Month: October 2020
In this bulletin:
- Reminder: OSC Participation Fee Calculation and Payment
- Ontario Proposes Changes to Business Corporations Act
- CSA Guidance on Client-Focused Reforms – Part 2
- FSRA Publishes 2021-22 Statement of Priorities for Comment
- Kik Back in the News After Settling U.S. Enforcement Proceedings Regarding Its Token Offering
- CSA Provides Guidance to Issuers on Reporting COVID-19 Impact
In Brief: OSC and IIROC Looking for Hot Tips about Abusive Trading ▪ FSB Finalizes Its Cyber Incident Recovery and Response Toolkit
News and Events: PMAC Annual Conference November 17 – See You (Virtually) There! ▪ Year-End AUM Law Bulletin
Click the link to access a PDF of our full, monthly bulletin summarizing these recent developments. >> Monthly Bulletin | Halloween Edition | October 2020
It’s time for Ontario-registered firms, unregistered exempt international dealer/adviser firms, and unregistered investment fund managers to get ready to file their annual participation fee calculations with the Ontario Securities Commission (OSC) by December 1 and pay the prescribed fees by December 31.
Filing and Payment
- How and when: Firms must complete and file Form 13-502F4 Capital Markets Participation Fee Calculation (Form 13-502F4) or Form 13-503F1 (Commodity Futures Act) Participation Fee Calculation (Form 13-503F1), as appropriate, by December 1.
- Certification: Your firm’s chief financial officer (CFO) or another specified officer, such as the chief compliance officer (CCO), can certify and submit the required forms to the OSC.
- Amount: According to the information that your firm provides in Form 13-502F4 or Form 13-503F1, the National Registration Database (NRD) generates a preliminary annual fee summary in early December. The participation fee in Form 13-502F4 or Form 13-503F1, as well as the annual fees payable in other jurisdictions (if applicable), will be withdrawn from your firm’s NRD account on December 31. Ensure that your NRD account has the necessary funds on December 31 to allow these withdrawals.
- If you do not pay: Failure to pay annual participation fees will result in automatic suspension of a firm and its individuals. Furthermore, late fees will apply for forms and participation fees submitted after the due dates.
AUM Law Can Help: Please contact Gordana Beric or Rachel Palozzi if you would like our help in preparing and filing Form 13-502F4 or Form 13-503F1, or if you have any questions about the requirements.
October 30, 2020
On October 6, the Government of Ontario introduced Bill 213 Better for People, Smarter for Business Act, 2020 (the Bill). If enacted as proposed, the Bill will eliminate director residency requirements for corporations established under the Ontario Business Corporations Act (OBCA) and introduce a more flexible regime for privately held OBCA corporations regarding written shareholder resolutions.
Director Residency: The Bill eliminates the requirement that at least 25% of the directors of an OBCA corporation be “resident Canadians”, as that term is defined in the OBCA. Dropping this residency requirement is consistent with the approach taken in the majority of provinces and territories and will provide Ontario corporations, both public and private, with greater flexibility in determining board composition. Corporations established under the Canada Business Corporations Act (CBCA), however, still must abide by the 25% director residency requirement.
Shareholder Resolutions: Currently, the written resolutions of an OBCA corporation’s shareholders must be signed by all of the shareholders entitled to vote on the resolution at a meeting of shareholders. If the corporation cannot obtain a shareholder’s signature, the only alternative is to call and hold a meeting for shareholders to vote on the resolution. If the Bill is enacted as proposed, the default approval threshold for an ordinary written resolution of the shareholders of a privately held OBCA corporation will drop from unanimity to a simple majority. This will enable corporations to avoid the cost and delay associated with holding a shareholders’ meeting. However, a higher approval threshold can be set in the corporation’s articles or in a unanimous shareholders’ agreement (USA). Note that if a written resolution of shareholders is passed by some but not all of the corporation’s shareholders, the corporation must provide written notice of the resolution, within ten days of the resolution being passed, to any voting shareholders who weren’t signatories to the written resolution. Importantly, no change is proposed to the requirement that written, special resolutions must still be signed by all shareholders, ensuring that minority shareholders have advance notice of any fundamental changes to the business.
Our Takeaways: The proposed changes offer more operational flexibility for Ontario corporations and make Ontario a more attractive jurisdiction for new businesses. Currently, the Bill is at the second reading stage. We will monitor its progress and update readers if and when it is passed. If the Bill is enacted, AUM Law can assist owners and managers of OBCA corporations in reviewing and, if appropriate, modifying their current articles, by-laws and USAs to take into account these amendments. In the meantime, please do not hesitate to contact us if you have any questions about the potential impact of these changes.
October 30, 2020
On October 13, the Financial Services Regulatory Authority of Ontario (FSRA) published for comment its proposed 2021-22 Statement of Priorities (SoP). We think our readers may find the following elements of the proposed SoP interesting.
Cross-Sectoral Priorities: FSRA has identified four cross-sectoral priorities.
- Enable Innovation: FSRA’s Innovation Office plans to, among other things, review the discretionary powers FSRA needs to enable regulatory solutions that respond to the pace of change in the sectors it regulates. It also intends to develop an inclusive innovation framework, a proactive innovation engagement and outreach strategy, build a two-way communication channel with stakeholders to support forward-looking regulatory practices, and create financial innovation testing environments and tools for prioritized sectors.
- Modernize Systems and Processes: In the coming fiscal year, FSRA expects to implement a technology platform that enables simplified and fully digitized operations, including a 360-degree view of regulated entities, a case management system, an enterprise content management system, and data analytics, with enhanced client portals. It also plans to implement advanced online/web-based information sharing and transactional processing tools on FSRA portals, develop digital document processing capabilities to streamline existing paper-based channels, and enable data analytics for each of its regulated sectors to support policy and supervisory initiatives.
- Transition to Principles-Based Regulation (PBR): FSRA will continue transitioning to a principles-based and outcome-oriented regulatory approach. This will involve, among other things, continuing to update its external supervisory and regulatory processes and guidance to reflect a principles-based approach, completing a review of its Guidance Framework and updating it as needed to ensure it’s aligned with PBR, initiating each sector’s implementation of a PBR approach, and then formally rolling out PBR to ensure understanding of the approach.
- Protect the Public Interest: FSRA plans to develop and publish a complaints framework and implementation plan for affected sectors, develop a strategy for consumer disclosures and pilot disclosure improvements, strengthen cross-jurisdictional regulatory collaboration around consumer protection issues, develop and publish a framework for consumer education, and pilot education tools and strategies.
Financial Planners and Advisers: As we discussed in our August 2020 bulletin, FSRA has proposed a regulatory framework for the approval and oversight of bodies that offer credentials that meet FSRA’s minimum standards for financial planner (FP) and financial adviser (FA) titles. In fiscal 2021-22, FSRA plans to operationalize and fully implement the title protection framework, including approval of credentialing bodies and FP/FA titles under the new regime, rollout of a supervisory approach to credentialing bodies, development of an action strategy targeting non-credentialed FP/FA users, and a public education campaign.
Mortgage Brokers: FSRA’s priorities for this sector will focus on supporting the Ontario Government’s policy direction relating to the five-year review of the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA) completed in 2019. The SoP, however, does not outline any specifics on what that work might involve.
What’s Next: Comments on FSRA’s proposed SoP are due on November 3 and FSRA expects to submit its annual business plan to the Minister of Finance by the end of the year.
October 30, 2020
Readers might recall that in August 2019, we reported that the U.S. Securities and Exchange Commission (SEC) was taking enforcement action against Ontario-based crypto-currency issuer Kik Interactive Inc. (Kik), alleging that it had made an unregistered offering of tokens known as Kin in violation of the Securities Act of 1933 (Securities Act).
On September 30, U.S. District Court for the Southern District of New York (Court) awarded summary judgment in favour of the SEC. Focusing on the economic realities of the transaction, the Court concluded that Kin met the definition of an “investment contract” and, therefore, Kik’s offering of Kin without a registration statement or available registration exemption violated the Securities Act.
Having ruled on the legal issues, the Court left it up to the parties to negotiate a final judgment. On October 21, the Court approved the parties’ settlement, which provides, among other things, that Kik will pay US $5 million to the SEC. For the next three years, Kik also is required to give the SEC 45 days’ advance notice before it participates, directly or indirectly, in any offer, sale, or transfer of the existing Kin tokens or any new, similar digital asset.
As we emphasized last year, this case and the regulators’ continued focus in this area highlight the importance of obtaining legal advice if your business plans contemplate the use of crypto-currency. AUM Law has experience in this area, and we can help you navigate its regulatory challenges.
October 30, 2020
On October 29, the Canadian Securities Administrators (CSA) published their biennial report (Report) on staff reviews of reporting issuers’ continuous disclosure (CD). Although the Report focuses mainly on staff’s findings for the fiscal years ended March 31, 2019 and March 31, 2020, CSA staff also have included guidance on how issuers should consider reporting the impact of COVID-19 on their operating performance, financial position, liquidity and future earnings. Staff’s recommendations in this area address the following topics among others:
- Financial statements: CSA staff note that given the rapidly changing environment, it may no longer be appropriate for issuers to condense or omit certain disclosures in their interim financial statements because the information disclosed in the latest annual financial statements may be less relevant. Issuers also must consider, as new information becomes available, whether their judgments and estimates must be updated and prospectively reflected in their interim financial reports.
- Forward-looking information (FLI): Due to the uncertainty arising from COVID-19, issuers may need to revise or withdraw previously announced FLI or outlooks.
- Don’t blame COVID-19 for everything: Staff emphasize that issuers’ MD&A should be entity-specific and transparent and provide a detailed explanation and breakdown of the impact not just of COVID-19 but of any other factors contributing to variances.
- Liquidity and capital resources: Issuers whose liquidity or capital resources are significantly affected by COVID-19 should provide a comprehensive assessment of the pandemic’s current and expected impacts and quantify that impact where possible.
- Material change reports: Staff reminded issuers to consider whether COVID-19 or resulting government or regulatory policies are having unique or more significant impacts on them compared with others in their industry and listed examples of developments that might require a material change report.
If you have questions about the Report or would like to discuss a potential disclosure issue, please do not hesitate to contact us.
October 30, 2020
October 30, 2020
In April, we wrote that the Financial Stability Board (FSB) was seeking comment on 46 recommended cyber incident response and recovery (CIRR) practices for financial institutions. On October 19, the FSB published its final “toolkit” consisting of 49 recommendations (Report). Although the FSB tends to focus more on systemically important financial institutions, we think that all capital markets participants will find it worthwhile to read the final Report. The FSB expects that firms of various sizes and with different business models will choose to adopt, and adapt, some or all of the recommendations as appropriate, taking into account their size, complexity and risks to the financial system.
AUM Law can help you assess and enhance your cyber security policies and procedures and conduct training in this area for your employees. Please contact us to find out more about our services in this area.
October 30, 2020
AUM Law is proud to sponsor the Portfolio Management Association of Canada’s National Conference, Hindsight is 2020: The Year in Review and What Lies Ahead, on November 17. Click here to see the agenda and to register, and please stop by our virtual booth to say hello.
October 30, 2020
In October 2019, the Canadian Securities Administrators (CSA) finalized their client-focused reforms to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) (CFRs or Amendments). The CFRs are the most sweeping changes to NI 31-103’s ongoing registrant obligations since the rule was adopted over ten years ago. These reforms represent a fundamental shift towards a best interest standard.
Implementing the CFRs will require changes to your policies, procedures, internal controls, record-keeping protocols, client-facing documentation and compliance training, but there’s no need to panic. AUM Law is here to help. Giving our clients practical advice on compliance with NI 31-103 is one of our core services. We can help you develop a project plan, work with you to systematically review and make any needed changes, and train your employees so that you are ready as the CFRs are phased in.
On September 28, the Canadian Securities Administrators (CSA) published guidance in the form of responses to frequently asked questions (FAQs) about how to interpret and implement the client-focused reforms (CFRs) to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). As our readers already know, the conflicts-related CFRs must be implemented by June 30, 2021 and the remaining CFRS must be implemented by December 31, 2021. If you need a refresher on the CFRs, you can download our recently updated publication In a Nutshell: Implementing the Client-Focused Reforms.
On September 30, we published an article sharing our first look at some of the FAQs. In this article, we’ll highlight additional FAQs that we think our readers will find relevant as they work on their implementation plans.
Know-Your-Client (KYC) and Suitability Requirements
- Collecting Information about Outside Holdings: In their response to FAQ 2, CSA staff provide guidance on how they expect registrants to handle situations where they do not have access to information about a client’s outside holdings, which may be relevant to the registrant’s assessment of the client’s capacity for loss. In particular, CSA staff expect dealers to obtain a breakdown of the client’s financial assets and net assets to ensure that the information collected accurately reflects the client’s financial circumstances and to assist the registrant in determining the availability of prospectus exemptions the suitability of any investment made. Outside investments may be particularly important to an assessment of whether a particular investment could lead a client to become over-concentrated in a security. Staff indicated, however, that if a client refuses to provide or update the requested information, that refusal does not automatically prevent the registrant from servicing the client. The registrant should use professional judgment in deciding whether it has sufficient information to meet its suitability determination requirement and whether that information is sufficiently current. Furthermore, staff expect dealers to make further inquiries where there is a reasonable doubt about the accuracy of information provided by the client or the validity of the client’s claim to be an accredited investor or eligible investor.
- Unsolicited Orders: In their response to FAQ 2, CSA staff also remind registrants of the new requirement, set out in section 13.3(2.1) of NI 31-103, regarding unsolicited orders. If the registrant believes that a client order or instruction isn’t suitable, it’s insufficient to mark the order as unsolicited. The registrant must advise the client in a timely manner against proceeding, indicate the basis for that determination, and recommend an alternative that satisfies the suitability requirement in subsection 13.3(1). In order to provide such advice, the registrant must have sufficient KYC information.
- Evidencing Compliance with KYC Update Requirements: In their response to FAQ 3, CSA staff emphasize that they have not prescribed how registrants must evidence their compliance with obligations to keep KYC information current. They note that methods for documenting a client’s confirmation of the accuracy of information, including significant changes, may include maintaining notes in the client’s file or more formal methods such as obtaining the client’s digital or handwritten signature. In some cases, notes of a phone call will be enough but in other situations (e.g. where there are significant changes in KYC information), staff expect that information to be repapered. Also, when a periodic review takes place, CSA staff expect all KYC elements to be reviewed. It wouldn’t be reasonable to update a client’s income or employment without asking questions to revisit their risk tolerance and time horizon.
- Reassessing Suitability When Team Membership Changes: Section 13.3.(2)(a) of revised NI 31-103 (the Revised Rule) requires a registrant to review a client’s account and reassess the suitability of the securities in that account if, among other things, a registered individual is designated as responsible for the client’s account. In FAQ 26, CSA staff provide guidance on how that requirement can be interpreted where a firm assigns teams, rather than specific individuals, to client accounts. They indicate that professional judgment must be exercised in deciding whether a change in team membership triggers a suitability review. For example, a change of one registered individual will not necessarily trigger the requirement but individual team members’ roles and responsibilities, to the extent they differ, should be considered. For example, if there is a team leader who approves other team members’ recommendations and that team leader changes, it is likely that a review would be appropriate because that individual is effectively designated as responsible for the client’s account.
Best Interests Standard: In FAQ 4, market participants sought more guidance on how they can ensure that they are addressing material conflicts of interest in the best interests of their client. CSA staff’s response, however, does not provide much additional information. Staff reiterate their prior statements that determining best interests is a facts and circumstances-specific exercise, point to their guidance in NI 31-103CP regarding conflicts, and stress that a registrant’s conflicts analysis should take into account materiality, reasonability and professional judgment, taking into account the client-registrant relationship and the registrant’s business model.
Conflicts Disclosure: FAQ 15 asks whether conflicts can be grouped for disclosure purposes or whether they must be specifically enumerated. In their response, CSA staff stress that they do not want the disclosure to overwhelm clients but that some specificity is needed to help clients evaluate their relationship with the registrant. Registrants should use their professional judgment in deciding whether grouping certain conflicts together will result in the client being able to more easily understand the disclosure.
Relationship Disclosure Information (RDI) Requirements
- Timeline: Now that the deadline for implementing the revised RDI requirements has been extended to December 31, 2021, CSA staff expect all new and existing clients to receive updated RDI in line with that deadline (FAQ 21).
- Delivery Mechanisms and Content: CSA staff’s response to FAQ 21 also emphasizes that registrants have flexibility about how they deliver the revised RDI. For example, the information could be provided to a new client during onboarding, while an existing client could receive the information when the registrant first interacts with that client after the implementation date. If an existing client has opted to receive correspondence electronically, firms should provide the s. 14.2 disclosure to that client by December 31, 2021 to the extent feasible. Staff also stress that, to satisfy s. 14.2, registered individuals must spend enough time with the client to adequately explain the information being delivered to the client, including an explanation of any changes to the RDI being delivered to the client. Finally, CSA staff encourage registrants to assess the effectiveness of the disclosure they provide to clients by considering behavioural economics principles and tactics to simplify the content.
- Standalone Conflicts Disclosure: FAQ 22 doesn’t expressly incorporate a question, but it seems to seek the CSA’s confirmation that firms will not have to mail out a separate disclosure document disclosing material conflicts of interest by June 30, 2021. In their response, CSA staff point out that the required conflicts disclosure to new and existing clients cannot be delayed past the June 30, 2021 deadline. However, the disclosure can be provided electronically or on paper, provided that it meets the CFRs’ plain language requirements. In addition, registrants that are not required to be members of the Investment Industry Regulatory Organization of Canada (IIROC) do not have use a prescribed RDI document to deliver the account opening conflict of interest disclosure.
- Disclosure about Fees, Expenses and Operating Charges: CSA staff’s responses to FAQs 23 and 24 go beyond the guidance in revised NI 31-103CP to set out some additional factors and principles to consider in crafting RDI to meet the requirements in sections 14.2(2)(b)(ii) and 14.2(2)(o). Among other things, staff state the following:
- Since fee models and products and services offered to clients vary widely, registered firms will have to exercise professional judgment as to the extent they can standardize disclosure, how client-specific it can be, and how much detail is needed. They also will need to strike the right balance between providing “enough information” and not overwhelming the investor.
- Subparagraph 14.2(2)(b)(ii) of NI 31-103 does not require the firm to provide the client with a list of all investment funds and other products with ongoing fees and expenses. Rather, it is to inform clients who may be invested in such products or services that those investments have ongoing fees and expenses. For example, staff would expect disclosure in plain language about how fees and expenses are taken from the fund as a percentage of its total assets, how the fees and expenses will be deducted from the fund’s returns (and therefore will affect the client’s returns on their investment for as long as they hold the fund), and that when the client gets information about the value of their investment in the fund, the fees and expenses have already been taken into consideration.
- The requirements for transaction charge disclosures in RDI are for “a general description” of the types of transaction charges that the client might be required to pay. This means that types of fees that the firm does not currently use for clients like the individual receiving the RDI should be excluded. It also means that the details of the amounts relating to a specific security should not be included in RDI.
- The requirement to disclose operating charges is not qualified as a “general description”. It is specific to what the firm might charge the client related to the account. This is because RDI is deliverable at account opening and the specific details about the cost of having the account are therefore relevant at that time.
- The requirement relating to the potential impact of fees and charges is for a “general description” but it is specific to the types of transaction charges and the actual operating charges (if any), as well as the investment fund management fees or other ongoing fees the client may incur in connection with a security or service, applicable to the client’s account. The most evident impact is that investment returns will be reduced in proportion to the fees and charges.
- Firms should not provide generic summaries of the kinds of charges that are used in the industry or a sector of it.
- A firm with a simple AUM-based fee model can be much more specific and more readily use numerical examples than one that relies on a mix of transaction fees and trailing commissions paid on products that it sells to clients.
- Firms are encouraged to use graphics as well as text in order to make the information understandable to as many clients as possible.
Training: In their response to FAQ 1 regarding training on conflicts of interest, CSA staff indicated that registrants should exercise professional judgment in developing training materials and determining which staff require the training. They also said that:
- They expect firms to train “all appropriate staff” on conflicts of interest generally, and this would include all registered individuals, all supervisory staff, and additional staff (including compliance staff) depending on their roles and responsibilities.
- Training on the firm’s code of conduct, which generally includes training on conflicts of interest policies, procedures and controls may be sufficient to evidence training of staff on conflicts of interest generally.
- Specific training modules for certain material conflicts also may be required for certain staff (e.g. training on compensation-related conflicts may be needed for all registered individuals and compliance/supervisory staff).
If/When Updates to Guidance Can Be Expected: FAQ 27 asks whether there is a comprehensive list of guidance and staff notices that the CSA and/or the self-regulatory organizations (SROs) expect to revise or rescind. In particular, market participants asked if guidance published by IIRCO and the Mutual Fund Dealers Association of Canada (MFDA) regarding personal financial dealings will be revised or rescinded. CSA staff state that:
- If there is an inconsistency between language included in prior CSA guidance and the CFRs, the CFRs prevail to the extent they impose requirements or set out more current guidance.
- The CSA proposes to review earlier guidance and may revise it or rescind it at a later stage. The FAQ guidance does not provide any specifics about what will be reviewed or when such a review will take place.
- IIROC does not expect to issue new guidance on personal financial dealings.
- The MFDA intends to revise “all [presumably relevant] guidance”. In particular, MSN-0047 Personal Financial Dealings with Clients will be revised but no changes to MSN-0031 Control or Authority over the Financial Affairs of a Client are expected.
If you would like to discuss the FAQ Guidance and its relevance to your business, or if you have other questions about the CFRs or would like our assistance on implementation matters, please do not hesitate to contact us. Please contact your usual lawyer at AUM Law for assistance, or if you’re new to the firm, please contact us for a free consultation.
October 9, 2020