Month: October 2021
In this bulletin:
- Investment Fund Burden Reduction Measures – Not a Trick!
- FSRA Publishes 2022-2023 Statement of Priorities for Comment
- CSA Proposes Mandatory Climate Change Disclosure
In Brief: Ontario’s New Draft Capital Markets Act ▪ Proposed Amendments to Derivatives Clearing Rules ▪ FCNB/NSSC Consultation on Diversity in the Capital Markets ▪ FSRA’s Draft Innovation Framework ▪ FCAC Consults on New Complaint-Handling Procedures for Banks
Important Reminders: Calculation for Capital Markets Participation Fees Form due December 1, 2021.
BLG’s Resource Corner
News: PMAC AML Training ▪ BLG Webinar November
Click the link to access a PDF of our full, monthly bulletin summarizing these recent developments. >> Monthly Bulletin | Halloween Edition | October 2021
On November 18, Richard Roskies will be speaking alongside BLG lawyers at the BLG’s Investment Management webinar, for which you will have received an invitation. Topics discussed will include regulatory developments relating to digital assets, investment fund prospectus disclosure, enhancements to IRC duties, regulatory burden reduction efforts, financial exploitation and vulnerable clients, and of course the client-focused reforms. Please contact us with any questions and we hope to see you there.
AUM Law’s very own Chris Tooley will be presenting to a large audience of PMAC member firms on November 29 on the subject of AML training. Please contact us for more details.
Our colleagues at BLG have written a number of articles we thought might interest our readers, including the following:
For more information, please visit the BLG website.
October 29, 2021
Form 13-502F4 – Capital Markets Participation Fee Calculation is due to be filed with the OSC no later than December 1, 2021. This requirement applies to firms in Ontario registered under the Securities Act or firms registered under both the Securities Act and the Commodity Futures Act. It must also be completed and filed by unregistered capital markets participants – firms relying on the international exemptions from registration.
October 29, 2021
The Financial Consumer Agency of Canada (FCAC) has released a proposed Guideline on Complaint-Handling Procedures for and Authorized Foreign Banks. The proposed new Guideline will support the implementation of the new Financial Consumer Protection Framework in the Bank Act. Banks are already responsible for setting out policies and procedures to ensure they deal with consumer complaints, and the Guideline sets out further principles and expectations for these policies and procedures, including principles of effectiveness, timeliness and accessibility. Employees who are designated as being responsible for either or both of implementing a bank’s policies and procedures, or receiving and dealing with complaints, are expected to have the experience, competencies and authority required to deal with complaints, and their titles should reflect that authority. Of note, the policies and procedures are expected to include an analysis of complaint data to identify opportunities to better serve the bank’s consumers. They are also to include mechanisms for identifying and remedying recurring or systemic issues, and tracking the causes of complaints to identify root causes. Where such issues have been identified, the policies are expected to ensure the bank provides redress and/or reimbursement to all affected consumers. Timelines for dealing with complaints internally are also set out in the Guideline. We are watching all the various proposals with respect to complaint-handling procedures closely, as changes in one sector of the financial ecosystem will likely affect others. Comments on the Guideline are due December 11, 2021.
October 29, 2021
The Financial Services Regulatory Authority of Ontario released a consultation paper regarding its new Innovation Office, which was launched in 2020 in order to facilitate what it has termed “responsible innovation” – i.e. managing risk to consumers and members of certain sectors within its regulatory sphere, including mortgage brokers and financial planners and advisors, while supporting the development of new or improved products, services and business models. It plans to set up a Test and Learn Environment (TLE) to provide innovative companies with access to a method of gauging market responses. The intention for the framework is to identify consumer-focused innovative products and services at an early stage, while looking for early signs of unintended consequences and compliance complications. FSRA has also prepared a draft “intake” form to standardize the information it would seek at a preliminary stage of review. It is expected that the first TLE will focus on the car insurance sector, given recent changes to the governing insurance rules in that sector. FSRA intends to approach each sector contextually, recognizing that different sectors have different risk appetites and regulatory frameworks. A number of discussion questions are posed throughout the paper, focusing on how the affected sectors can best work with the Innovation Office.
October 29, 2021
The Nova Scotia Securities Commission (NSSC) and the New Brunswick Financial and Consumer Services Commission (FCNB) have issued a short consultation paper with respect to disclosure on diversity in the capital markets and are accepting comments until November 15th. The consultation is further to the CSA’s announcement earlier this year that they will be conducting research to help determine how the disclosure needs of Canadian investors and practices among public companies have changed since the gender diversity requirements in National Instrument 58-101 Disclosure of Corporate Governance Practices were adopted. The NSSC and the FCNB asked for responses to a number of specific questions about the disclosure regime regarding diversity. It is noted in the paper that a number of foreign jurisdictions are already requiring additional disclosure with respect to gender and diversity targets. The consultation seeks feedback on whether additional disclosure requirements are needed for Canadian reporting issuers, how investors may use that information, and the impact on public companies in disclosing the data.
October 29, 2021
We wanted to note for those that follow changes to the derivatives reporting rules that the CSA (other than the OSC) has released a notice and request for comment related to proposed amendments to NI 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions. Currently, clearing intermediaries have to provide specified information to the regulators with respect to the value of collateral held or posted by each reporting clearing intermediary. Form 94-102F3 Customer Collateral Report: Regulated Clearing Agency also provides the regulators with information on the value of customer collateral received by a regulated clearing agency from each clearing intermediary. Earlier in 2021, all CSA jurisdictions (except the OSC) reduced the frequency of the requirement for regulated clearing agencies to deliver Form 94-102F3 from monthly to quarterly by way of parallel orders. The change in reporting frequency was made on the basis that the CSA would still be able to identify major changes in the derivatives clearing market and to identify customer collateral. The OSC instead made expedited amendments to NI 94-102, which had the same effect as the orders. The other CSA members are now proposing to also amend NI 94-102 to reduce the frequency of the requirement to deliver Form 94-102F3 in order to reflect the orders. Comments on the proposal are due by November 15.
October 29, 2021
For those looking for some new reading material, a Capital Markets Act (the “Act”) draft has been released by the Ontario Ministry of Finance. The Act is intended to replace both the current Ontario Securities Act as well as the Ontario Commodity Futures Act, and is responsive to many of the recommendations made in the final report of the Capital Markets Modernization Taskforce (the Taskforce) released in January of this year. Unlike some of the current legislation, the new Act sets out a “platform” framework, where the legislation governing securities and derivatives will be set out, but the detailed requirements will be left to rules, in order to promote flexibility and allow the OSC to respond to market developments in a timelier manner. The Act will be expanded as suggested by the Taskforce to include in the OSC’s mandate fostering capital formation and competition in capital markets.
The Act will set out the OSC’s powers as well as those of the new Capital Markets Tribunal, which will have adjudicative powers separate from the OSC’s regulatory powers, the latter of which would be exercised by its board or the newly titled Chief Regulator/CEO. A new position, that of Chief Adjudicator, will be responsible for directing the Tribunal’s operations. Further to other legislation released earlier this year, the current Chair and CEO functions at the OSC will also be separated into two positions. If the Act goes forward, commodity futures contracts and commodity futures options would be regulated as derivatives under the Act. A new section in the Act will regulate trading in derivatives, including permitting the OSC to make rules imposing registration requirements on OTC derivatives dealers and advisers.
The Ministry has set out 30 consultation questions throughout its commentary on the new Act, seeking feedback on matters ranging from the appropriate statutory civil liability for distribution of ETF securities, to the impact of including the independent review committee of a private fund to the definition of a “market participant”, to the appropriate requirements for managing conflicts of interest. The deadline for providing comments is January 21, 2022, and we will be providing further analysis and commentary on the draft Act and its implications in upcoming publications.
October 29, 2021
The CSA released a consultation paper on October 18, proposing a new National Instrument NI 51-107 Disclosure of Climate-related Matters (“NI 51-107”) and its companion policy, which would introduce new disclosure requirements for reporting issuers. NI 51-107 would not apply to investment funds or certain other issuers such as designated foreign issuers and issuers of asset backed securities. The new disclosure requirements are based on four elements set out by the international Task Force on Climate-related Financial Disclosures (TCFD), being governance, strategy, risk management and metrics/targets.
The proposed requirements build on a number of prior CSA notices and existing disclosure requirements relating to material information on climate-related matters, as well as international work and the recommendations of the Ontario Capital Markets Modernization Taskforce. The Taskforce has recommended that public companies be required to disclose material ESG information, and in particular, climate-related disclosure that is compliant with the final TCFD recommendations. The CSA noted in the request for comments that investors are increasingly focused on climate-related risks and are seeking more disclosure on governance processes and material risks, opportunities and the financial impacts of climate change. Our registrant clients who make decisions on the purchase and sale of securities may be interested in providing input to the CSA on the utility of the new disclosure information and how it would be used in their investment decision-making (and/or whether additional or different information should be disclosed).
With respect to governance, reporting issuers would be required to disclose the board’s oversight of climate-related risks and opportunities and management’s role in assessing the same. For the TCFD’s element related to strategy, issuers would disclose the climate-related risks and opportunities the issuer has identified over the short, medium and long term and the impact on the issuer’s businesses, strategy and financial planning. On risk management, the disclosure would focus on an issuer’s processes for identifying, assessing and managing climate-related risks and how they are integrated into overall risk management. Finally, reporting issuers would need to disclose the metrics used to assess climate-related risks and opportunities in line with its strategy and risk management process where such information is material, as well as Scope 1, Scope 2 and Scope 3 GHG emissions and related risks or the issuer’s reasons for not disclosing the information. An alternative approach being considered would be to require issuers to disclose Scope 1 GHG emissions. The issuer would need to describe the targets used to manage risks and opportunities, and its performance against those targets where such information is material.
In response to concerns raised about the cost of the new requirements, it is proposed that issuers would not be required to disclose a scenario analysis including a 2°C or lower scenario (i.e. how resilient an issuer’s strategies are to climate related risks and opportunities given a lower-carbon economy consistent with a 2°C or lower scenario and, where relevant to the issuer, scenarios consistent with increased physical climate-related risks). Information on governance would be added to an issuer’s management information circular (or AIF or MD&A if no circular is sent). The disclosures related to strategy, risk management, and metrics and targets would be included in an issuer’s AIF (or MD&A if an issuer does not have an AIF). It is proposed that there be lengthy transition periods (three years for venture issuers and one year for non-venture issuers) to allow issuers time to prepare the necessary disclosure.
The CSA does not anticipate NI 51-107 would come into force prior to December 31, 2022. The CSA noted that by mandating specific disclosure on climate-related matters, it will provide clarity to issuers on expectations, and also ensure consistency and comparability among issuers. The climate-related disclosure requirements are also meant to align Canadian disclosure standards with the expectations of international investors and remove costs that would be associated with reporting to multiple disclosure frameworks. Comments on the proposal will be accepted until January 17, 2022.
October 29, 2021
On October 7, 2021, the Financial Services Regulatory Authority of Ontario (FSRA) published for comment its proposed 2022-2023 Statement of Priorities (SoP). The SoP, and financial plan, as finalized, will form the core of FSRA’s Annual Business Plan to be submitted to the Minister of Finance for approval. The proposed priorities outline FSRA’s initiatives with a continued focus on improving regulatory efficiency (i.e. burden reduction) and effectiveness. We think our readers will find the following elements of the proposed SoP interesting.
Cross-sectoral Priorities: FSRA has identified the following three cross-sectoral priorities:
- Strengthen Consumer Focus: FSRA plans to identify opportunities to respond to the needs of and risks to consumers in positions of vulnerability, strengthen its understanding of the current complaints resolution system, strengthen the Consumer’s Office consumer research agenda, and enable the FSRA Consumer Advisory Panel and others to participate in more of FSRA rule development, guidance and policy work.
- Enable Innovation: FSRA plans to implement the innovation tools it has developed, scale its Test and Learn Environments to ensure they support responsible innovation in Ontario’s financial services ecosystem, implement an engagement strategy that proactively engages sector participants and consumers to identify innovation opportunities and emerging trends, and act as a center of expertise and information on innovation.
- Modernize Systems and Processes: FSRA expects to implement technology solutions to implement advanced online/web-based information sharing and transactional processing tools, develop digital document processing and digital signature capabilities and enable data analytics.
Sector-specific Priorities: FSRA has identified the following priorities in these sectors:
- Credit Unions: FSRA expects to implement a new credit union legislative framework, enhance financial stability structures and implement risk-based supervision. FSRA will support the Ministry of Finance in the implementation of regulations under the Credit Unions and Caisses Populaires Act, 2020.
- Mortgage Brokers: FSRA expects to implement recommendations from the review of the Mortgage Brokerages, Lenders and Administrators Act, 2006 and promote high standards of governance and business conduct. FSRA will implement any government-approved regulatory amendments that introduce licensing with enhanced proficiency requirements that better reflect the practices of different segments of the mortgage industry. FSRA will also work with stakeholders and the Ministry of Finance to consider policy changes that could introduce an additional license for dealing in activities that require additional proficiency from the current requirements.
- Financial Planners & Advisors: FSRA plans to operationalize the title protection framework for financial planners and advisors. Under the framework, FSRA will establish (i) minimum standards for financial planner/financial advisor credentials, (ii) criteria that entities must meet to obtain approval as a credentialing body, and (iii) a supervisory framework for the oversight of credentialing bodies.
What’s Next: FSRA will consider comments made on this consultation and will consult with its Stakeholder Advisory Committee and Consumer Advisory Panel.
October 29, 2021
On October 7 the Canadian Securities Administrators (CSA) published amendments (the Amendments) to implement eight initiatives to reduce the regulatory burden for investment funds. Generally, the changes eliminate duplicative requirements, streamline regulatory approvals and processes, and codify frequently granted exemptions from certain requirements. The changes are as follows.
- Consolidating the simplified prospectus and annual information form (AIF) into one document. The Amendments repeal the requirement for a mutual fund in continuous distribution to file an AIF. In lieu of an AIF, the mutual fund may file a new Form 81-101F1 Contents of Simplified Prospectus (Form 81-101F1) that includes unique requirements of the Form 81-101F2 Contents of Annual Information Form (Form 81-101F2). The Amendments also streamline the Form 81-101F1 by repealing difficult-to produce requirements that were found to not be meaningful for investors, and requirements to produce disclosure that is available in other regulatory documents.
- Mandating a requirement for each investment fund to have a designated website on which to post the fund’s regulatory disclosure. The website must be publicly accessible and established and maintained by the investment fund or by the investment fund manager or a person designated by the investment fund manager. This person may include a third-party service provider, or an affiliate or associate of the investment fund manager.
- Codifying exemptive relief allowing for the use of notice-and-access system for the solicitation of proxies by investments funds. Notice-and-access permits delivery of proxy-related materials by sending a notice providing registered holders or beneficial owners with summary information about the proxy-related materials and instructions on how to access them. The Amendments also extend the notice-and-access system to non-management solicitation of proxies, consistent with the rules for non-investment fund reporting issuers.
- Minimizing personal information form (PIF) filings by individual registrants and permitted individuals. The filings will not be required for such persons that have previously filed a Form 33-109F4Registration of Individuals and Review of Permitted Individuals (Form 33-109F4). The CSA noted that this does not affect investor protection as information provided to the regulators in Form 33-109F4 is otherwise required to be kept up-to-date.
- Codifying exemptive relief granted in respect of conflicts applications. These include exemptions to permit (a) fund-on-fund investments by investment funds that are not reporting issuers; (b) in specie subscriptions and redemptions involving related managed accounts and mutual funds; and (c) inter-fund trades of portfolio securities between related reporting investment funds, investment funds that are not reporting issuers and managed accounts at the last sale price. Please note that there are a number of conditions to this relief. The CSA is not proceeding with the codification of exemptive relief to engage in in specie transactions at this time, in order to permit the CSA to consider the impact of CSA Staff Notice 81-333 Guidance on Effective Liquidity Risk Management for Investment Funds on in specie
- Broadening the pre-approval criteria for investment fund mergers. The Amendments provide that subparagraph 5.6(1)(a)(ii) of National Instrument 81-102 Investment Funds (NI 81-102) can be satisfied where: (a) the investment fund manager reasonably believes that the transaction is in the best interests of the investment fund despite differences between the funds; and (b) the information circular discloses the differences between the funds and explains why the investment fund manager is of the belief that the transaction is in the best interests of the investment fund despite the differences. In addition, the Amendments provide that paragraph 5.6(1)(b) of NI 81-102 can also be satisfied where: (a) the investment fund manager reasonably believes that the transaction is in the best interests of the investment fund despite the tax treatment of the transaction; and (b) the information circular: (i) discloses that the transaction is not a “qualifying exchange” within the meaning of section 132.2 of the Income Tax Act (Canada) (ITA) or a tax-deferred transaction under subsection 85(1), 85.1(1), 86(1) or 87(1) of the ITA; (ii) discloses the reason why the transaction is not structured so that the pre-approval criterion applies; and (iii) explains why the investment fund manager is of the belief that the transaction is in the best interests of the investment fund despite the tax treatment of the transaction.
- Repealing the regulatory approval requirement for a change of manager, change of control of a manager, and change of custodian that occurs in connection with a change of manager. The CSA noted that since the adoption of these requirements in NI 81-102, National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations has implemented registration requirements for investment fund managers that allows the CSA to continue assessing suitability for investment fund manager registration. A change of manager will continue to be subject to securityholder approval and the requirement to prepare an information circular. In order to help investment funds meet their disclosure obligations, the Amendments add certain specific disclosure requirements that will apply to the information circular when there is a change of manager.
- Codifying exemptive relief granted in respect of the fund facts and ETF facts delivery requirement for certain purchases. These are with respect to: (a) purchases of conventional mutual fund securities made in managed accounts or by permitted clients that are not individuals; (b) subsequent purchases of conventional mutual fund securities under model portfolio products and portfolio rebalancing services; (c) purchases of conventional mutual fund securities made under automatic switch programs; and (d) conforming Form 81-101F3 Contents of Fund Facts Documents with Form 41-101F4 Information Required in an ETF Facts Document.
The Amendments amend National Instrument 41-101 General Prospectus Requirements (NI 41-101), National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101), NI 81-102, National Instrument 81-106 Investment Fund Continuous Disclosure, and National Instrument 81-107 Independent Review Committee for Investment Funds. In addition to the amendments described above, certain other consequential amendments were made to NI 41-101, NI 81-101 and NI 81-102. Annex D to the Amendments is published in any local jurisdictions that are making changes to local securities laws. For example, in Ontario, the Ontario Securities Commission (OSC) published a summary of public comments and OSC responses on the Ontario cost-benefit analysis along with amendments to OSC Rule 13-502 Fees.
Subject to Ministerial Approval, the Amendments will come into force on January 5 and January 6, 2022.
The Amendments complete the first stage of the CSA’s initiative to reduce regulatory burden on investment fund issuers. Subsequent stages will include further examination of the prospectus filing regime, modernizing the continuous disclosure regime, and exploring alternatives to the current requirements for delivering investment fund related materials.
If you would like to discuss the items highlighted in this summary or any aspect of the Amendments, including your ability to rely on existing exemptive relief you may have received, please do not hesitate to contact us. Please watch for our BLG colleagues’ detailed analysis of these proposals, which will be published in the coming days.
October 29, 2021