Month: February 2022
In this bulletin:
- Everything’s Derivative: Canadian Securities Regulators Adopt Amendments to Derivatives Clearing Rules
- Now You See Me: New Ownership Transparency Requirements for Private Ontario Corporations
- Not Just a Status Update: New AML Requirements Applicable to Portfolio Managers and Dealers
- Cover Me: Recent Proposed Regulatory Reforms to Protect Investors in Insurance Products
In Brief: Sweeps, Sweeps and More Sweeps ▪ CSA Updates its Review on Disclosure Regarding Women on Boards ▪ European Developments – SDR and SRD
FAQ Corner: Investing Clients’ Assets Into Crypto ▪ Preparing Account Statements and Reports on a “Household” Basis ▪ Registered Firm Conducting a Suitability Determination at a “Household” Level
Important Reminders: Reassess Application of “Business Trigger” as Business Activities Change
BLG’s Resource Corner
News and Events
Click the link to access a PDF of our full, monthly bulletin summarizing these recent developments. >> Monthly Bulletin | Hello February! Why So Short? Edition | February 2022
On January 27, 2022 the Canadian Securities Administrators (CSA) announced that they are adopting Amendments to National Instrument 94-101 Mandatory Central Counterparty Clearing of Derivatives and Changes to Companion Policy 94-101 Mandatory Central Counterparty Clearing of Derivatives (the Amendments).
NI 94-101, which came into force in 2017, requires that certain market participants clear prescribed over-the-counter derivatives through a central clearing counterparty, subject to exemptions, in order to reduce counterparty risk. The Amendments are in response to feedback received by the CSA and are intended to refine the scope of market participants that are subject to the clearing requirements and reduce regulatory burden. The CSA had published proposed amendments to NI 94-101 back in September 2020 (the 2020 Proposed Amendments) and the current Amendments differ from those 2020 Proposed Amendments in a few ways. These differences include the new transition period (see coming into force date below), removal of a requirement relating to affiliates having to enter into an agreement to rely on the intragroup exemption that was considered an unnecessary burden, and additional guidance on the CSA’s expectations regarding the multilateral portfolio compression exemption. Amendments were also made to Appendix B Laws, Regulations or Instruments of Foreign Jurisdictions Applicable for Substituted Compliance (Appendix B) that now includes the relevant laws and regulations of the United Kingdom to reflect Brexit.
Provided that all necessary approvals are obtained, the Amendments will come into force on September 1, 2022, except for Appendix B which will come into force earlier on April 12, 2022.
If you have any questions about the Amendments, please contact a member of our team.
February 28, 2022
In the Ontario 2021 Fall Economic Statement the Government of Ontario announced its intention to address tax evasion, money laundering and other illicit financial activities through amendments to the Business Corporations Act (Ontario) (the Amendments). The Amendments will require privately-held Ontario corporations to record the identities and details of all individuals who exercise significant control over those corporations. Corporations that offer securities to the public and their wholly owned subsidiaries will be exempt from these requirements.
The information requirements will apply to an individual (referred to as an “individual with significant control”) who: a) owns, controls or directs 25% or more of the voting shares of the corporation or shares that are worth 25% or more of the fair market value of all outstanding shares of the corporation; or b) has direct or indirect influence over the corporation without owning at least 25% of the shares. A person would also be caught by these requirements if they own or control a significant number of shares jointly with other people.
The information required to be maintained by the corporation of each individual with significant control includes: their name, date of birth and address, jurisdiction of residence for tax purposes, date of becoming or no longer being an individual with significant control, a description of how the person has significant control, and a description of the steps the corporation takes to keep the information current each year. Updates to the information would be needed at least once during each financial year of the corporation and within 15 days of the corporation becoming aware of a change in the relevant information.
The Amendments are to be effective January 1, 2023 and would bring Ontario in line with other Canadian provinces. If you have any questions about the Amendments or how they may impact your business, please contact us.
February 28, 2022
As has been widely reported in the media, the Emergency Economic Measures Order under the Emergencies Act (Canada) had immediate consequences for registered firms. While the use of the Act has now ended, orders such as this one are a good reminder that firms must always be on the lookout for changes to the designated persons list and for new or amended economic sanctions.
Registrants were required under the emergency order to confirm if they were in possession or control of any property owned, held or controlled by a person or entity that was involved in the trucker blockade protests, or those supporting such protests. These persons were referred to as “designated persons” in the order. We understand that the RCMP provided certain institutions with lists of people who would fall within the definition of a “designated person”. In addition to all other AML obligations pursuant to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, including potentially the filing of suspicious transaction reports, firms had to screen their client lists against these new names. Certain technology solution-based service providers have uploaded these names to their data bases for name checking purposes. In the event a registrant finds out that they have a designated person as a client, a number of actions could be required, including potentially disclosing the existence of the property to the appropriate authorities.
In addition, on February 22 and February 24 the government announced that it would levy new economic sanctions on Russia as a result of its actions in the Ukraine under the Special Economic Measures (Russia) Regulations. These sanctions include a broad prohibition on persons in Canada from engaging in transactions (including financial dealings) in the specified regions and with the named individuals. We expect further sanctions may follow.
These situations by nature change rapidly and must be watched closely. We frequently help clients with their AML obligations, even if some of them are time-limited in scope. If you have any questions about these or any other AML requirements, please reach out to a member of our team.
February 28 2022
As the next group of products under scrutiny by various regulators, insurers and intermediaries should be aware of proposed guidance recently released by The Canadian Counsel of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO). The proposed Incentive Management Guidance is intended to provide illustrations and guidance on how incentive arrangements related to the sales and servicing of insurance products should be designed in order to meet the expectations of the existing CCIR-CISRO Guidance involving the fair treatment of customers, which came into force in 2018. Since that time, insurance regulators have determined that some practices may present risks to the fair treatment of customers and that additional guidance is needed.
The proposed guidance is principles-based and provides flexibility to design policies and controls to support fair customer outcomes based on the nature, size and complexity of the activities of insurers and intermediaries. “Intermediaries” include individual agents, brokers and business entities authorized to distribute insurance products and services, including managing general agencies. In the guidance, “incentives” include both monetary and non-monetary compensation offered by insurers and intermediaries to their employees and other persons acting on their behalf in the sale and servicing of insurance products. Among other expectations, CCIR and CISRO note that insurers and intermediaries’ governance culture must place the fair treatment of customers at the center of decisions concerning the design and management of incentive arrangements. It is also suggested that as part of the management of these arrangements, appropriate deterrents should be established to actively discourage behaviours that could cause unfair outcomes to customers, and provide arrangements for recovering, when appropriate, the compensation once it has been paid out. Post-sale controls should also be established to identify inappropriate sales resulting from incentive arrangements.
An appendix to the guideline contains examples where certain components of incentive arrangements (without appropriate controls) may increase the risk of unfair outcomes for customers. Examples include:
- arrangements with excessive incentives for cross-selling optional products;
- bonus rates that increase with predetermined sales volumes thresholds without adequate consideration to the fair treatment of customers;
- lifetime vesting of renewal commissions to intermediaries which can result in eventual client orphaning; and
- incentive arrangements which can result in penalties (e.g. exit fees) for the customer.
Earlier this month, the same regulators announced their position on the use of Deferred Sales Charges in segregated fund contract sales. They further indicated that insurers should refrain from new DSC sales with an eye on the June 1, 2022 ban of mutual fund DSC sales and expect a transition to stopping such sales on seg funds by June 1, 2023. They also indicated an intention to consult on other upfront commissions in individual variable insurance contracts later this year.
Comments on the proposed guidance are due April 4, 2022.
February 28, 2022
A number of CSA jurisdictions have begun their promised registrant reviews relating to the client-focused reforms. These jurisdictions have sent out very extensive questionnaires relating specifically to the conflicts of interest provisions that came into force at the end of June, 2021. The questions include those relating to the formation of a firm’s conflicts inventory, inquiries about fee arrangements and proprietary products, and ask for documentation and proof of changes made to policies and procedures to demonstrate compliance with the new requirements. We suspect the result of these reviews will result in further guidance to the industry on baseline regulatory expectations.
Registered firms with clients in Québec should also soon be hearing from the AMF, if they haven’t already. The AMF is currently conducting a normal course focused review with a number of questions being asked of firms that do not have a physical presence in Québec. The stated purpose of the review is to get a better understanding of a firm’s activities in the province.
In addition to regulatory reviews, the OSC has begun the process of individually reminding registrants of the 2022 risk assessment questionnaire (RAQ), which will be sent out in early May and is due by mid June. The 2022 RAQ will ask about information for the period ended December 31, 2021. While the questions are expected to be substantially similar to those in the 2020 RAQ and some fields that relate to information unlikely to change from year to year will be pre-populated, significant time and resources will still be required to complete all sections of the questionnaire fully. The OSC email includes a link to a copy of the 2020 questions in order to help get firms started on collecting the necessary information. The OSC will also be providing a list of FAQs and user guides for each section of the questionnaire and is setting up a webinar as part of its Registrant Outreach to be held in May. We would urge clients to begin thinking about and planning for this project. As the form requires certification from a firm’s UDP, it is important to leave enough time for the c to review the form prior to submission.
As a reminder, firms in Ontario that are registered as investment fund managers must also complete the OSC’s Investment Fund Survey (which has already been sent out) by April 29th.
We are assisting a number of clients with responding to these reviews, and we would be pleased to answer your questions about this or any other regulatory sweeps occurring.
February 28, 2022
Back in November, the Canadian Securities Administrators published CSA Multilateral Staff Notice 58-313 Review of Disclosure Regarding Women on Boards and in Executive Officer Positions (the Report). The Report outlines key findings from a recent review of issuers’ public disclosure regarding women on boards and in executive officer positions, as required by Form 58-101F1 Corporate Governance Disclosure (Form 58-101F1 ). These requirements are applicable to issuers listed on the Toronto Stock Exchange (TSX) and other non-venture issuers and are meant to increase transparency for investors and other stakeholders.
Following the report, on January 20, 2022, the securities regulatory authorities in Manitoba, New Brunswick, Nova Scotia, Ontario, Québec and Saskatchewan (the participating jurisdictions) published the underlying data used to prepare the Report.
This is the 7th annual review on this topic, and the Report includes the following interesting trends:
- 22% of board seats were held by women and 6% of the chairs of the board were women;
- 5% of issuers had a woman chief executive officer (CEO);
- 60% of issuers adopted a policy relating to the representation of women on their board;
- The number of women on boards varied by industry. The manufacturing, retail and utilities industries had the highest percentage of issuers with one or more women on their boards. The biotechnology, technology and mining industries had the lowest percentage of issuers with one or more women on their boards; and
- There was a correlation between issuers adopting certain diversity measures and the proportion of board seats held by women.
The Report also provided guidance on the disclosure requirements related to this initiative. It included helpful examples of how information regarding the following topics should be organized and presented in issuers’ applicable disclosure documents:
- Data regarding women on boards and in executive officer positions, as required by Item 15 of Form 58-101F1;
- Information regarding targets, as required by Item 14 of Form 58-101F1; and
- Information regarding terms limits and other mechanisms of board renewal, as required by Item 10 of Form 58-101F1.
February 28, 2022
There are two European developments we wanted to bring to your attention, somewhat confusingly referred to as SDR (Settlement Discipline Regime) and SRD II (Shareholder Right Directive).
SDR concerns the European Union’s (EU) Central Securities Depositories Regulation (CSDR). The common requirements apply to central security depositories that operate across the EU. SDR introduces a number of measures to prevent trade settlement fails by ensuring that all transaction details are provided to facilitate settlement and incentivises timely settlement by cash penalty fines. Canadian firms trading securities that ultimately settle at a CSD domiciled in the EU may be subject to these rules and, consequently, also potentially the fines.
SRD is a directive that concerns the EU’s requirements related to transparency and corporate governance. Provisions include those relating to the remuneration of directors, identification of shareholders (for engagement purposes), facilitation of exercising shareholder rights, and the transmission of information. Some of these provisions may apply to particular parties that transact with securities that are in-scope (e.g. traded on a European exchange).
February 28, 2022
Answer: This question arises because OSC Staff have stated their position that a registered firm that plans to establish, manage, advise and/or trade in securities of investment funds with portfolios of cryptocurrencies or cryptocurrency assets are required to report these as changes in business activities on Form 33-109F5 Change of Registration Information and to update information previously provided on Form 33-109F6 Firm Registration (Form 33-109F5 requirement for registered firms that establish, manage, advise and/or trade in securities of cryptocurrency investment funds | OSC).
Based on our interactions with OSC Staff to date, we understand the following:
In the event the PM wishes to invest client accounts, including any investment fund managed by the PM, directly into crypto assets or cryptocurrencies then the PM would first be required to report this as a change in business activities per the above. It would then be prudent for the PM to first verify whether OSC Staff may have any concerns in this regard or expect any conditions to be met before proceeding further.
In the event the PM will limit the investment of client accounts, including any investment fund managed by the PM, to publicly-listed issuers, ETFs or investment funds that provide indirect crypto exposure, the PM would not be required to report this as a change in business activities per the above.
In either case, we would add that the PM should ensure that any crypto exposure, whether direct or indirect, is in line with a client’s IPS or an investment fund’s stated investment objectives, and the PM may wish to consider whether the client might want to be notified in advance depending on the level of direct or indirect crypto exposure contemplated. Additionally, we would encourage the PMs to have thorough documented KYP, KYC and suitability done in regard to these types of investments.
February 28, 2022
Answer: Registered firms sometimes ask us if they can provide account statements and reports on a household basis to families where multiple family members are clients of the firm. According to regulatory guidance, the answer is a qualified yes, but… registered firms may choose to provide supplementary reporting at the household level to clients that request it, but only if they also separately provide account-level reporting. This means that registered firms are permitted to provide account statements and cost and performance reports on a household basis to clients that want it, but only as additional reports to account-level statements and reports for each individual client in the household.
February 28, 2022
Answer: The regulatory guidance on this topic is similar to the answer above; registered firms can perform a suitability determination at a household level, but only if they also separately make an account-level suitability determination. In other words, the household-level suitability determination must be supplemental to the account-level determinations.
From a compliance perspective, before registered firms can perform supplementary suitability determinations at the household level:
- the household members should have sufficient alignment of investment objectives to benefit from a household account suitability assessment,
- each individual who is not a minor within the household should be fully informed of the purpose of a household suitability determination and how it differs from account-level suitability determinations, and
- each individual who is not a minor within the household should agree to the household suitability determination.
These and many more topics are covered in the CSA’s Client Focused Reforms FAQs.
February 28, 2022
Trading or advising in securities for a business purpose triggers the requirement to register as a dealer or adviser unless an exemption is available. Many of our readers are familiar with the concept of the “business trigger” for registration, which is described in the companion policy to NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103CP). To determine whether an entity or individual is in the business of trading or advising in securities, the regulators look at the type of activity and whether it is carried out for a business purpose. NI 31-103CP sets out a number of factors and examples that are relevant to the business trigger determination including:
- engaging in activities similar to a registrant;
- intermediating trades or acting as a market maker;
- directly or indirectly carrying on the activity with repetition, regularity or continuity;
- being, or expecting to be, remunerated or compensated; and
- directly or indirectly soliciting.
The factors set out in NI 31-103 CP are not an exhaustive list and do not automatically determine whether an individual or firm is in the business of trading or advising in securities. The particular circumstances must be considered. We remind firms and individuals who have been operating under the assumption that they do not trip the business trigger to be cognizant that as their business and capital raising activities evolve, the business trigger factors should be continuously reassessed to determine whether registration may be required. If you would like our assistance with conducting a “business trigger” analysis please contact a member of our team to discuss.
February 28, 2022
Our colleagues at BLG have written the following articles we thought might interest our readers:
For more information, please visit the BLG website.
February 28, 2022
We would like to congratulate our very own Kim Poster on the achievement of being included in the 2022 Edition of the Canadian Legal Lexpert® Directory for the practice area of Investment Funds.
February 28, 2022
On February 16, Stacey Long and Richard Roskies served as expert instructors on Registration and Investment Fund Considerations for the Osgoode Intensive Course in Canadian Securities Law and Practice.
February 28, 2022