Month: April 2021
In February 2021, FINTRAC updated its guidance on politically exposed persons (PEP) and heads of international organizations (HIO), as well as related guidance for account-based reporting entity sectors, including “securities dealers” (i.e. dealers and advisors). This guidance comes into effect on June 1, 2021.
The fundamental obligation of a registrant to make a PEP and HIO determination remains unchanged. The new guidance adds additional specificity and clarity regarding the duration of being a PEP/HIO and who constitutes a family member or close associate of a PEP or HIO. It also sets out some exceptions to the requirement to make a PEP or HIO determination.
Prior to the new guidance taking effect in June 2021, registrants should reflect the revised guidance in their compliance manuals and review their account opening documents to ensure that the PEP and HIO questions accurately capture those who meet the definitions.
The general FINTRAC guidance regarding a PEP and an HIO can be found here and the account-based information can be found here. Please don’t hesitate to contact your usual lawyer at AUM Law.
April 30, 2021
On May 12, AUM Law’s Chris Tooley will participate as a speaker at the Portfolio Management Association of Canada (PMAC) Spring Regulatory & Compliance Webcast on FINTRAC audits and Richard Roskies will also be speaking on the topic of OSC audits.
April 30, 2021
On March 29, the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC, and together with the CSA, Regulators) jointly published Staff Notice 21-329 Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements (Staff Notice). The Staff Notice is intended to provide regulatory guidance on how securities legislation, as it currently stands, applies to platforms (Crypto Asset Trading Platforms, or CTPs) that facilitate or propose to facilitate the trading of crypto assets that are securities (Security Tokens) or instruments or contracts involving crypto assets (Crypto Contracts) in the interim period while the Regulators continue working on establishing a long-term regulatory framework for CTPs. The Regulators’ work in this area began with the publication of Consultation Paper 21-402 Proposed Framework for Crypto-Asset Trading Platforms back in March 2019 (Consultation Paper), which we reported on in a previous issue of our bulletin.
In providing their guidance, the Regulators divide the CTPs into two broad categories: The Marketplace Platforms, which operate in a manner similar to marketplaces as currently defined in securities legislation and the Dealer Platforms, which are CTPs that are not marketplaces.
Dealer Platforms: The two most common characteristics of a CTP that is a Dealer Platform are that:
- It only facilitates the primary distribution of Security Tokens; and
- Clients do not interact with one another on the CTP.
The Regulators indicate that for a Dealer Platform that only facilitates distributions or the trading of Security Tokens in reliance on prospectus exemptions and does not offer margin or leverage, registration as an exempt market dealer or, in some circumstances, restricted dealer may be required.
A Dealer Platform that trades Crypto Contracts, on the other hand, would be expected to be registered in an appropriate dealer category, and where it trades or solicits trades for retail investors that are individuals, it will generally be expected to be registered as an investment dealer and be an IIROC member.
Marketplace Platforms: Generally, a CTP would be a Marketplace Platform if it:
- Constitutes, maintains or provides a market or facility for bringing together multiple buyers and sellers and their orders for trading in Security Tokens and/or Crypto Contracts; and
- Uses established, non-discretionary methods under which such orders will be executed and processed.
Marketplace Platforms will generally be subject to the requirements applicable to alternative trading systems, such as those set out in National Instrument 21-101 Marketplace Operations.
Additionally, it is contemplated that activities on Marketplace Platforms will be subject to market integrity requirements, such as IIROC’s Universal Market Integrity Rules or similar provisions.
Where a Marketplace Platform also conducts activities similar to those performed by Dealer Platforms, it would also be subject to the appropriate dealer requirements, including dealer registration requirements, discussed above.
The Regulators acknowledge the continued evolution of fintech businesses and the emergence of a wide variety of CTP models, and note in all cases that exemptive relief may be available and terms and conditions that are tailored to their businesses may be appropriate.
The Staff Notice also contains in an appendix the Regulators’ responses to the comments received from industry stakeholders on the Consultation Paper, but does not give much indication on what the long-term regulatory framework may look like (other than, perhaps, the taxonomy of CTPs that is used in the Staff Notice) or an expected timeline.
They encourage CTPs to consult with their legal counsel and to contact staff of their local securities regulatory authority on the appropriate steps to comply with securities legislation and IIROC rules. If you have any questions on the implications of this guidance, please contact us.
April 30, 2021
On March 29, 2021, Bill 22, Red Tape Reduction Implementation Act, 2020, was proclaimed into force in Alberta. As a result, an Alberta corporation will no longer be required to have any Canadian citizens on its board of directors. In addition, director residency information will no longer be collected.
Previously, businesses incorporated under the Business Corporations Act (Alberta) were required to have a minimum of 25% of their directors be Canadian residents. The move is part of a larger Government of Alberta mandate to attract businesses by reducing costs and regulatory burden for Alberta businesses. We previously reported similar proposed changes for corporations incorporated under the Business Corporations Act (Ontario) pursuant to Bill 213. Bill 213 has received royal assent on December 8, 2020 but has not yet been proclaimed into force.
April 30, 2021
On March 31, 2021, the Alberta Securities Commission and the Financial and Consumer Affairs Authority of Saskatchewan adopted, on an interim, three-year basis, a new prospectus exemption entitled the Self-Certified Investor Prospectus Exemption, as outlined in Multilateral CSA Notice of Implementation Alberta and Saskatchewan Orders 45-538 Self-Certified Investor Prospectus Exemption. The new exemption allows individual investors in Alberta and Saskatchewan who do not qualify as an accredited investor to invest alongside accredited investors, provided that they meet other criteria to demonstrate their financial and investment knowledge. There are a number of conditions to the exemption, including an extensive prescribed risk disclosure as part of the self-certification, and limits on investments to $10,000 in the last 12 months per issuer, with an aggregate cap of $30,000 in the last 12 months for all issuers. The investment limits do not apply for ‘Listed Issuer Investments’, or those issuers listed on certain exchanges in Canada, provided the investor receives suitability advice respecting the investment from a registrant. Guidance is provided on the distribution of securities by private issuers to self-certified investors and special purpose vehicles comprised in part of self-certified investors.
April 30, 2021
The Alberta Securities Commission and the Financial and Consumer Affairs Authority of Saskatchewan have proposed a new prospectus exemption to assist small businesses in Alberta and Saskatchewan to raise up to $5 million from investors in those provinces, based on a simple offering document (which would be considered an offering memorandum under securities legislation).
There are many proposed conditions to the use of the exemption, which vary depending on whether or not financial statements are provided to an investor. For example, if the statements are not provided, the maximum an issuer group could raise from investors that would not qualify to invest under other specified prospectus exemptions over a 12 month period would be $1.5 million, subject to a lifetime limit of $5 million. The maximum any one investor could invest would be $2,500, or a higher limit of $10,000 if they qualify as a “minimum income investor” (which would have lower thresholds than those required of an “accredited investor”). The individual investor thresholds are slightly higher if financial statements are provided.
It is proposed that the financial statements provided under the exemption would not need to be audited (review engagement only) and could be prepared based on Canadian GAAP applicable to private enterprises (with some modifications). It is noted that corporate or other legislation might still require certain issuers to provide audited statements. The financial statements would have to continue to be provided to investors but only until such time as the proceeds from the offering are expended, and continuous distribution offerings would not be permitted. The exemption is intended to address financing challenges for small businesses that do not yet attract venture capital investors, and the exemption would not be available to issuers that are reporting issuers or investment funds. Other conditions to the exemption include requiring investors to sign a prescribed risk acknowledgement, the filing of a report of exempt distribution and the filing of the offering document on SEDAR.
Interestingly, an issuer would be given the choice of creating their own offering document with the specified information included, or to use a pre-designed form of offering document with a drop down menu that could be completed electronically in a Q&A format. Comments on the proposal are due on May 7 (May 24 with respect to the technical amendments relating to SEDAR filing requirements).
April 30, 2021
The Alberta Securities Commission is continuing to explore unique exemptions to revitalize Alberta’s capital markets and assist small businesses to raise capital efficiently while balancing investor protection.
The proposed new blanket order would provide an exemption from the dealer registration requirement in Alberta for individual finders who utilize pre-existing personal contacts. It would replace the current Northwestern Exemption which has been revoked everywhere except Alberta. The targeted exemption is intended to assist early stage businesses raising modest amounts of capital without the participation of a registered dealer. There are a number of requirements for the use of the exemption, including that the issuer must have its head office in Alberta, and that the issuer can not have raised more than $5 million under all exemptions from the prospectus requirements. The registration exemption for finders would only be available if the issuer uses certain specified prospectus exemptions, such as the private issuer exemption where the purchaser is an accredited investor or not a member of the “public”, the offering memorandum exemption and the accredited investor exemption.
Finders would not be permitted to solicit prospective purchasers other than people with whom they have a “substantial pre-existing relationship”, and as a result advertising would also be prohibited. In addition, the finder would not be allowed to rely on the dealer exemption if they have previously provided certain financial services to the purchaser of securities, such as financial planning, provision of insurance products or mortgage services. Investors would be required to sign a specified risk acknowledgement form, and an information form with respect to the finder would need to be filed with the ASC within 10 days of the distribution. Comments on the new proposal are due by May 7.
April 30, 2021
The Supreme Court of British Columbia has confirmed that monetary penalties and disgorgement orders from regulatory proceedings are exempt from a bankruptcy discharge. In 2015, the British Columbia Securities Commission ordered Thalbinder Singh Poonian and Shailu Poonian to pay more than $19 million in penalties and disgorgement after the commission found that the pair had engaged in market manipulation. In 2018, the Poonians sought a discharge from bankruptcy absolving them of their debts. The British Columbia Supreme Court denied their application for an absolute or suspended discharge from bankruptcy under the Bankruptcy and Insolvency Act.
The ruling sends a strong message that securities law violators may have difficulty using bankruptcy laws to release themselves of the financial consequences of their wrongdoing.
April 30, 2021
On March 18, 2021, the Court of Appeal for Ontario ruled that a malicious prosecution lawsuit against the Ontario Securities Commission and three of its employees can proceed. One of the appellants in the case, Mr. Sam Qin, and various entities he controlled, were involved in the development and management of solar energy projects in Ontario and elsewhere. Mr. Qin attempted to raise capital for his projects using a program sponsored by the Ontario government. Neither Mr. Qin, nor any of his companies, were registered to sell securities and no prospectus was filed in connection with Mr. Qin’s efforts to raise funding. After certain proceedings, the OSC dismissed the allegations, finding that the appellants were not mainly engaged in the sale of securities and were not required to register under the Securities Act (Ontario).
In their statement of claim, the appellants argued that the allegations were false, made without reasonable and probable cause, and made for a collateral and improper purpose.
April 30, 2021
In January 2021, the Capital Markets Modernization Taskforce published its final report after completing its review of the status of Ontario’s capital markets. In its most recent provincial budget, the Government of Ontario indicated that it will proceed with certain of the recommendations made in the report, including to expand the Ontario Securities Commission’s mandate to include fostering capital formation and competition in the markets. The OSC’s current mandate is to provide protection to investors from unfair, improper, or fraudulent practices, to foster fair and efficient capital markets and confidence in capital markets, and to contribute to the stability of the financial system and the reduction of systemic risk.
April 30, 2021
In this bulletin:
- Updates on Amendments re Syndicated Mortgages
- FINTRAC Publishes Guidance on Politically Exposed Persons and Heads of International Organizations
- ASC Notice and Request for Comment re Blanket Order 31-536 Alberta Small Business Finder’s Exemption
- CSA Multilateral Notice and Request for Comment re Proposed Order 45-539 Small Business Financing
- CSA Publishes Guidance on Crypto-Asset Trading Platforms
In Brief: Alberta and Saskatchewan Adopt Self-Certified Investor Prospectus Exemption ▪ FSRA Publishes First Quarterly Report Scorecard on Service Standards ▪ Expansion of Ontario Securities Commission’s Mandate ▪ Lawsuit Against Ontario Securities Commission Can Proceed ▪ Disclosure Expectations for Crypto Asset Reporting Issuers ▪ Regulatory Penalties in British Columbia Not Discharged Through Bankruptcy ▪ Alberta Eliminates Director Residency Requirements
News: AUM Law Speaks at PMAC Conference
Click the link to access a PDF of our full, monthly bulletin summarizing these recent developments. >> Monthly Bulletin | Hello Spring Edition | April 2021
On March 12, 2021, the Financial Services Regulatory Authority of Ontario (FSRA) published its first quarterly scorecard on its service standard performance. FSRA has 22 service standards to support core regulatory services. The standards measure operational and regulatory activities that FSRA provides to industry and consumer stakeholders, such as licence renewals, regulatory applications, complaints resolution and annual information returns. The standards set service expectations and targets for stakeholders and consumers under normal conditions and are intended to improve accountability and timeliness of service delivery. According to the results for Q3 of 2020:
- FSRA met or exceeded service targets for 80 per cent of its standards over the reporting period.
- Standards that fell below target were related to complaints, licence applications processing (including mortgage broker licensing) and pension applications processing.
- The below-target performance is an outcome of FSRA adopting new service processes mid-quarter. The processes required staff to adapt to new steps and technology.
- Where FSRA fell below target, it has identified mitigation plans. FSRA intends to continue to conduct staff training on the new processes and expects performance scores in all three areas to improve in subsequent quarters.
FSRA intends to monitor quarterly scores and adapt standards to its regulatory activities, resources and the needs of stakeholders. In the fall, as part of its 2022-2023 business planning/budgeting process, FSRA will seek comments regarding the need for additional resources to meet higher standards. The service standards will undergo a full review in early 2022.
April 30, 2021
As reported in our December 2020 bulletin, on December 7, the Ontario Securities Commission (OSC) released the final amendments to OSC Rule 45-501 Ontario Prospectus and Registration Exemptions (Amendments). The Amendments form part of the changes across Canada which, in Ontario, will have as one of their effects the transfer from the Financial Services Regulatory Authority of Ontario (FSRA) to the OSC of regulatory oversight over the distribution of non-qualified syndicated mortgages (NQSMIs) to persons that are not permitted clients.
On February 25, 2021, the Canadian Securities Administrators (CSA) published CSA Staff Notice 45-328 Update on Amendments relating to Syndicated Mortgages. In that notice, the CSA confirmed that the Amendments and the amendments in the local jurisdictions to the syndicated mortgage rules, took effect in all jurisdictions on March 1, 2021, except in Ontario and Quebec where the amendments are expected to take effect on July 1, 2021.
Accordingly, if a firm trading syndicated mortgages is operating only in Ontario or Quebec, they have until July 1, 2021 to comply with the Amendments. Firms operating in all other Canadian jurisdictions needed to comply with the Amendments by March 1, 2021.
Furthermore, on March 10, 2021, FSRA released final approach guidance (the “SMI Guidance”) for supervising mortgage brokerages and administrators that engage in NQSMIs. FSRA consulted on the proposed guidance in August-September 2020. The SMI Guidance will apply to: (a) mortgage brokerages dealing and/or trading in NQSMs with permitted clients on or after July 1, 2021; (b) mortgage brokerages acting on behalf of the borrower in NQSMIs with investors/lenders that are non-permitted clients; (c) mortgage brokerages that dealt and/or traded in legacy NQSMIs (conducted prior to July 1, 2021); and (d) mortgage administrators administering NQSMIs. The SMI Guidance highlights the division of regulatory oversight of NQSMIs, risk profile factors for mortgage brokerages, administrators and NQSMIs, information required for the quarterly data report for NQSMIs with permitted clients and data collection for legacy NQSMIs. Firms in Ontario dealing and/or trading in NQSMIs or mortgage administrators administering NQSMIs will want to review the final guidance in detail. Please don’t hesitate to contact your usual lawyer at AUM Law.
April 30, 2021
Industry participants are re-thinking their business operations as a result of mortgage lenders no longer being able to operate outside of a securities law regime as of March 1, 2021. Many lenders that previously qualified investors on a deal by deal basis in order to avoid having to become registered are now establishing pooled funds to ease the management of a growing investor base and to better compete on investments where other lenders are ready to commit without needing to syndicate a deal. One of the more popular pooled vehicle structures that is being turned to is the mortgage investment corporation (MIC).
In this publication we discuss what to keep in mind when structuring a MIC, such as dealer registration and other obligations, as well as the evolving regulatory framework for syndicated mortgage investments (SMIs).