Month: August 2022
Aug 17, 2022 | Investment Funds, Regulatory Compliance
On July 7, the Ontario Securities Commission’s independent Investor Advisory Panel (IAP) released its 2021 report outlining its activities for that calendar year. The IAP’s mission is to provide input to the Ontario Securities Commission (OSC) throughout its policy development process, including identifying issues for consideration, providing input to the OSC on policies to pursue, and responding to requests for comment, all with the voice of investors at the forefront. The OSC Investor Office acts as a liaison between the IAP and the OSC and is the IAP’s secretariate – the IAP however conducts activities without direction from the OSC. It is noted that during the year, the IAP held 24 meetings with external organizations, had 11 meetings amongst themselves and made 6 submissions to the OSC/Canadian Securities Administrators and other regulatory bodies.
Much of the IAP’s focus was placed on disruption and the future of regulation, and, in particular, the entry of big-tech firms into retail wealth management, digital self-sovereignty including the ownership of personal information, biased AI and demographic changes expected to result in a shortage of retail advisors. The IAP expressed concerns to regulators that the fragmentation and responsive nature of securities regulation (as well as product-specific mandates) do not leave regulators well positioned to address the decentralized, fast-spreading evolving marketplace.
The IAP continued to review recommendations made by the Ontario Capital Markets Modernization Task Force and the new mandate for the OSC to include growing capital markets in Ontario. See our summary of some of these recommendations here. The IAP indicated such a mandate would introduce conflict and confusion especially with respect to another of the OSC’s mandates to foster fair capital markets. The IAP submitted to the OSC that it should develop clear guidelines as to how fairness will be maintained under the revised mandate and confirm whether investor protection was still a central focus.
Further concerns were expressed with respect to the Financial Services Regulatory Authority of Ontario’s (FSRA) final frameworks for title protection, on the basis that too many titles could still be used that are confusing with the protected titles of “financial planner” and “financial advisor”. In addition, a preference for FSRA to conduct proactive monitoring of improper title use, rather than relying on public complaints, was expressed. On the issue of dispute resolution, the IAP reiterated its support for binding authority to be granted to the Ombudsman for Banking Services and Investments (OBSI).
The IAP intends to focus its efforts in 2022 on items such as the new self-regulatory organization to be formed upon the consolidation of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA), and the role that model disruption is having in the investment space, including cryptocurrencies and ESG products.
August 17, 2022
Aug 17, 2022 | Investment Funds, Regulatory Compliance
At the end of July, the Alberta Securities Commission (ASC) and the Financial and Consumer Affairs Authority of Saskatchewan (FCAA) amended the self-certified investor prospectus exemption that is available in Alberta and Saskatchewan under ASC Blanket Order 45-538 Self-Certified Investor Prospectus Exemption and FCAA General Order 45-538 Self-Certified Investor Prospectus Exemption (collectively, the Orders).
The exemption allows purchasers in the two provinces to invest alongside persons who qualify as accredited investors on a number of conditions, the primary condition being a self-certification that they meet alternative criteria with respect to their financial and investment knowledge. For example, the qualification criteria includes holding a CFA or Chartered Financial Analyst Charter from CFA Institute or any predecessor or successor organization or holding a CPA or Chartered Professional Accountant designation from CPA Canada (there are many additional permitted categories of educational/financial experience that will allow someone to self-certify for the purposes of the exemption).
The amendments to the exemption are meant to further facilitate its use in Alberta and Saskatchewan to allow the resale of a security on the basis of the exemption – i.e. not only an issuer but a selling security holder can utilize the exemption to distribute a security. The amendments also allow for the distribution of securities to a special purpose vehicle (SPV) without the SPV having to meet the investment limits that individual purchasers are subject to (i.e. not more than $10,000 per issuer per calendar year and not more than $30,000 across all issuers per calendar year). The new carve out for SPVs require that (i) all of the owners of interests, direct, indirect or beneficial, except the voting securities required by law to be owned by the directors, are accredited investors and self-certified investors; (ii) the SPV distributes its securities to self-certified investors in compliance with the exemption; and (iii) self-certified investors have not contributed more than 25% in total of the funds invested in the SPV.
The other conditions of the exemption all still apply, including that the head office of the issuer of the security must be located in either Alberta or Saskatchewan, the purchaser must be provided access to substantially the same information about the securities as would be provided to an accredited investor, and the seller must obtain from the purchaser a statutory declaration in prescribed form acknowledging the criteria on which the purchaser is relying on the exemption. If the distribution is made by the issuer of the security, the issuer must file a report of exempt distribution and pay applicable fees on or before the 10th day after the closing of the distribution.
August 17, 2022
Aug 17, 2022 | Investment Funds, Regulatory Compliance
The Investment Industry Regulatory Organization of Canada (IIROC) released its annual Enforcement Report (Report) for the fiscal year 2022 (April 1, 2021 to March 31, 2022). The report highlighted IIROC’s commitment to protect clients, namely senior and vulnerable clients, its achievements in strengthening its legal authority across Canada, and the results of the inaugural use of Early Resolution Offers to speed up enforcement matters.
The Report references the main benefits of introducing Early Resolution Offers as 1) speeding up the enforcement and remediation process most notably the cooperation from member firms and 2) freeing up resources both at IIROC and at member firms as a result of speedier resolutions. It noted that firms are further incentivized to participate in the process by the 30% reduction in sanctions imposed. During the inaugural year of the program, IIROC entered into four offers with member firms. The main themes of these enforcement matters related to strengthening market integrity and improving industry standards.
For one member firm, its failure to comply with trading supervision obligations to detect and prevent a client interfering with fair market operations lead it to accept an Early Resolution Offer option. The matter was discovered by the IIROC enforcement team. Once brought to the firm’s attention, it cooperated fully with the investigation and remediation efforts, resulting in a reduced fine of $150,000, which was resolved in weeks instead of months.
The other matters resolved involved lapses in industry standards. The member firms involved were cited for failing to establish and maintain a system to supervise the activities of their employees, or the failure to establish internal controls and supervision that would reasonably allow for compliance with IIROC by-laws and requirements and failure to implement adequate supervisory controls when onboarding accounts of clients trading in crypto currencies and other assets.
In one case, the firm discovered the issue and notified IIROC. The issues involved an inconsistency in the fees charged to clients in fee-based accounts which differed from what was documented in the clients’ fee agreements. The firm’s cooperation with IIROC assisted in the reduction of the fine imposed.
In total IIROC reported an increase in fines, disgorgement and costs imposed by hearing panels on IIROC-regulated persons (individuals and firms) during fiscal 2022. Over $4 million in fines were imposed industry wide, with individuals ordered to disgorge $211,736.87 of ill-gotten gains, an increase from prior years.
IIROC’s right to impose and collect fines from coast to coast has been confirmed with Newfoundland and Labrador becoming the final jurisdiction to allow IIROC the authority to collect fines through the courts. The report highlights IIROC’s efforts to strengthen the effectiveness of its enforcement authority and its efforts to request that provinces grant the ability to collect evidence during investigations and provide IIROC protection against malicious lawsuits when acting in accordance with its mandate.
Finally, the report notes that even as the announced merger of IIROC and the MFDA comes closer into being, enforcement efforts under the new SRO will continue to strengthen regulatory efforts to protect the Canadian markets. It will be interesting to keep a close eye on the new SRO’s enforcement powers and actions moving forward.
August 17, 2022
Aug 17, 2022 | Regulatory Compliance
On June 29, 2022 the Canadian Securities Administrators (CSA) issued its fiscal year 2021-2022 Enforcement Report (Report), for the year ended March 31. The Report indicates an increased attention being applied by the Canadian securities regulators on the crypto-asset space, an emphasis on employing various tactics to disrupt ongoing or potential illegal activity, that the CSA is continuing to develop and enhance their market analytics and technological capabilities to address evolving threats, and collaboration on international investigations.
There were 14 crypto cases where the CSA took action to clarify and enhance regulations this past year. The message from the CSA Chair also noted increased instances of “high-pressure sales tactics being used to lure Canadians into fraudulent investment offerings, particularly related to crypto assets”. The message also indicated ongoing development of technologies and training to improve enforcement capabilities in the crypto-asset space. As such, market participants should be aware of the special attention being given to this area.
The message from the Chair also stressed the importance of preventative measures for investor protection. The use of disruption techniques, such as investor alerts, which are used to warn the public about potential harmful or illegal activity, has increased this past year. Specifically, 236 investor alerts were issued by CSA members in 2021, representing a significant increase compared to the 159 issued in 2020.
Over the past year, several CSA members were also involved in a 20-country investigation, resulting in the U.S. Securities and Exchange Commission charging defendants in a fraudulent penny stock scheme that generated more than USD$194 million in illicit proceeds.
Market participants should also note that the 59 matters commenced in 2021 represents a continuation in the uptick of enforcement proceedings over last couple of years (for reference, there were 52 cases commenced in 2020). Of the fines imposed, the majority stemmed from the illegal distribution of securities, which refers to the sale of securities that have failed to comply with securities laws regarding registration, trading, or disclosure.
If you have any questions or are interested in learning more, please contact us.
August 17, 2022
Aug 17, 2022 | Investment Funds, Regulatory Compliance
It’s been a year since we wrote about proposed draft regulations under Saskatchewan’s The Financial Planners and Financial Advisors Act. The title protection framework was initially based primarily on Ontario’s title protection framework, requiring approval for credentialing bodies (CBs) and their financial planner and financial advisor credentials. However, the latest request for comment released by The Financial and Consumer Affairs Authority of Saskatchewan (FCAA) introduces a number of changes in response to comments received on the initial consultation which would de-harmonize the regulations from those that have already been finalized in Ontario.
As part of the credentialing process, both jurisdictions have proposed baseline competency profiles in order for a financial planner (FP) or financial advisor (FA) credential to be approved. The FCAA is considering changing the competency profiles for the financial advisor credential to be closer to that of a financial planner. Originally, the FA credential would have required education relating to products and services provided by the individual, along with education requirements relating to a broad overview of the Canadian financial services marketplace, among other topics. Some commentators, however, felt that the profile was too limited for the FA credential and that it should include proficiency in multiple technical areas and not take a product focused view. The commentators indicated that FAs should take a broad approach to financial advice where the advice would be focused more on specific strategies or approaches and not specific products. The new language would require a broader expertise when providing suitable recommendations to a client and thus would require a financial advisor credential to have educational requirements related to estate planning, tax planning, retirement planning, investment planning, finance management and insurance and risk management. As noted in the consultation, the key difference between the competency profiles for an FP and FA would be that:
“an FP will require knowledge and competency in respect of developing and presenting an integrated financial plan for the client; whereas an FA will require knowledge and competency in respect of providing suitable recommendations to a client with respect to broad-based financial and investment strategies.”
A question is also raised as to whether FAs should be required to disclose the product(s) they are authorized to sell (along with their title).
Comments are also being sought on the appropriate transition period. It was originally contemplated that there would be a transition period for people already using one of the titles as of July 3, 2020, which would be four years from the date the regulation comes into force for the financial planner title, and two years for the financial advisor title. Given the proposed changes to the financial advisor credential, the FCAA has asked whether the transition period for FAs should be extended to match those that will be available to FPs (i.e. four years from the date the regulation comes into force). They are also asking whether the date of July 3, 2020 (the cut-off date for when individuals must have already been using one of those titles in order to be able to rely on the transition period) should be moved up to closer to the present date.
Interesting questions have also been posed with respect to the process the FCAA should follow in the event the approval of a CB is revoked, or the operation of a CB otherwise ceases, and how the FCAA should transition credential holders to a CB in good standing.
We suspect the proposed fee schedule will also be the subject of industry comment, as CBs operating in more than one jurisdiction will be required to pay separate fees (some of which can be substantial if there are a large number of credential holders) to each jurisdiction.
Comments on the proposed regulations are due September 20, 2022.
August 17, 2022
Aug 17, 2022 | Featured
In this bulletin:
- Keeping Fit: OSC’s Investor Advisory Panel Releases Report
- Don’t Stress Out: We’ll Explain the Expansion of the Self-Certified Investor Prospectus Exemption
- IIROC Enforcement Report 2021-2022: Trends to Note
- All Work and No Play: CSA’s 2021-2022 Enforcement Report Released
- Making Changes: Saskatchewan Republishes Title Protection Rules for Comment
- The Importance of Inclusion: The Department of Finance Canada Consults on Modernizing Corporate Governance for Federally Regulated Financial Institutions
In Brief: Healthy Habits: New Investor Advisory Panel Established by CSA ▪ Roundtable to be Held on Derivatives Business Conduct Rules – A Potential Lunch and Learn Opportunity for Your Team ▪ No Laughing Matter: OSFI Releases Final Guideline for Technology and Cyber Risk
BLG’s Resource Corner
News
Click the link to access a PDF of our full, monthly bulletin summarizing these recent developments. >> Monthly Bulletin | Wellness Edition | Summer 2022
Aug 17, 2022 | Corporate Finance, Corporate Law, Regulatory Compliance
The Department of Finance Canada is currently consulting on proposed changes to the governance framework for federally regulated financial institutions (FRFIs) to reflect changes that have been made to corporate legislation regarding diversity requirements, as well as to permit the use of additional electronic communications by FRFIs and allow all-virtual meetings.
The Canada Business Corporations Act (CBCA) was amended to include diversity disclosure requirements for reporting issuers that are federally incorporated with respect to the representation of women, visible minorities, Indigenous peoples, and people with disabilities on their boards and in senior management. Information must also be disclosed on the policies and targets for representation, or an explanation must be provided as to why the issuer does not have such policies and targets. Similar rules are included in securities legislation in most provinces that apply to provincially regulated reporting issuers where disclosure is required on gender diversity on boards and in executive officer roles. The Department of Finance Canada’s consultation asks for comments on applying the CBCA’s comply or explain provisions to FRFIs, as well as whether a prescribed form for the data should be implemented and/or if any compliance measures should be implemented.
Feedback is also sought on the considerations for expanding the use of electronic communications with the owners of FRFIs for the provision of governance documents. The government is considering permitting either a “notice and access” model (where governance documents could be posted on SEDAR and a FRFI’s website instead of mailing materials to owners after notifying owners), or the Canadian Securities Administrators’ (CSA’s) newly proposed “access equals delivery” model (where delivery is effected by alerting owners through a news release that a document is available on SEDAR).
Finally, the Department of Finance Canada is also considering allowing FRFIs to hold shareholder meetings exclusively online, without requiring a court order to exempt them from the current requirements which only allow hybrid shareholder meetings.
Comments on the proposal are due September 23, 2022. Investors/owners in FRFIs may be interested in taking a look at whether these changes could impact communication with and/or engagement with these institutions.
August 17, 2022
Aug 17, 2022 | Regulatory Compliance
In mid July, the Canadian Securities Administrators (CSA) announced that they have established its new, much anticipated Investor Advisory Panel (IAP) which was first publicized in 2021. The IAP is intended to provide awareness of the interests of retail investors’ interests as well as support the CSA’s policy development and help co-ordinate investor related issues amongst the various Canadian securities regulators.
Nine initial members with deep experience in investor issues have been appointed as of September 1, and members will have staggered terms of either two or three years with one potential renewal term. Panelists were chosen by a selection committee of CSA senior officials through a public selection process. The announcement noted that the Ontario Securities Commission has its own investor advisory panel, and thus cross-appointments on both committees will be held by an additional member on the IAP to help ensure interconnection between them.
August 17, 2022
Aug 17, 2022 | Regulatory Compliance
Faithful bulletin readers will recall our prior articles regarding the proposed derivatives business conduct rules, most recently released in January for the third round of comments in Proposed National Instrument 93-101 Derivatives: Business Conduct and Proposed Companion Policy 93-101CP Derivatives: Business Conduct (collectively, the Proposed Derivatives Rules). The Proposed Derivatives Rules sets out a business conduct regime for over-the-counter (OTC) derivatives. They are intended to apply to persons and companies that meet the definition of a “derivatives adviser” or “derivatives dealer”, and a business trigger test (similar to what is already in use for securities advisers and dealers) will be used to determine which provisions of the Proposed Derivatives Rules will apply. The rules set out a business conduct regime for the OTC derivatives market and include provisions relating to conflicts, know-your-derivatives-party, senior management duties and suitability. Even if an entity is subject to the requirements and no exemption is available, it is proposed that certain eligible derivatives parties would still be able to waive certain of the requirements.
A transition period had been proposed to allow certain derivatives firms to treat existing permitted clients as “eligible derivative parties” for up to five years, along with a delayed effective date of one year from the final publication of the Proposed Derivatives Rules.
These rules may have a significant impact on the market. The Canadian Securities Administrators (CSA) will hold a virtual roundtable on the Proposed Derivatives Rules on September 28, 2022. A panel will discuss a number of implementation and compliance issues relating to the CSA’s plan to adopt a final rule in the next year. A status update on other OTC derivatives rules (including we assume the initially proposed derivatives registration rule) will also be provided. The information to be discussed in the roundtable will be very important for any adviser or dealer in the OTC derivatives space and we will be following the event with interest.
August 17, 2022
Aug 17, 2022 | Corporate Finance, Cyber-security and Data Privacy, Regulatory Compliance
The Office of the Superintendent of Financial Institutions (OSFI) has released its final Guideline B-13 Technology and Cyber Risk Management, which sets out OSFI’s expectations for federally regulated financial institutions (FRFIs) with respect to how they should manage technology and cyber risks. The guideline is organized into the following three parts: Governance and Risk Management, Technology Operations and Resilience and Cyber Security.
The section on Governance and Risk Management covers topics such as expectations for the accountability and organizational structure regarding the management of technology and cyber risks by senior officers, the preparation of a strategic technology and cyber plan, and the establishment of a technology and cyber risk management framework. The section on Technology Operations and Resilience discusses the implementation of a technology architecture framework, maintaining an inventory of all technology assets supporting business processes or functions, and change and release management. With respect to Cyber Security, the Guideline references the importance of conducting intelligence-led threat assessment and testing, and ensuring FRFIs maintain situational awareness of the cyber threat landscape. Regular testing of employees to assess cyber threat awareness is also mentioned.
The Guideline will be effective for FRFIs as of January 1, 2024. For additional information and commentary, please see the article included in BLG’s Resource Corner below. While the Guideline does not apply to non FRFIs, securities dealers and advisers may still find some of the recommendations for managing technology assets, as well as the guidelines for cyber security management, helpful.
August 17, 2022
Aug 17, 2022 | News, Regulatory Compliance
Our colleagues at BLG have provided the following insights we thought might interest our readers:
For more information, please visit the BLG website.
August 17, 2022
Aug 17, 2022 | News
We are delighted to welcome Bill Donegan as Senior Compliance Consultant to AUM Law. In his role, Bill will provide senior level advisory services to registered individuals and dealers, on all aspects of their securities regulatory compliance obligations and the implementation of securities regulatory requirements. Before joining AUM Law, Bill practiced law in the private industry for ten years, prior to his long-tenure in compliance roles, most recently as Chief Compliance Officer with Manulife Securities. He also oversaw wealth management compliance for both the IIROC and MFDA channels nationally.
August 17, 2022
Aug 17, 2022 | Events, News, Regulatory Compliance
On September 7, AUM Law’s Bill Donegan will participate as a speaker at the TSAM Toronto panel on investment operations and optimizing compliance.
August 16, 2022
Aug 8, 2022 | Featured
Bill Donegan joins AUM Law as senior compliance consultant
Toronto (August 8, 2022) – AUM Law and Borden Ladner Gervais LLP (BLG) are delighted to welcome Bill Donegan to AUM Law as senior compliance consultant.
Bill Donegan is a seasoned lawyer and senior compliance officer with a wealth of experience working within asset management and distribution firms, as well as the Mutual Fund Dealers Association of Canada (MFDA). He has managed large compliance teams and has acted as chief compliance officer for the wealth management arms of major financial institutions in Canada.
“Bill brings AUM Law his unique business and compliance experience along with a deep understanding of the regulatory environment for securities registrants and the challenges and opportunities they face,” said Kevin Cohen, National Leader, AUM Law. “Bringing Bill onboard is a significant step in securing our reputation as a leader in providing legal regulatory compliance services in Canada and growing our annual support plan program.”
“BLG’s Investment Management Group is equally excited to welcome Bill to our collective team. Bill is joining AUM Law at a critical juncture for investment management firms – with heightened focus on regulatory compliance and changes in regulatory structure with the pending consolidation of the SROs,” said Prema Thiele, BLG’s National Group Head of Corporate and Capital Markets. “Bill is extremely well-respected across the sector and we are thrilled that he has chosen to join us to help further serve our clients across the country.”
Prior to joining AUM Law, Bill was the Chief Compliance Officer at two major Canadian financial institutions where he oversaw wealth management compliance for both Investment Industry Regulatory Organization of Canada and MFDA channels nationally.
BLG + AUM Law
AUM Law was founded in 2009 with a singular vision and dedicated focus on serving the regulatory compliance needs of registrants in the investment management sector. Our firm name reinforces our focus, being the commonly used industry acronym for “assets under management”.
AUM Law has been part of BLG since May 2021 and is integrating with BLG’s suite of alternative legal services known as BLG Beyond.
AUM Law provides its registrant clients with annual fixed-fee regulatory compliance support plans and related offerings. It provides registrants with an efficient, innovative approach to help manage their legal and regulatory compliance obligations.
Practical Advice · Efficient Service · Fixed-Fee Plans
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For more information, please contact:
Tamara Costa
National Director, Marketing and Communications
Borden Ladner Gervais LLP
TCosta@blg.com
416.350.2642
