Month: August 2020
In this bulletin:
- CSA Finalizes Amendments to Syndicated Mortgages Regime, While OSC and FSRA Publish Local Rules and Guidance for Comment
- FSRA Consults on Rules and Guidance for the Use of Financial Advisor and Financial Planner Titles
- Ontario Consults on on Potential Reforms to Privacy Legislation
- CSA Publishes Research Report on How CRM2 Reforms and Mutual Fund Point-of-Sale Rules Have Affected Investor Knowledge, Attitudes and Behaviour
In Brief: CSA Raises the Bar on Threshold for Business Acquisition Reports ▪ SEC’s Risk Alert on COVID-Related Compliance Risks Is Instructive for Canadian Registrants ▪ Wealthsimple to Test Crypto Asset Trading Platform in CSA’s Sandbox ▪ NASAA Task Force Targets COVID-19 Fraudsters
News and Events: PMAC Fall Regulatory and Compliance Webcast – September 24
Click the link to access a PDF of our full, monthly bulletin summarizing these recent developments. >> Monthly Bulletin | Work from Wherever Edition | August 2020
On August 6, the Canadian Securities Administrators (CSA) published final amendments to national rules affecting the prospectus and registration exemptions for distributions of securities involving syndicated mortgages (National Amendments). In addition, some provinces including Ontario have proposed additional changes to their local prospectus and registration exemptions, and the Financial Services Regulatory Authority of Ontario (FSRA) is consulting on draft guidance (FSRA Guidance) for its supervision of mortgage brokers and administrators dealing in certain syndicated mortgages. The National Amendments, proposed FSRA Guidance, and proposed Ontario-specific amendments prospectus and registration exemptions (Ontario Rules) are expected to come into effect on March 1, 2021. Below, we highlight key features of the reforms.
The National Amendments will amend National Instrument 45-106 Prospectus Exemptions (NI 45-106), National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), and the related companion policies. Among other things:
- The existing prospectus and registration exemptions in Ontario, Newfoundland and Labrador, the Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island and the Yukon for securities that are syndicated mortgages (Mortgage Exemptions) will be removed. This will align the regulatory frameworks in these jurisdictions with the rest of Canada.
- The private issuer prospectus exemption (Private Issuer Exemption) will be removed for distributions of syndicated mortgages.
- Because of these changes, exempt distributions of syndicated mortgages in Canada will have to be effected under another prospectus exemption, such as the accredited investor exemption (AI Exemption), offering memorandum exemption (OM Exemption), or family, friends and business associates exemption (FFBA Exemption).
- Consistent with the current approach in British Columbia for syndicated mortgages distributed under the OM Exemption, the National Amendments will require supplemental disclosure tailored to syndicated mortgages.
- In Ontario and other jurisdictions where the Mortgage Exemptions currently apply to syndicated mortgages, market participants that are in the business of trading syndicated mortgages will need to determine whether the registration requirement applies to them.
Changes since 2019: The National Amendments are substantially similar to the proposed amendments published by the CSA for comment in March 2019 (2019 Proposal). But there have been a few changes. For example, Form 45-106F18 Supplemental Disclosure for Syndicated Mortgages will require disclosure of the potential subordination of the syndicated mortgage, clarify the calculation of the loan-to-value ratio, and include additional examples of risk factors.
Some jurisdictions have proposed further changes to their exemptions:
- Qualified syndicated mortgages: Ontario and New Brunswick have published for comment prospectus and registration exemptions for “qualified syndicated mortgages” (QSMs), and we expect Nova Scotia to introduce a similar pair of exemptions. Alberta and Québec have proposed a prospectus-only exemption for trades in QSMs.
- Distributions of non-qualified syndicated mortgage investments (NQSMIs) to permitted investors: Ontario and New Brunswick also have proposed prospectus and registration exemptions for distributions of NQSMIs to permitted clients (i.e. institutional and high net worth investors). Alberta has proposed a prospectus-only exemption for trades in NQSMIs to permitted clients, while Québec is asking for feedback on whether such an exemption should be introduced.
- Reports of exempt distribution: Ontario and New Brunswick will not require a Form 45-106F1 Report of Exemption Distribution to be filed for distributions of QSMs under their new prospectus exemptions or for distributions of NQSMIs sold to permitted clients.
Who will regulate what in Ontario beginning in March 2021? FSRA currently regulates all syndicated mortgage investments in Ontario. When the new regime comes into effect, FSRA will continue to supervise transactions involving qualified, syndicated mortgage investments and the mortgage brokers and administrators involved in such transactions. Oversight of NQSMIs will be split between FSRA and the OSC, depending on the status of the investor/lender and the type of transaction. In particular, FSRA will supervise:
- NQSMI transactions with permitted clients;
- NQSMI transactions with permitted and non-permitted clients before March 1, 2021 (Legacy NQSMIs); and
- Administrators of NQSMIs.
Mortgage brokerages that deal in mortgages and syndicated mortgages only with permitted clients will not have to register with the OSC and the distributions of these products to permitted clients will be exempt from the prospectus requirement. There will be dual oversight however, in some circumstances. For example, FSRA will have oversight over mortgage brokers dealing in NQSMIs when they act on behalf of the borrower who is not a permitted client, with the OSC having oversight over the trades with respect to that investor/lender.
The proposed FSRA Guidance describes FSRA’s forward-looking, risk-based approach to supervision of the firms and transactions over which it will have authority and outlines the data it plans to collect from firms to inform its risk assessments.
Comment Deadline: Comments on the proposed Ontario Rules and FSRA’s Proposed Guidance are due on September 21, 2020. If you are interested in submitting comments or have questions about how these changes to the syndicated mortgages regime could affect your business, please contact us.
August 31, 2020
On August 13, the Financial Services Regulatory Authority of Ontario (FSRA) published for comment Proposed Rule [2020-001] Financial Professional Title Protection (Rule), which will require individuals who use either the financial advisor (FA) or financial planner (FP) titles to have the appropriate credential from a FSRA-approved, credentialing body. FSRA’s authority to regulate the use of the FA and FP titles comes from the Ontario Financial Professionals Title Protection Act (FPTPA), which was passed in May 2019 but hasn’t come into force yet.
Instead of introducing a brand-new licensing regime for individuals, FSRA has proposed a framework that leverages existing credentials. The proposed Rule provides for the approval and oversight of bodies that offer credentials that meet FSRA’s minimum standards for FA and FP title users. Under the new regime, holding a designation (such as the CFA Charter) or a license from a regulatory agency will not automatically qualify an individual to use either the FA or FP titles. The body that issues the credential or license, and the specific license or credential, will have to be approved under the Rule first.
FSRA is seeking comments on, among other things:
- Its criteria for approval of credentialing bodies and specific credentials;
- Whether the baseline competency profiles outlined in the proposed Rule reflect the knowledge, skills and competencies that should be included in a credentialing body’s education program to establish the minimum standard for FP and FA title users; and
- Whether title holders should have to disclose to their clients the credential they hold that entitles them to use the FA or FP title (and what this disclosure should look like).
FSRA has also published draft guidance (Guidance) on the application process for approval of credentialing bodies and specific credentials.
Financial planning and advising activities that are subject to regulation will, in addition to oversight by the credentialing body with respect to the appropriate use of title, continue to be overseen and regulated by the relevant regulatory bodies.
Transition Period: Individuals who used either the FA or FP title immediately before January 1, 2020 and continue using it until the proposed Rule comes into force may continue using that title for another three years (in the case of FA title users) or five years (in the case of FP title users). This will give credentialing bodies time to become approved at the entity and credential level and give title holders time to obtain an approved credential, if required.
The comment period closes on November 12, 2020. If you have any questions about how the Proposed Rule could affect your business, please do not hesitate to contact us.
August 31, 2020
On August 13, the Ontario Ministry of Government and Consumer Services (Ministry) launched a consultation (Consultation) regarding potential reforms to Ontario’s privacy laws. Currently, the principal legislation governing privacy matters in Ontario’s asset management sector is the federal Personal Information Protection and Electronic Documents Act (PIPEDA). The Ontario government is considering whether there is a need for Ontario legislation or other measures to address potential legislative gaps or provide enhanced protections for individuals in Ontario.
This initiative is at an early stage of development, with the Ministry is seeking feedback on general concepts, including the following:
- Increase transparency: Provide individuals with more detail about how their information is being used by businesses and organizations;
- Enhance consent provisions allowing individuals to revoke consent at any time and establishing an opt-in model for secondary uses of their information;
- Introduce a right to be forgotten so that individuals can request that information relating to them be deleted;
- Introduce standards for de-identified data (i.e. anonymized data derived from personal information) to clarify how privacy protections apply;
- Introduce data portability standards, giving individuals greater freedom to change service providers without losing their data;
- Create a legislative framework for data trusts so that, for example, an organization’s data could be governed by a third party to ensure the data is used in a transparent and accountable way; and
- Increase the Information and Privacy Commissioner’s enforcement powers including the introduction of penalty powers.
Many of these themes overlap with issues being considered by the Government of Canada as part of its initiative to modernize PIPEDA, which we discussed in our May 2019 bulletin.
In Ontario, the Ministry has launched a survey to collect individuals’ views on privacy issues. Organizations are invited to make written submissions on the Consultation by October 1, 2020. If you want to make a submission or learn more about how existing privacy legislation and potential reforms may affect your business, please do not hesitate to contact us.
August 31, 2020
On August 27, the Canadian Securities Administrators (CSA) published a report on their four-year study of what individual investors think about fees and the performance of their investments and how they interact with their advisors (Report). The study was conducted to measure the impact of Phase 2 of the Client Relationship Model (CRM2) and the mutual fund “point of sale” (POS) rules on investor knowledge, attitudes and behaviour, although the CSA acknowledges that other developments such as news coverage and growing interest in low-cost funds may have contributed to the changes identified in the Report. Key findings include the following:
Fees: Readership of account statements hasn’t changed much since 2016, but more investors reported having a better understanding of how fees affect investment returns and considered it important to monitor the fees they were charged. However, there was no improvement between 2016 and 2019 in the number of investors indicating that their advisors discussed the impact of fees on returns with them.
Clients (Dis)Satisfaction: There was a statistically significant decline between 2016 and 2019 in how satisfied investors were with their advisors. More investors reported that they had changed, or were likely to change, their advisor in 2019 as compared with 2016.
Fund Facts Are Just Fine: Very few investors reported that they want more information to be included in the Fund Facts document.
Let’s (Not) Talk about Investment Plans: Investors reported little change in representatives’ practices of discussing investment planning with them, comparing 2019 to 2016 levels.
Firms with a significant number of individual clients might find it worthwhile to skim the Tracking Study as well as the Report. The Tracking Study includes demographic data and more detailed breakdowns of the findings (e.g. by province and account type). For example, the Tracking Study shows that a statistically significant increase in the percentage of investors advised under the discretionary authority (PM model) recently changed, or were likely to change, their investment firm (13% in 2016, versus 24% in 2019).
The CSA said that it expects the study results to inform its policymaking, although it did not provide any specifics. If you want to discuss the Report’s relevance for your business operations, please do not hesitate to contact us.
August 31, 2020
On August 20, the Canadian Securities Administrators (CSA) published final amendments (Amendments) to the business acquisition report (BAR) requirements for non-venture reporting issuers. Currently, such issuers must file a BAR after an acquisition if any of the significance tests set out in National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) exceeds 20%. To reduce the regulatory burden for issuers, the Amendments:
- Narrow the circumstances under which a BAR must be filed to transactions where at least two of those significance tests are triggered; and
- Raise the significance threshold to 30%.
The CSA expects the Amendments to take effect on November 18, 2020. If you have questions about the BAR requirements, please do not hesitate to contact us.
August 31, 2020
On August 12, the Office of Compliance Inspections and Examinations at the U.S. Securities and Exchange Commission (SEC) published a Risk Alert outlining compliance risk considerations for broker-dealers and investment advisors. Although the Risk Alert is most relevant for firms subject to the SEC’s jurisdiction, we think it is a helpful compilation of pandemic-related compliance and supervisory risks for Canadian firms to consider, too, and a possible indicator of the kinds of themes that Canadian securities regulators might also decide to pursue in compliance audits in the coming year.
August 31, 2020
Earlier this month, the Canadian Securities Administrators (CSA) published their first decision registering a crypto asset trading platform under their Regulatory Sandbox program. Wealthsimple Digital Assets Inc. (Wealthsimple) has been granted temporary exemptions from the prospectus requirements and certain requirements applicable to registrants (Exemptions) so that it can test its trading platform. The Exemptions provide, among other things, that Wealthsimple does not have to comply with the suitability determination requirements.
At AUM Law, we have extensive experience helping start-ups, including fintech firms, navigate the Canadian securities regulatory environment including the exempt market. If you are exploring a technologically innovative business model in the asset management sector, we can help you assess your chances of being accepted into a regulatory sandbox, engage with regulators on your behalf, and prepare the relevant documentation to get your business up and running. Please contact us for a free consultation today.
August 31, 2020
AUM Law is a proud sponsor of the Fall Regulatory and Compliance Webcast organized by the Portfolio Management Association of Canada (PMAC) on September 24. Click here to register for the event. We hope to (virtually) see you there and don’t forget to drop into our online booth for a chat.
On August 19, the North American Securities Administrators Association (NASAA) reported on the activities of its COVID-19 Enforcement Task Force (Task Force), which has initiated actions to disrupt 200 schemes intended to profit fraudulently from the pandemic. Modelled on NASAA’s 2018 Operation Cryptosweep, the Task Force includes investigators from 44 jurisdictions in Canada, Mexico and the United States. Canadian Task Force members accounted for more than one quarter of the actions taken to date.
According to the Task Force, many of the fraudulent offerings share characteristics, such as preying on fear while promoting safety amid uncertainty, promising monthly payments to appeal to cash-strapped investors, and/or involving cryptocurrency-related investment products, foreign exchange, and/or other products unfamiliar to inexperienced investors. We think the Task Force’s work may of interest to participants in Canadian capital markets, since it shows how North American securities regulators can act swiftly, in a coordinated way, to address emerging risks.
August 31, 2020