Month: August 2021
In this bulletin:
- OSC Finalizes 2021-2022 Statement of Priorities
- OSC’s CRR Branch Publishes its Annual Report on Registrants
- CSA Announces Plans to Create a New Self-Regulatory Organization
- Policies and Procedures Change Required – CSA Finalizes Rules Protecting Vulnerable Clients
- Consultation on Strengthening Canada’s External Complaint Handling System in Banking
- Ontario’s Title Protection Framework – Have Your Say on Fees
- Titles, Titles and More Titles: Saskatchewan and New Brunswick Consider Title Protection Regimes
- CSA Proposes a New Prospectus Exemption for Canadian-Listed Issuers
In Brief: Has the OSC Asked You for Documents? OSC Publishes Guidance on Enforcement Investigations and Document Production ▪ CDCC and IIROC Propose Amendments Relating to Futures Segregation and Portability ▪ FSRA Proposes Approach Guidance for Publication of Enforcement Proceedings ▪ CSA Proposes Amendments to Guidance for Financial Statements in Long Form Prospectuses
FAQ Corner: What’s Next for the CFRs? CFR Phase II Checklist
BLG’s Resource Corner
Click the link to access a PDF of our full, monthly bulletin summarizing these recent developments. >> Monthly Bulletin | Heatwave Edition | August 2021
Our colleagues at BLG LLP have written a number of thought-provoking articles our readers may be interested in, including the following:
August 31, 2021
The Financial Services Regulatory Authority of Ontario (FSRA) has released a proposed approach guidance, outlining its intentions with respect to how and when it will publish information about enforcement proceedings and investigations in the sectors it regulates, including the mortgage brokerage industry. The purpose of such publications are to inform the public about who is being sanctioned, but perhaps more importantly for discouraging similar behaviour, the conduct for which they are being sanctioned. Certain information would be made available on its web site and through news releases, including Notices of Proposal (e.g. to revoke a license) and Notices of Intended Decision when FSRA initiates an enforcement action for non-compliance with regulatory requirements and regulatory misconduct. The approach guidance also confirms that FSRA would not ordinarily disclose to the public the existence of an ongoing investigation, except in exceptional circumstances such as when there is credible evidence of ongoing behaviour that is likely to result in immediate harm to consumers. As set out in the notice, having a consistent and clear approach to transparency of enforcement is intended to result in even treatment for regulated entities and individuals, as they will know in advance when FSRA will let the public know it is taking action. The consultation period ends September 24, 2021.
August 31, 2021
On July 28, 2021, the Canadian Securities Administrators (CSA) announced a proposed new prospectus exemption for issuers listed on a Canadian stock exchange. The proposal is in response to comments received from CSA Consultation Paper 51-404 Considerations for Reducing Regulatory Burden for Non-Investment Fund Reporting Issuers, and reflects research on capital raising requirements in other countries as well as other stakeholder feedback about the prospectus system. The proposed Listed Issuer Financing Exemption is expected to reduce costs for issuers that would otherwise raise small amounts of capital through the public markets, usually through a short-form prospectus offering. The new exemption is expected to be used by such issuers as an alternative to the accredited investor and family, friends, and business associates prospectus exemption. The exemption would not be available to issuers that have been a reporting issuer for less than 12 months, nor to issuers that have not filed all continuous disclosure documents required under Canadian securities legislation. In addition, the exemption could not be used by an issuer whose principal assets are cash or its exchange listing, nor by an issuer that intends to use the proceeds for a significant transaction such as an acquisition that would require shareholder approval, on the basis that the issuer’s existing business should already be adequately described in its current disclosure documents.
To avail themselves of the proposed exemption, eligible issuers would need to file a short offering document (not expected to be longer than 5 pages) updating the existing public disclosure, including with respect to any new developments in the issuer’s business, and confirming that the issuer will have sufficient funds for at least 12 months after completion of the offering. Issuers could raise up to the greater of $5 million or 10% of the issuer’s market capitalization, to a maximum of $10 million, annually. In addition, the offering can not result in more than 100% dilution for existing shareholders. Purchasers under the exemption would have rights under the secondary market civil liability regime, and would also have a contractual right of rescission against the issuer for a period of 180 days in the event of a misrepresentation. As with many prospectus exemptions, the issuer would be required to report sales by filing a Form 45-106F1 Report of Exempt Distribution, but would not be required to complete the schedule that contains the names of the purchasers. If you have any questions about the availability of the proposed exemption or would like to comment on the consultation, please contact us.
August 31, 2021
On August 12, the Canadian Securities Administrators (CSA) released proposed amendments to the Companion Policy to National Instrument 41-101 General Prospectus Requirements that provides an interpretation of the financial statements that are required to be included in a long form prospectus where the issuer has or proposes to acquire a business that would be the primary business of the issuer. The existing requirements are intended to provide investors with information on the financial history of the issuer, even if the issuer’s history included multiple legal entities. In practice, many issuers have pre-filing consultation discussions with the regulators to determine exactly which financial statements are required to be included in the prospectus, which is a time consuming and costly exercise. The clarifications are intended to reduce the need for such consultations, including by explaining the regulators’ interpretation of a “primary business” and “predecessor entity”, and the time periods for which financial statements would be required. Helpfully, the proposed amendments include a number of examples of when a reasonable investor would consider an acquisition to be the “primary business” of the issuer and runs through the resulting expectations for inclusion of various financial statements. Comments on the proposed guidance are due by October 11.
August 31, 2021
Answer: While some are breathing a (small) sigh of relief as the deadline for complying with the conflict-of-interest provisions of the Client Focused Reforms has passed, it is time to consider how prepared your firm is for the next phase of the CFR amendments, coming into effect on December 31, 2021.
Some questions to ask yourself include whether:
- Any employee titles need to be changed to comply with the misleading communication requirements;
- Your firm’s current KYP policies and procedures have been documented appropriately;
- You have formalized a system to monitor the securities products on your firm’s shelf as part of the new KYP obligations;
- Your firm’s suitability determination policies and procedures have been updated to the new standard;
- Your KYC forms are compliant with the new standard (and the requirement to get the information for a trusted contact person!);
- Your Relationship Disclosure Information (RDI) contains all the required new information;
- You have a plan / deadline to provide your clients with updated RDI;
- Your Compliance Manual will include all the new policies and procedures relating to the CFRs; and
- You have scheduled employee training on the new KYC, KYP and suitability determination obligations.
We know it’s a long list, but it does not need to be an overwhelming one. AUM Law would be pleased to assist you with any or all of the above, please reach out to your usual AUM lawyer to discuss further.
August 31, 2021
The Canadian Derivatives Clearing Corporation (CDCC) has proposed amendments to its Rules, Operations Manual, Risk Manual and Default Manual to introduce the Gross Client Margin Model (GCM). The changes being proposed by the CDCC are intended to align with international standards on segregation and portability for futures accounts, namely Principle 14 of the Principles for Financial Market Infrastructures. Portability of client positions and collateral is the alternative to closing out the positions upon the insolvency of a clearing participant. The GCM model is a method of calculating the margin a clearing participant must post where the amount is the sum of the margin requirements for each client (i.e., its not a net calculation).Each clearing member would need to report client positions on a daily basis to determine the initial margin requirement. The purpose of the amendments is to allow each client equal protection from the CCDC, regardless of the credit quality of the respective clearing members. The GCM model is to be undertaken in phases and implemented in the second quarter of 2022.CDCC does not initially expect a large impact on stakeholders, as the GCM model is already used for the U.S. market.
The Investment Industry Regulatory Organization of Canada (IIROC) has proposed changes to its own rules and Form 1 relating to the futures segregation and portability protection regime, relating to the CDCC proposal. IIROC’s changes are also intended to make it easier to port client positions and the value of posted collateral in the event of a default of a clearing participant. The changes to IIROC’s rules are required because the CDCC model is separate from the existing IIROC-CIPF model, and the purpose of the amendments is to reduce “funding drain” on dealers and reduce linkages between a dealer’s futures business and securities business – i.e., the possibility that dealers would have to utilize margin from other accounts in order to post the higher requirements for futures that will be required under the CDCC model. The rules include additional client disclosure and daily reporting to IIROC to identify gross customer margin futures positions. The CGM model allows CDCC to port positions more quickly, but may result in higher margin requirements and restrictions on cross-product hedges involving futures for some institutional participants. To mitigate this impact, the proposals allow one business day grace period to collect margin calls. Comments on the CDCC proposal are due by September 3, and IIROC is accepting comments until shortly thereafter on September 7.
August 31, 2021
The Financial and Consumer Affairs Authority of Saskatchewan (FCAA) released draft regulations under The Financial Planners and Financial Advisors Act relating to title protection. The legislation and proposed regulations are based primarily on Ontario’s framework of requiring approval for credentialing bodies (CBs) and their financial planner or financial advisor credentials, but which recognizes provincial distinctions. The draft regulation establishes approval criterial for CBs as well as for credentials in order for a person to be permitted to use the title of financial planner or financial advisor. Examples of baseline competency profiles are set out in the consultation, including expected client outcomes when dealing with retail clients. The regulations include a “best interest” standard of care, including that a financial planner or financial advisor must put the client’s interest first when making a suitability determination. The FCAA is seeking comments on a number of specific questions, and is looking for some examples of titles that could reasonably be confusing with the title of financial planner or financial advisor. The transition period for persons already using one of those titles as of July 3, 2020 is proposed to be four years from the date the regulation comes into force for the financial planner title, and two years for the financial advisor title. The comment period ends October 1, 2021.
Following existing rules in Québec and proposed rules in Ontario and Saskatchewan, the Financial and Consumer Services Commission of New Brunswick (FCNB) has begun its own consultation on a framework for the protection of titles used by financial professionals. Some differences between the proposed regulations in Ontario and Saskatchewan are noted in the consultation, including that Saskatchewan will have different penalties and enforcement provisions for people who use protected titles without authorization and a process for approving CBs already approved in another province. The FCNB is seeking feedback on a number of questions, including whether New Brunswick should adopt enforcement powers similar to those available in the Saskatchewan legislation, and a simplified method for approving CBs already credentialled elsewhere. It is also considering setting out a list of prohibited titles as is currently the case in Québec, including titles such as “financial consultant” and “private wealth advisor” which are considered to be confusing to the “financial planner” title. Comments are being accepted until October 25, 2021.
If you wish to provide comments on any or all of the proposals affecting the use of the financial advisor or financial planner title, please contact your usual lawyer at AUM Law.
August 31, 2021
The Financial Services Regulatory Authority of Ontario (FSRA) proposed amendments to Rule 2019-001 – Assessments and Fees (the Fee Rule) in late July, which sets out the structure for fees to be charged to credentialling bodies (each, a CB) with respect to the title protection framework. FSRA’s proposed title protection framework was subject to an earlier consultation in May 2021 and described here. FSRA has proposed that fees be comprised of both application fees, and annual fees, as follows:
- $10,000 application fee upon the submission of an application for approval of a CB and $5,000 for each credential application for either a financial advisor or financial planner credential.
- An annual assessment, itself comprised of the following three components:
- A fixed annual CB fee of $25,000.
- A variable annual CB assessment. The variable annual assessment will allocate FSRA’s total budgeted expenses related to the financial professionals sector (currently anticipated to be $1.1 million / year), net of budged fixed fees, among CBs proportionally, based on their share of the total number of credential holders in the sector.
- A time limited annual assessment to recoup FSRA’s start-up costs. This time-limited annual assessment relates to FSRA’s costs incurred to implement the title protection framework, and are estimated to be $3.1 million. Again, FSRA proposes to allocate these costs to approved CBs in proportion to their share of the total number of credential holders, over a 5-year period. If new CBs are approved during the 5-year period, this portion of the annual assessment would be adjusted for all CBs.
The fees are based on the stated principles included in the Fee Rule, which include fairness, simplicity, consistency and transparency. The application fees are intended to be associated with the time FSRA staff will spend reviewing the applications. The annual assessment fees relate to FSRA’s recovery of costs, and will support its infrastructure for the oversight of CBs and help monitor individuals who use a financial advisor or financial planner title without an approved credential. As a bottom line, FSRA estimates that the annual average cost for the first five years of the framework could be $22 per credential holder, all assuming the costs set out above and 81,000 credential holders in Ontario.
Commentators on the earlier proposed amendments to the framework had expressed concerns that persons holding more than one approved credential might pay more than one fee under the Fee Rule, particularly as the Fee Rule only applies in Ontario and other jurisdictions are implementing their own title protection rules, and that smaller organizations might be disincentivized from applying as a CB, or wait to apply until start-up costs have been recouped by FSRA. Suggestions had been made earlier that FSRA should instead determine fees based on the number of title users, and not the number of credential holders. FSRA is seeking feedback on the fee rule, including how it should determine which credential holders would be subject to the fee payable by the CB, such as whether residency in Ontario or the conduct of business in Ontario should be a factor. If you have any questions on the proposal or wish to provide a comment, please contact your usual AUM lawyer. Comments are due October 20, 2021.
August 31, 2021
On June 29, 2021 the Ontario Securities Commission (OSC) published its 2021-2022 Statement of Priorities (the Statement of Priorities) for the financial year ending March 31, 2022. The OSC received 16 comment letters on its draft Statement of Priorities which was released for comment in November 2020. The OSC added new priorities to reflect its role in developing and implementing policies for the 2021 Government of Ontario budget. The final list outlines 20 priority areas on which the OSC will focus its resources.
The Statement of Priorities sets out four strategic goals, as follows: 1) promote confidence in Ontario’s capital markets; 2) reduce regulatory burden; 3) facilitate financial innovation; and 4) strengthen the OSC’s organizational foundation. The OSC also acknowledged the effects of several current events and trends such as the COVID-19 pandemic, the Ontario Capital Markets Modernization Taskforce (the Taskforce) and March 24, 2021 Ontario provincial budget, the increasing pace of financial innovation, the growing role of retail investing, and the surge of capital-raising.
Promoting Confidence in Ontario’s Capital Markets
With respect to the goal of promoting confidence in Ontario’s capital markets, the OSC’s first priority is to support the implementation of the Client Focused Reforms (the CFRs). The CFR amendments relating to conflicts of interest took effect on June 30, 2021 and the remaining changes will take effect on December 31, 2021. The OSC noted that it is working with the other Canadian Securities Administrators (CSA) jurisdictions to implement the CFRs and provide guidance, respond to questions and otherwise assistant registrants to operationalize the CFRs. The OSC is also publishing frequently asked questions and guidance to assist with implementation.
The OSC’s second priority under this goal is the implementation of mutual fund embedded commissions rules and the discontinuance of the deferred sales charges (DSC) payment option. The OSC will also work with fund mangers and dealers to streamline implementation issues relating to the trailing commission ban where no suitability determination is required.
The third priority is to improve the retail investor experience and protection. This will be achieved by engaging in stakeholder consultations on ways to improve the investor experience, investor education and financial literacy activities, and continued implementation of the OSC Seniors Strategy.
There are several other priorities under this goal, including strengthening investor redress through the Ombudsman for Banking Services and Investments (OBSI), bringing timely and impactful enforcement actions, advancing work on the Taskforce policy recommendations identified in the Ontario Government’s 2021 Budget, improving climate change-related disclosures, and integrating new mandates for fostering capital formation and competition in the OSC’s activities.
The OSC noted that its work will include implementing annual surveys of private and public investment funds about their portfolio exposure to assess systemic risks with a focus on aggregated asset class and leverage information.
Reducing Regulatory Burden
The OSC will continue to implement its burden reduction initiatives under the oversight of its Innovation Office. This will involve the adoption of certain Taskforce recommendations and the continued implementation of the burden reduction initiatives identified in the OSC’s November 2019 report “Reducing Regulatory Burden in Ontario’s Capital Markets”. The specific actions will include working with the CSA on the Rationalization of Investment Fund Disclosure (RID) project and streamlining continuous disclosure requirements.
The third goal of the OSC is to facilitate financial innovation. This will be done by the OSC continuing to develop flexible regulatory approaches and improved access to services and support for businesses looking to establish or expand in Ontario. The OSC will implement a multi-year plan for its Innovation Office, and engage with innovative businesses. One of the actions under this priority will be for the OSC to work with external stakeholders, such as law firms, advisors, incubators and accelerators, and venture capital and angel investor organizations to consider potential tools to give the innovation community important insights and information into securities law requirements.
Strengthening the OSC’s Organizational Foundation
The last goal of the OSC is to strengthen its organizational foundation in order to regulate and support an ever-changing and highly competitive financial sector. The first priority under this goal is the redevelopment of the CSA national systems with SEDAR+. This new CSA system is intended to be the common platform for all filings, disclosure, payments, and information searching for the Canadian capital markets. Unfortunately, on June 25, the CSA announced that the timing for the roll-out for the SEDAR+ platform will be delayed.
Other priorities under this goal include modernizing the OSC’s technology platform and increasing the use of analytics in delivering regulatory outcomes, to be overseen by the OSC’s newly created Digital Solutions Branch. The OSC is also prioritizing fostering inclusion, equity, and diversity in the OSC community. This will include implementing an Inclusion and Diversity Strategy and taking actions outlined in the BlackNorth Initiative (BNI) CEO pledge to end anti-Black systemic racism.
The OSC will continue to monitor and adapt to the impacts of the COVID-19 pandemic to accommodate remote work including a hybrid workplace model post-pandemic. The OSC will also implement structural changes to reflect governance best practices and enhance tribunal independence. This will include defining new roles of key senior leaders like the CEO, Chair, Board of Directors, Chief Adjudicator and Adjudicators. The expected outcome of this will be a separation of the regulatory and adjudicative functions at the OSC and a new Capital Markets Tribunal that will enhance tribunal independence, while preserving accessibility and transparency.
The OSC has a very busy agenda for the upcoming year. That also means that it will likely be another busy year for market participants from a regulatory perspective. If you have any questions about the Statement of Priorities or how they might impact your firm, please contact your usual lawyer at AUM Law.
August 31, 2021
On July 22, 2021, the Ontario Securities Commission (OSC) published OSC Staff Notice 15-707 Enforcement Investigation Guidance and OSC Staff Notice 15-708 Document Production Guidance (the Guidance) to assist individuals and companies that participate in initial assessments and investigations conducted by OSC Enforcement Staff (Staff). The Guidance provides added transparency on the processes and timeliness that individuals and companies can expect when they are interacting with Staff, as well as setting out Staff’s preferred production methods to assist those responding to Staff request for records and documents.
Staff expect all persons and companies involved in enforcement assessments and investigations to co-operate fully and may give credit as applicable and appropriate. Examinees in enforcement assessments and investigations have a right to have counsel present. The length of enforcement investigations and assessments vary depending on complexity and volume of data.
The OSC may issue written notice that it requires you to produce records and documents as part of an investigation. The Guidance sets out the OSC’s preferred production methods for records it requires or requests in the course of carrying out its regulatory functions. Following the Guidance may reduce time, costs and resources for Staff and parties producing records to Staff. Importantly, the Guidance reminds us that the powers of compulsion in securities and commodity futures legislation do not empower Staff to compel the production of records that are privileged although privilege must be asserted in writing with enough specificity to support the assertion.
If Staff intend to bring regulatory proceedings at the conclusion of Staff’s investigation, Staff may offer to meet with those involved in the investigation (or their counsel) to discuss the findings of the investigation and consider whether there is potential for early settlement. If there does not appear to be a likelihood of early settlement, Staff may deliver a confidential Enforcement Notice advising of the conclusion of Staff’s investigation and Staff’s intention to commence a regulatory proceeding.
If you are the subject of an investigation or have been requested to produce records and documents, or would like to discuss any element of the Guidance, please contact us.
August 31, 2021
The Department of Finance Canada released a consultation paper on July 16 relating to the complaint handling process used by consumers for banking services and products. The consultation document follows a review of the process and Canada’s external complaint handling bodies completed by the Financial Consumer Agency of Canada (FCAC), and seeks views on the guiding principles and structural considerations for the system going forward. Currently, banks have a two-part complaint handling process involving an internal complaints process and external compliant handling system which relies on two external complaint bodies (an ECB) for those complaints that are not resolved by the bank’s internal process. The FCAC report, published in February 2020, identified some concerns regarding the current system including that the multiple model (with more than one ECB) may undermine consumer trust, add complexity, impact impartiality and complicate regulatory supervision. All banks in Canada must belong to an ECB, which must be approved by the Minister of Finance on the recommendation of the FCAC Commissioner.
The minimum operating standards for an approved ECB are set out in banking legislation, and they are required to be impartial and independent when dealing with a complaint. There are two approved ECBs, the ADR Chambers Banking Ombuds Office (whose parent firm operates on a for-profit basis) and the Ombudsman for Banking Services and Investments. The consultation paper suggests that a strong complaint handling system would empower consumers by ensuring they have the ability to clearly set out their complaint with evidence, and help them understand the reasons for the final decision by the ECB. The paper sets out that guiding principles for Canada’s complaint handling system includes accessibility, accountability, impartiality, timeliness, and impactful decisions. Questions in the consultation relate to the structural consideration of allowing banks to choose their ECB, and also solicits views on the attributes of an effective system, such as an ECB’s profit structure, funding model, functions, complainant assistance, governance structure, and whether recommendations should be binding. While the paper relates to the banking sector, other market participants may wish to follow the outcome as it may have an impact on complaint handling processes for registrants in future. Comments on the proposal are being accepted until October 14.
August 31, 2021
On July 15, 2021, the Canadian Securities Administrators (CSA) published final amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations that are intended to improve the protection of older and vulnerable clients, with effect as of December 31, 2021. We first described the proposed amendments in our bulletin here.
There are two main components of the amendments:
- Registrants will be required to take reasonable steps to obtain the name and contact information of a trusted contact person from individual clients and written consent for the trusted contact person to be contacted in specified circumstances.
- The creation of a regulatory framework for registrants who place a temporary hold on transactions, withdrawals or transfers in circumstances where the registrant has a reasonable belief that there is financial exploitation of a vulnerable client or where there are concerns about a client’s mental capacity to make decisions involving financial matters.
Registrants that have not already taken measures to enhance the protection of their older and vulnerable clients should ensure that they have taken the following measures by the end of the year:
- Implement written policies and procedures to identify senior and vulnerable clients, collect trusted contact person information and address how such information will be used and describe if and when a temporary hold can be placed.
- Provide relevant employees with training on the new rules and internal policies.
- Revise account opening forms (IMAs, subscription documentation) to collect trusted contact person information and obtain consent to contact such person in the enumerated circumstances.
- Consider how enhanced KYC information from older and vulnerable clients will be collected.
- Consider how trusted contact person information will be kept current (g., through the normal-course KYC information update process).
The CSA clarified that there is no expectation that registrants take reasonable steps to collect trusted contact person information from existing clients as of the effective date of the amendments. Rather, the CSA would expect registrants to take reasonable steps to collect that information from existing clients the first time they update the client’s KYC information after December 31, 2021 (i.e., pursuant to the CFR requirements). However, we encourage registered firms to start revising their policies and procedures now if they have not already done so, as a prudent practice and given existing CSA guidance setting out regulatory expectations regarding engaging with older and vulnerable clients. Many of our clients are revising their documentation for these requirements together with all the changes required by the client-focused reforms, and we can help with both sets of amendments. Please contact us for assistance.
August 31, 2020
On August 10, 2021, staff of the Compliance and Registrant Regulation (CRR) Branch at the Ontario Securities Commission (OSC) published OSC Staff Notice 33-752 Summary Report for Dealers, Advisers and Investment Fund Managers (Report). The Report provides an overview of the CRR’s work for the 2020-2021 fiscal year and is a must-read for all registrants. The OSC encourages registrants to use the Report to learn more about recent and proposed regulatory initiatives, the OSC’s expectations for registrants and how staff interpret initial and ongoing requirements for registration and compliance.
1. Focus Areas for 2021-2022 Compliance Reviews
The OSC identified the following as focus areas:
- Firms identified as high-risk through the Risk Assessment Questionnaire (RAQ) process;
- Client Focused Reforms review, which will commence after the key implementation dates of June 30, 2021 and December 31, 2021;
- Firms offering online advice or online dealer platforms; and
- “Registration as the First Compliance Review” for crypto-asset trading platforms.
AUM Law’s focused and general compliance risk assessments can save you time and money by enabling you to proactively identify and address issues before they flare up into problems or you are audited by the OSC. Please contact us to learn more about these services.
2. Compliance Initiatives
- COVID-19 Survey: In July 2020, the OSC issued a COVID-19 Survey to gather information from registrants to better understand the initial impacts of the COVID-19 pandemic on registrants’ operations. Overall, the information gathered from the survey demonstrated that registrants adapted well.
- Remote Work and Business Location Registration Considerations: Questions on whether individuals working remotely are required to identify their personal residence as a “business location” in accordance with NI 33-109 have popped up. The Report notes that the OSC continues to take a flexible and practical approach on this issue considering many firms have established work-from-home (WFH) arrangements with their registered individuals. However, registered firms that allow staff to work remotely must have compliance systems in place, including appropriate policies and procedures related to supervision, that adequately address the WFH arrangements.
- Business Continuity Planning: The operational challenges arising out of the COVID-19 pandemic demonstrated the importance of business continuity plans (BCPs). It is important that senior management is involved in the creation and approval of the firm’s BCP. Senior management’s ongoing communication and participation regarding the firm’s BCP will demonstrate a positive and strong tone at the top.
- 2020 Risk Assessment Questionnaire: In June 2020, the OSC issued the 2020 RAQ to over 1,000 firms. The RAQ is the OSC’s primary tool to obtain information about a registrant’s business operations, which supports the OSC’s risk-based approach to select firms for compliance reviews or targeted reviews. Registrants can expect to receive the next version in April 2022.
3. Compliance Deficiencies
What follows are highlighted topics we think will be of particular interest to our readers.
- Representatives servicing clients without required registration: The Report notes instances of representatives of registered firms conducting registerable activities in Ontario without being registered as either ARs, AARs or dealing representatives. If a firm is not in compliance with the registration requirements in Ontario, this may raise concerns regarding the adequacy of the firm’s compliance system and may reflect poorly on the firm’s continued fitness for registration. This may also raise concerns that the firm is not adequately supervising its representatives.
- Policies and procedures not tailored to the firm’s operations: For instance, (a) written policies and procedures did not address Ontario regulatory requirements, such as CRM2 guidelines for client account reporting and minimum timelines for retention of books and records, (b) the annual compliance report to the Board of Directors (or equivalent) did not address the firm’s compliance with Ontario securities regulatory standards or was signed by someone other than the firm’s CCO, and (c) confidentiality provision language in employment agreements, such as non-disclosure agreements and whistleblower policies, did not permit exceptions for voluntary communication with Ontario regulatory authorities.
- Inadequate disclosure when using benchmarks: Staff noted instances of registered firms presenting benchmarks in marketing materials to compare to the performance of their investment strategies, without adequate accompanying disclosure for a client to draw correct conclusions from the comparisons.
- Misleading marketing material: Several firms included claims in marketing material that were misleading. Registrants must ensure that all claims included in marketing material can be substantiated, are factually correct and are up to date to ensure that existing and prospective clients are not misled.
- Prohibited representations: The Report identifies instances where firms made prohibited representations in their marketing material that (a) implied the OSC had passed upon the financial standing, fitness or conduct of the firm, (b) resulted in the registration of the firm being improperly marketed, or (c) suggested the firm or an individual employed by the firm is holding out as being registered through the use of misleading titles.
- Outside business activities: OBAs are a regulatory concern for a number of reasons, including when the OBA (a) creates a material conflict of interest for the representative that must be addressed in the best interest of the client, (b) places the representative in a position of influence over clients, especially vulnerable clients, (c) creates the risk for client confusion, or (d) limits the ability of the representative to properly service clients. As such, firms must supervise their representatives’ OBAs as part of their compliance system and respond to material conflicts of interest which include OBAs. Firms are also required to report their representatives’ OBAs on each individual’s registration application, and report changes on the NRD within ten days.
- Complaint handling processes: Staff identified a number of issues, including a failure to clearly set out a client’s right to immediately access OBSI if they are not satisfied with the firm’s response. In some cases, clients were instead directed to the firm’s internal ombudsperson. Staff found this to be problematic as it may mislead clients to believe that they are required to contact an internal ombudsperson first before escalating their complaints to OBSI, or that the internal ombudsperson is an alternative to OBSI. The Report reminds firms that both the UDP and CCO have responsibility for establishing an effective compliance system, which includes maintaining a complaint handling process that is consistent with the firm’s obligations to deal fairly, honestly and in good faith with their clients.
- Net asset value adjustments: Section 12.14 of NI 31-103 requires an IFM to deliver no later than the 90th day after the end of its financial year and no later than the 30th day after the end of its first, second and third interim period, a completed Form 31- 103F4 Net Asset Value Adjustments (Form 31-103F4), if any net asset value (NAV) adjustment has been made in respect of an investment fund managed by the IFM during the financial year, including any interim period. A NAV adjustment is necessary when there has been a material error and the NAV per unit does not accurately reflect the actual NAV per unit at the time of computation. The Report notes instances where the error was identified by sub-advisers, auditors, or third-party fund administrators. Staff’s review found that most of the errors were identified and rectified in a timely manner, however, there were instances where inadequate controls resulted in the error remaining undetected for an extended period of time (e.g., greater than one month).
- Wholesaling securities requiring registration: Market participants who engage in wholesaling activities should (a) not communicate with end-purchasers when relying on section 8.5 of NI 31-103, including through written communications and marketing and registered firms should have procedures to prevent their employees from doing so, (b) seek registration as a dealer if they are not able to rely on section 8.5 of NI 31-103, and (c) have procedures to prevent their registered individuals from engaging in wholesaling outside of the registered firm.
- Ownership changes: The Report notes firms are not filing the notice of proposed ownership changes in, or asset acquisitions of, registered firms required under sections 11.9 or 11.10 of NI 31-103. Also noted were instances where, in addition to the registered firm missing the notice under sections 11.9 or 11.10 of NI 31-103, the firm did not make the required filings under NI 33-109, in particular the filing of Form 33-109F5 to reflect the change in share ownership or the acquisition of its assets. A registered firm has 30 days to file any changes to information previously reported in Part 3 of Form 33-109F6, which includes Item 3.12 Ownership Chart. A registered individual or permitted individual must also update information previously provided under Item 17 Ownership of Securities and Derivatives Firms of Form 33-109F4 within 10 days of such change. Failure to provide notice of ownership changes or asset acquisitions may also result in the issuance of a warning letter or further regulatory action.
- Incomplete Form 33-109 submissions: Registrants need to provide blacklines showing the amended sections of the form when making an update to information previously provided under Form 33-109F6. Furthermore, an update to information about a registered firm previously filed using Form 33-109F6 requires that the title of an authorized signing officer or partner be specified in the certification section in Form 33-109F5.
- Exemptive relief applications: The Reports reminds market participants engaging in at-will financings facilities/equity lines that both the issuer and the purchaser generally require registration relief. In addition, market participants are reminded that other requirements of Ontario securities law, including prospectus exemptions, early warning and insider reporting requirements, the prohibition on trading in securities of a reporting issuer while in possession of material undisclosed information and the prohibition on market manipulation, may also apply to market participants involved in equity line arrangements.
4. Additional Items of Note
- Voluntary Surrender Process: The OSC expects a registered firm to file an application to surrender its registration (a voluntary surrender application) when it ceases (or intends to cease) conducting registerable activities. To initiate the voluntary surrender process, registered firms must submit an application letter and an officer’s/director’s certificate. There is no prescribed format for the application letter or officer’s/director’s certificate. The application letter and certificate must be filed through the OSC’s Electronic Filing Portal.
- Registration of Client Relationship Managers: Last year, the Canadian Securities Administrators (CSA) updated its expectations for the assessment of Relevant Investment Management Experience (RIME) for advising representatives (ARs) wishing to act as client relationship managers (CRMs). Associate advising representatives (AARs) that act as CRMs typically will not have accumulated sufficient securities-selection RIME to become ARs. However, an AAR or other individual who can demonstrate that they have all of the other proficiencies required for registration as an AR, in addition to significant experience relevant to CRM activity, can be registered as an AR who will specialize in CRM activity (a CRM AR). In any case, terms and conditions will be applied to the registration of CRM ARs to restrict their registerable activities to things that do not involve the selection of securities.
5. Policy Initiatives
As usual, the Report summarizes certain policy initiatives affecting registrants and provides links to the relevant publications. This year, the Report covers:
- Burden reduction;
- Crypto-asset trading platforms;
- Client focused reforms; and
- Exemption from underwriting conflicts disclosure requirements.
If you would like to discuss the issues highlighted in this article or any aspect of the Report and its relevance to your business, please do not hesitate to contact us.
August 31, 2021
On August 3, 2021, the Canadian Securities Administrators (CSA) published CSA Position Paper 25-404 – New Self-Regulatory Organization Framework (Position Paper), announcing its plans to create a new single Self-Regulatory Organization (New SRO). The Position Paper is a product of the SRO Framework Review Project that began in December 2019 with the formation of a CSA working group (Working Group) to study the current SRO regulatory framework.
The CSA stated that it has decided to pursue the establishment of the New SRO, after evaluating a number of other options.
The establishment will be carried out in two phases. In Phase 1, a CSA integrated working committee (IWC) will determine the appropriate corporate structure for the New SRO and define and oversee the execution of the implementation strategy, focusing on i) the integration of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) into the New SRO, ii) the harmonization of the rules, policies and related processes of the current SROs and iii) making changes to the governance of the New SRO by strengthening the CSA’s oversight framework. Following completion of Phase 1, the project will enter Phase 2 where the CSA will consider incorporating other registration categories such as portfolio managers, exempt market dealers and scholarship plan dealers into the New SRO.
Some of the specific plans for the New SRO include:
- Creation of formal investor advocacy mechanisms, as well as a separate investor office charged with investor education and outreach, within the New SRO;
- Reviewing the proficiency requirements applying to investment dealers and mutual fund dealers;
- Reducing industry cost by:
- Allowing introducing / carrying broker arrangements to allow mutual fund dealers to access certain products more easily, such as ETFs;
- Reviewing the current SRO fee models for dual platform dealers;
- Enabling dual platform dealers to include its mutual fund dealer and investment dealer businesses within one legal entity and integrate similar compliance and back office functions to realize economies of scale;
- Harmonizing applicable policies and rules into a consolidated rule book to reduce operating costs; and
- Reviewing the rules on directed commissions (although no specific proposal was made as yet, other than that the CSA will form a working group comprising appropriate CSA stakeholders).
The Position Paper also referred to the consolidation of the two current investor protection funds into a single protection fund which will be independent from the New SRO.
The Working Group will consider comments no later than October 4, 2021. The IWC will make a public communiqué that includes an implementation timeline once it has determined the appropriate corporate structure for the New SRO as part of its work in Phase 1.
August 31, 2021