court’s ruling emphasizes the importance to firms of taking the technical requirements of CASL seriously, training their employees on those requirements, and substantiating any exception that the firm intends to rely upon. Breaching CASL could result enforcement action providing for significant penalties, a civil lawsuit, and/or unwelcome publicity. Please contact us if you would like to discuss the implications of this decision for your business operations or have us assist you with a review of your compliance program.

June 30, 2020

CSA Members Say They’ve Made It Easier to Register Client Relationship Management Specialists

On June 10, the Canadian Securities Administrators (CSA) announced steps, effective immediately, to make it easier for advising representatives (ARs) of portfolio managers (PMs) to register as client relationship management (CRM) specialists. Until now, CSA members required all applicants for registration as ARs to have stock-picking expertise and expected applicants for registration as associate advising representatives (AARs) to accumulate such expertise to become eligible to register as ARs.

Now, when a PM sponsors an individual for registration as an AR or AAR, the PM can identify the individual as a CRM specialist whose advice to clients will not include stock-picking. If the individual’s application for registration is accepted, it will include terms and conditions prohibiting them from providing stock-picking advice and requiring them to tell clients about the limits of the advice they can give. A PM will be expected to have at least one individual registered as a “full AR”. The CSA has also developed standard terms and conditions for CRM specialists so that regulatory expectations are clear and consistent.

Although this change in regulatory practice addresses the relevant investment management experience (RIME) requirement for registration, applicants in these registration categories will still have to meet the applicable education requirements. For example, to be an AR-CRM, the individual will have to be a Chartered Financial Analyst (CFA) or hold the Canadian Investment Management (CIM) designation).

The approach described above to registering individuals as AR-CRMs or AAR-CRMs reflects a change in regulatory practice. The CSA has not created a new registration category for CRMs at this time.

AUM Law has extensive experience helping firms and individuals navigate the registration process. We can help you assess the pros, cons and probability of succeeding with an application for individual registration in various categories and then prepare your application and engage with regulators on your behalf. Please contact us to discuss your options.

June 30, 2020

CSA Consults on Potential Reforms to SRO Framework

On June 25, the Canadian Securities Administrators (CSA) published a consultation paper (Consultation Paper) seeking feedback on whether the current framework for self-regulatory organizations (SROs) should be reformed. As our readers know, the existing system requires investment dealers to be members of the Investment Industry Regulatory Organization of Canada (IIROC) and requires most mutual fund dealers (except those in Québec) to be members of the Mutual Fund Dealers Association of Canada (MFDA). CSA members directly regulate and oversee exempt market dealers (EMDs), investment fund managers (IFMs), portfolio managers (PMs), and scholarship plan dealers (SPDs).

The Consultation Paper is the latest in a series of publications considering whether the existing SRO system should be reformed. In February, we discussed the MFDA’s proposal that the CSA take over direct oversight of markets while giving up direct oversight of EMDs, SPDs and certain PMs to a new self-regulatory organization (NewCo) that would take on direct responsibility for the registration, business conduct, prudential oversight, policymaking and enforcement functions of the registrants mentioned above, plus those currently overseen by IIROC and the MFDA. More recently, IIROC proposed that IIROC and MFDA be brought together as divisions of a consolidated SRO.

At this stage, the CSA is not recommending any particular regulatory model or reforms. Instead, the Consultation Paper describes the existing SRO framework, summarizes the results of  the CSA’s recent consultations with stakeholders, and seeks feedback on the issues raised by those consultations. According to the Consultation Paper, many stakeholders commended the SROs’ specialized expertise and the benefits of their national scope. However, they also raised some concerns about the existing system, including the following:

  • Product-based regulation: Some stakeholders think that there is an unlevel playing field and potential for regulatory arbitrage because similar products and services are subject to different rules, or differing interpretations of similar rules, depending on which organization’s rules apply.
  • Duplicative operating costs: There also are concerns that the lack of common oversight standards and differing interpretations of similar rules have led to duplicative operating costs for dealers who operate under both the IIROC and MFDA platforms.
  • Structural inflexibility: Some stakeholders think that the existing framework makes it harder for dealers to accommodate evolving investor preferences (e.g. to access a wider range of products from a single registrant), creates succession planning challenges for mutual fund dealers and their representatives (because of the limited product shelf they can offer their clients), and/or limits investment dealers’ ability to grow their businesses due to difficulties in attracting mutual fund dealing representatives because of the additional proficiency requirements.
  • Investor confusion: Investors and their advocates stated that layers of regulation have contributed to investor confusion because investors can’t access a broad range of products from one representative and/or are unsure whom to turn to if an issue arises.
  • Public confidence in SRO system: Some stakeholders see this project as an opportunity to enhance the SROs’ governance structures to focus on their public interest mandates and strengthen complaint resolution mechanisms.

Although the Consultation is likely to be of particular interest to IIROC and MFDA members, this initiative has the potential to reshape in fundamental ways the regulatory environment for all registrants, including firms and individuals currently subject to direct regulation and oversight by the CSA. The deadline to submit comments is October 23. If you would like to discuss the Consultation and its potential impact on your business, please contact your usual lawyer at AUM Law.

June 30, 2020