Month: February 2023

Bulletin | Family Day Edition | February 2023

In this bulletin:

  1. Taking Care of One Another – New SRO Releases Proposal on Distributing Funds to Harmed Investors
  2. Conflicts of Interest Requirements – More Than Once Per Year

In Brief: In Sync – Ontario’s Ownership Transparency Obligations Now in Force ▪ A Holiday for Everyone – Temporary Late Fee Exemptions in Ontario ▪ Additional Information on Offering Memorandum Prospectus Exemptions – Getting Everyone Together ▪ Not Just Another Manic Monday – Cessation of CDOR has Implications for Some Registrants ▪ Promises, Promises – CSA Enhances Requirements for Crypto Asset Trading Platforms ▪ Potential Extension of FINTRAC Requirements to the Mortgage Industry – There’s no Place Like Home

Important Reminders: SEDAR+ Will be Here June 13 – Adding to the Family ▪ Reporting Up – CCO Reports for Many Firms Due Soon

BLG’s Resource Corner


Click the link to access a PDF of our full, monthly bulletin summarizing these recent developments. >> AUM Law Bulletin | Family Day Edition | February 2023


Taking Care of One Another – New SRO Releases Proposal on Distributing Funds to Harmed Investors

The New Self-Regulatory Organization of Canada (New SRO) released a consultation earlier this month with respect to distributing disgorged funds, entitled the Proposal on Distributing Funds Disgorged and Collected through New SRO Disciplinary Proceedings to Harmed Investors.

The New SRO is not currently able to release disgorged funds to investors that have suffered a loss, even if a disciplinary proceeding has ordered disgorgement. Disgorgement aims to ensure that respondents, who are found liable for breaching regulatory requirements, do not keep any funds they obtained (e.g. incorrect commissions or fees), or benefit from losses avoided, as a result of their contravention. Disgorged funds differ from amounts that may otherwise be recovered by investors for losses as a result of their advisors’ activities. The New SRO reviewed research and recommendations from an internal working group and is proposing to enhance its existing enforcement process to add a mechanism to distribute disgorged funds to harmed investors.

Under the proposal, an eligible investor would be a person who suffered direct financial loss because of the contravention giving rise to the disgorgement directly linked to the enforcement findings. A potential class of investors would thus be identified at the investigation stage. While the consultation acknowledges that this may exclude certain investors, it will prevent focusing the enforcement process on investor compensation (which can still be pursued elsewhere) when the focus is intended to be the prevention and deterrence of misconduct.

It is suggested that the program be structured outside of the enforcement process and be administered by a separate branch of the New SRO (an Administrator). Once the enforcement process is completed and funds are disgorged and collected, notice would be provided to all known eligible investors, and claimants would need to opt in within a prescribed time frame set by the Administrator (within 30-90 days). Claimants would need to declare any recovery obtained elsewhere and claims for payment would then be assessed by the Administrator. The working group also recommended that the New SRO’s Office of the Investor act as liaison between the Administrator and investors.

Harmed investors would not be prevented from bringing civil claims or seeking compensation elsewhere for losses arising from the same conduct. Specific questions posed in the notice accompanying the consultation relate to the proposed restraints on eligibility and the potential for investor confusion with respect to their redress options.

Comments are due on the proposal by May 1, 2023.

February 28, 2023

Conflict of Interest Requirements – More Than Once Per Year

Since the introduction of the new conflict of interest (COI) requirements in June 2021, the Canadian Securities Administrators (CSA) and New Self-Regulatory Organization of Canada (New SRO) have been actively testing how well the industry has adapted to the requirements, and in particular, their COI obligations. All aspects relating to COI are considered important by the regulators because conflicts, and how they are managed, are a key component of the client-registrant relationship.

In October 2022, the Ontario Securities Commission (OSC) released OSC Staff Notice 33-754, and in the same month the British Columbia Securities Commission (BCSC) held their Compliance Registrant Outreach Workshop-October 2022. Staff from both regulators shared their findings from their individual COI sweeps. There were similar findings and deficiencies noted by each regulator, including that firms had not taken the appropriate steps to:

  • identify and address COIs, especially material COIs;
  • address material COIs in the best interest of the clients;
  • disclose all material COIs;
  • ensure updates to policies and procedures were adequate; or
  • train staff on their obligations and the firms’ expectations.

The CSA has stated that throughout 2023, they will continue to examine the effectiveness of the industry’s implementation of the COI requirements and the other Client Focused Reforms. They plan to provide further guidance to help the industry moving forward, but in the meantime, if a firm is found to have deficiencies, the first will be expected to rectify their processes and internal controls, within the CSA’s typically tight timelines.

What Does the CSA Expect Firms to Have in Place When It Comes to Dealing With COIs?

Firms are expected to take reasonable efforts to be aware of the COIs that they and their individual registrants face. Firms are expected to be able to evidence the actions taken to handle conflicts in the best interest of their clients, and for conflicts deemed to be material, that all mandated disclosures have been provided. The CSA has made it clear that when it comes to material conflicts, disclosure alone will not be sufficient to satisfy the firm’s obligations. Firms must, in addition, have controls in place to mitigate and manage conflict risk exposures that may arise from a material conflict or avoid the conflict all together.

As noted above, the regulators have found that some firms made no or insufficient updates to their policies and procedures. The BCSC noted that in the deficient policies and procedures they reviewed, firms failed to outline how the firm would comply with the requirements and why the firm believed that their procedures were adequate to meet these requirements.

In relation to COI, updated policies and procedures should include specific information, including how the firm will undertake the following items.

  • Identify: Firms are expected to take reasonable steps to identify COIs at their firm, especially material conflicts of interest that are reasonably foreseeable. Firms are encouraged to have a consistent and ongoing method of identifying conflicts so that they can be dealt with effectively. Conflicts are based on circumstances and as those change so would the impact identified conflicts would have on clients. To support this ongoing process, the CSA expects firms to have an internal reporting framework (in the event one does not already exist) to allow for the timely capture of information relating to conflicts and outside activities.
  • Assess: Firms should proactively assess the impact of a conflict and address accordingly. The assessment should be documented, and the analysis should include the nature of the “materiality” of the conflict, and the reasonability that once known the nature of the conflict could affect the client’s decision or recommendations made to the client. Professional judgement should also play a role in the analysis as to whether suggested controls are sufficient to mitigate the impact to a client.
  • Address: Once the assessment has been done, the firm should retain supporting documentation on the firm’s decision on whether to avoid or manage/control the conflict. For certain material conflicts the CSA has stated that firms are required to avoid the conflict if they do not have adequate controls in place to address the matter in the best interest of the client.
  • Disclose: For all material conflicts, disclosure to impacted clients is mandatory, even if the conflict has been resolved or avoided. The timeliness of the disclosure is a key requirement, and the CSA has mandated that disclosure provided to a client must be prominent and clear.
  • Outside Activities: Conflicts may arise due to an outside activity of a representative, particularly if the activity involves a position of influence.
  • Manage/Control: Conflicts are based on circumstances, and as circumstances change a firm’s records should reflect the changes and how the firm addressed them. The person or team responsible for oversight of the conflicts should also be documented.
  • Report: Outside activities must be disclosed via the NRD within prescribed timelines.
  • Train: Firms are required to train staff on identifying and reporting conflicts internally. Staff must be made aware of their obligations in relation to conflicts, the best interest standard, what constitutes a material conflict, and the firm’s expectations. Firms should maintain records of training sessions, attendance and the training material used.

If It’s Not Documented…

It is important to maintain a COI record of all the identified, assessed and addressed conflicts. A COI record should contain a conflict related analysis and actions taken by the firm to address and manage conflicts. The level of detail in a firm’s COI record is something that the CSA has left up to professional judgement. That said, the CSA has suggested the following as material conflicts of interest that require extensive detailed documentation to be maintained:

  • Recommendation of use of proprietary products and services in fulfilling investment objectives or meeting client financial needs;
  • sales practices;
  • compensation arrangements;
  • incentive practices;
  • referral arrangements (and fees); and
  • product-shelf development conflicts.

The companion policy of NI31-103 outlines the expectations of what the detailed documentation should contain.

Establishing a new internal reporting framework or enhancing what exists to capture in a timely manner information relating to COIs (even the non-reportable ones), is another tool firms will find helpful to have in place. A COI record will help demonstrate to regulatory staff that the firm is aware of its’ obligations and is being proactive in meeting them. If a regulator, a client, or a third party disputes the firm’s actions on a COI related matter in the future, having an analysis captured in a COI record may help the firm remediate the matter more efficiently.

February 28, 2023

In Sync – Ontario’s Ownership Transparency Obligations Now in Force

In addition to all of the other records expected to be maintained by registrants, private companies incorporated in Ontario should take note that as of January 1, 2023, it is also now a requirement to keep a register of individuals with significant control or influence over the company.

The definition of significant control is complex, particularly with respect to indirect and joint ownership. One example includes a registered or beneficial owner of a significant number of shares, which includes shares that carry 25% or more of the voting rights or represent 25% or more of all the outstanding shares’ fair market value, however other arrangements may also be captured. The register must still be maintained even if there are no individuals that cross the threshold for inclusion on the form.

The new register does not have to be maintained for private companies that are wholly owned subsidiaries of another company that is publicly traded. For all others, please note that there are penalties that can be levied on both the private company and the company’s shareholders, directors and officers if the requirements for the new register are not complied with. The register must be reviewed and updated at least once a year, and changes to the register must be entered within a prescribed period of time. Certain regulators, including the Ontario Securities Commission, can have access to the register.

For additional helpful information on what the register should contain, how to determine the individuals with significant control and the significant penalties for non-compliance, please see this article from our friends at BLG.

February 28, 2023

A Holiday for Everyone – Temporary Late Fee Exemptions in Ontario

The Ontario Securities Commission (OSC) has issued two temporary exemptions from late fees that would otherwise be levied in connection with reporting certain registration information, for filings made between February 13, 2023, and before April 3, 2023. The pithy orders are located on the OSC’s website and are entitled Ontario Instrument 13-510 Temporary Exemption from the Late Fee under Subsection 6.4(1) of Ontario Securities Commission Rule 13-502 Fees for the Late Filing of a Form 33-109F5 to Amend Item 10 of Form 33-109F4, which includes Disclosure Requirements in respect of Certain Outside Activities and Ontario Instrument 13-511 Temporary Exemption from the Late Fee under Section 3.3 of Ontario Securities Commission Rule 13-503 (Commodity Futures Act) Fees for the Late Filing of a Form 33-506F5 to Amend Item 10 of Form 33-506F4, which includes Disclosure Requirements in respect of Certain Outside Activities.

The orders under the Securities Act (Ontario) and the Commodity Futures Act (Ontario) are consistent with previous late fee moratoriums and amendments to the fee rules that will come into force on April 3, 2023, which will permanently eliminate these specific late fees. Item 10 of Form 33-109F4 (and its equivalent under the Commodity Futures Act (Ontario)) requires disclosure of an individual’s activities within the registered firm as well as reportable outside activities.

February 28, 2023

Additional Information on Offering Memorandum Prospectus Exemptions – Getting Everyone Together

Significant changes to National Instrument 45-106 Prospectus Exemptions that impact the use of the offering memorandum prospectus exemption are expected to take effect shortly on March 8, 2023. These changes impact issuers using this specific prospectus exemption to issue securities, that engage in “real estate activities” as well as issuers that are “collective investment vehicles”. Significant new disclosures about these issuers that must be included in the prescribed offering memorandum in order to take advantage of this exemption.

For real estate issuers, required disclosure includes detailed descriptions of each property, real estate development projects and information about future cash calls required by investors. In certain circumstances it will also be necessary to provide to investors (and file with the relevant securities regulatory authorities) an independent appraisal of an interest in real property. Collective investment vehicles (including mortgage investment entities) will also need to provide new information, including portfolio performance information.

For more detail on the requirements, please see our January bulletin article here. Issuers may also be interested in webinars being offered with respect to these amendments, such as the webinar hosted by staff of the Alberta Securities Commission on March 6, 2023. For more information and to register, please visit the ASC website.

February 28, 2023

Not Just Another Manic Monday – Cessation of CDOR has Implications for Some Registrants

On February 23, 2023, the Canadian Securities Administrators released Staff Notice 25-309 Matters Relating to Cessation of CDOR and Expected Cessation of Bankers’ Acceptances (the CDOR Staff Notice). The information in the CDOR Staff Notice is helpful to market participants who need to focus on potential issues relating to the Canadian Dollar Offered Rate (CDOR), and the resulting cessation of Bankers’ Acceptances (BAs). CDOR will cease to be published on June 28, 2024.

For registered firms, Multilateral Instrument 25-102 Designated Benchmarks and Benchmark Administrators provides that if certain market participants (including registrants) use a designated benchmark such as CDOR, and the benchmark cessation could have a significant impact on the market participant (or a security it issues or a derivative to which it is a party), the market participant must have a written plan outlining the actions it will take.

The CDOR Staff Notice also suggests that certain institutional investors may need to consider the use of alternative products to BAs.

February 28, 2023

Promises, Promises – CSA Enhances Requirements for Crypto Asset Trading Platforms

On February 22, 2023, the Canadian Securities Administrators published CSA Staff Notice 21-332 Crypto Asset Trading Platforms: Pre-Registration Undertakings – Changes to Enhance Canadian Investor Protection (the Platform Notice). The Platform Notice impacts crypto asset trading platforms operating in Canada that are seeking registration, all of whom are required to file a pre-registration undertaking. These undertakings already include obligations that the platforms will operate in a certain manner as they seek registration, and the Platform Notice introduces new commitments the CSA will expect to see. These new commitments include those relating to the custody and segregation of crypto assets and preclude the platform from offering margin, credit or other forms of leverage to clients, enhanced financial reporting to the CSA, and prior approval from the CSA before buying or depositing certain assets (such as stable coins).

Unregistered platforms operating in Canada while pursuing applications for registration must provide a revised undertaking based on the template set out by CSA staff within 30 days of the publication of the Platform Notice and implement any system changes needed within the timeframes set out in the undertaking.

February 28, 2023

Potential Extension of FINTRAC Requirements to the Mortgage Industry – There’s no Place Like Home

Registered dealers and advisers are well versed in the AML requirements contained in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. The federal Department of Finance has recently released proposed amendments to regulations under the Act that would impact certain non-financial institution entities, including mortgage brokers, mortgage lenders and mortgage administrators.

The proposed amendments are a result of a number of studies and recommendations relating to the increased risk of money laundering in the real estate sector. A number of AML obligations, such as developing a compliance program, gathering prescribed KYC information (including beneficial ownership), keeping records, suspicious transaction reporting and monthly AML reports, would then apply. Penalties similar to those imposed on other sectors would also apply, which would range based on the harm done and the entity’s history of compliance. For example, the range of penalty for a very serious violation would be from $1-$500,000 per violation for an entity.

If adopted, the amendments would come into force 8 months after their publication in the Canada Gazette, Part II. FINTRAC would be expected to release additional guidance specific to the mortgage industry to assist with interpretation of the new requirements. The draft regulations are open for comment until March 20, 2023.

February 28, 2023

Important Reminders: SEDAR+ Will be Here June 13 – Adding to the Family

All issuers that currently file on SEDAR will have to undertake a number of steps to ensure access to the new SEDAR+ system, which the securities regulators refer to as “onboarding.” Information on the CSA’s website suggests that these steps should be completed by April 14, 2023 to ensure immediate access to SEDAR+ once it is rolled out. A number of agreements must be reviewed and entered into, including an electronic filer agreement and a filing agent authorization form (for issuers and funds that use filing agents). There are also a number of new fields in SEDAR+ that may take some time to populate. For more information, please refer to the article written by BLG below. If you have not yet begun this process or require additional information, please contact us for assistance.

February 28, 2023

Important Reminders: Reporting Up – CCO Reports for Many Firms Due Soon

National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations sets out the obligations of a registered firm’s Chief Compliance Officer. The CCO is required to submit an annual report to the firm’s board (or individuals acting in a similar capacity), for the purpose of assessing compliance by the firm and individuals acting on its behalf with securities legislation. Many firms operate on a calendar year end, and typically CCO reports are completed in the first quarter of the year. AUM Law can provide assistance with these reports on a fixed fee basis – please contact us for more information.

February 28, 2023

BLG’s Resource Corner

Our colleagues at BLG have provided the following insights we thought might interest our readers:

February 28, 2023

AUM Law Team Members Announcements

We are delighted to welcome Iva Vranic as a Senior Legal Counsel to AUM Law. Iva’s practice focuses on securities law, specifically regulatory compliance and risk management for registrants. Prior to joining AUM Law in 2023, she worked at Scotiabank where she spent the last 14 years in legal/compliance roles of increasing responsibility. Most recently, she led a compliance transformation project aimed at optimizing several key conflict management programs at Scotiabank.

Iva has an extensive range of experience in both the private and public sectors. She has provided advice over the years on a variety of compliance issues, including registration reform, conflict management, insider reporting and obtaining discretionary relief from registration requirements.

February 28, 2023