Category: Client-Focused Reforms (CFRs)
Richard Roskies, Senior Counsel at AUM Law, recently sat down with Parham Nasseri from InvestorCOM to discuss the Client Focused Reforms and practical approaches for investment dealers and advisors to meet their KYP obligations.
Parham: What are your thoughts on how investment dealers have generally responded to the CFR requirements and their state of readiness?
Richard: By now, the CFRs should be on every dealer and advisors’ radar. I’d say about 60% of the clients I work with are at least knee deep into the conflict-of-interest requirements that are due in June. When it comes to the KYP, KYC and Enhanced suitability segments, I believe most people have started to think about it, but they haven’t yet weighed in with full focus. For example, these topics have not been a huge topic on the implementation committees I sit on.
That being said, depending on the size of the dealer’s product shelf, the KYP piece requires a fair amount of work and now is the time to start thinking about implementation strategy.
In terms of materials coming out of the final SRO rules-based comments, there wasn’t much to be concerned about. While the rules are close to baked, the interpretation will be ongoing through implementation guidance and FAQs. In short, this will be an ongoing iterative process for our industry.
Parham: At a high level, are there any outstanding areas for clarification or is the implementation goal quite clear?
Richard: I believe we are going to get ongoing implementation guidance and FAQs throughout this year.
The Canadian Securities Administrators (CSA) has done a lot of work in setting out what the goals, principals and expectations of the CFRs are. When it comes to KYP, it is clear that the regulators now expect documented KYP evidence for all traded products. However, when you drill down to the details of what is a reasonable way for firms to achieve these goals, I believe CSA guidance defers to industry by using the term use your “professional judgement” about ten times.
The regulators have definitely given us enough guardrails about what reasonable KYP should look like, but the last details will be determined by the ongoing interaction between regulatory Staff and industry. In short, you should absolutely start working on the CFRs, including KYP, but it will be important to follow the clarifications that come out over the course of at least this coming year.
Parham: Given the Dealer’s new KYP obligations, can you comment on what it means to monitor for significant changes and what needs to happen when a significant change is detected?
Richard: First it is important that the CSA guidance explicitly narrowed the requirement here from general monitoring to monitoring for significant changes. We don’t get an explicit definition of “significant change”, as the guidance indicates that it will vary depending on your firm’s operations and the type of security. However, I think a generally safe litmus test is that you are looking for any event that may significantly affect market price.
To that end, for most securities, I would be thinking about creating proactive alerts for any news stories related to the issuer (including earnings calls). Where we are talking about private funds, there will still usually be certain disclosure events that you can use as triggers for reviews. These are the kinds of triggers that you would want to consider. You also would want to have policies on reviewing your shelf if a sector or broad market downturn arises as companies are likely change in those times of stress. I read into the guidance that the higher the risk profile of the security, the more often you should be “checking in”.
Parham: Can you discuss the requirement to assess products on your shelf, how frequently, is this the regulator’s way of reducing shelf sizes, how does this requirement differ for dealers that have a proprietary shelf or have proprietary products on their shelves?
Richard: I think industry’s major comment to regulators over the course of the discussion about KYP is that some of these changes may have the unintended consequence of reducing shelf size. Whether that occurs in actuality will have to be determined over the course of the next few years.
In terms of different KYP approaches, that term “professional judgement” comes back into play. The guidance is clear that you are indeed allowed to simplify the due diligence required as the product trends towards the lower risk/well understood end of the scale. In fact, we are talking to our clients and regulators have confirmed that for certain lower risk/public securities, you could even do KYP by sector (e.g. draft a KYP document for the “public banking sector in Canada”). As you trend towards higher risk, private and more complex securities, the diligence will need to become more detailed. Private proprietary products are likely much closer to the highly detailed side of the scale.
Parham: Clearly, the new KYP requirements are raising some questions in the industry. What are some practical approaches in your view for tackling this new requirement?
Richard: When it comes to what is practical and reasonable, I always come back to two rules:
- Effort counts. When it comes to compliance, the goal cannot be absolute perfection. The goal has to be creating a strong and demonstrable “culture of compliance”. This is a key term regulatory auditors look for. Basically, as long as you are adequately protecting clients, effort counts. Where compliance departments can show that they have taken the CFRs seriously and have built up processes that reasonably resemble those of their competitor firms, then in an audit, regulators may dispute interpretation or approach but you are not going to fall below that dangerous red line. Where thoughtful effort is not shown, that is where you start to get into trouble.
- “If it is not documented, it does not exist.” If you boil down the CFRs into one concept, it is that most of what they mandate are things that dealers and advisers have generally been doing in their heads. The CFRs ask that you better evidence your existing process. To that end, their needs to be a good paper trail for each of the tasks the CFRs are asking you to do. I get that creating a paper trail for each KYP review is onerous, and there are tech solutions that can help with that. However, the papering aspect of these CFRs cannot be understated.
Finally, tackling the CFRs from scratch are going to be hard. You need tools.
Parham: Did the comment letters (and any of the responses you’ve seen – introduce or raise any substantive items, or do you feel like what Advisor KYP is and what is required is fairly clear here?
Richard: The current round of comments for the IIROC/MFDA rules that ended January 18 was relatively sparse. I believe there were about a handful of letters and while they were thoughtful they were relatively short. As mentioned earlier, the implementation guidance/FAQs will be more informative over the coming year.
Parham: In your respective view, do the requirements raise the bar for advisors when it comes to meeting their KYP requirements?
Richard: I think that the requirements codify a lot of the best practices that Commission Staff have been recommending for a number of years. In short, most of what is in the CFRs are not “net new” from a substantive standpoint. What is new and onerous is that dealer/adviser activity will now need to be evidenced in a written and formal manner.
Parham: What are the challenges a dealer and advisors needs to consider with respect to their KYP obligation and considering a reasonable range of alternatives when making recommendations?
Richard: The first and main challenge is trying to determine what this phrase means for different firm models. While this specific phrase is drawn from the suitability requirement, there are a number of instances within the KYP requirement where you may have to look at comparator products as part of your due diligence requirements.
Understanding the “why” of this requirement will help inform when and how you should be including comparator product analysis in your KYP diligence.
The first “why” is conflicts of interest – If you are a dealer or adviser that is recommending a product (both proprietary and third party) where you are getting direct or indirect compensation for that recommendation, there is a (reasonable or otherwise) perception that you are only recommending this product because you are getting paid for it. Regulators have struggled with this issue for years. Where this conflict is identified for your firm, it is helpful to do a comparator product review so that you can show that the product you are recommending is being recommended because it is a good product, not because you are getting paid to sell it. This will give your firm additional protection as this area evolves.
The second “why” is based around some recent OSC decisions. Regulators have found that there is a client expectation that when they go to a firm, they are getting access to all the products the firm sells not just the products that an individual dealer sells. To the extent that you can show that a dealer considered all of the firm’s shelf when recommending a product to a client, you are avoiding a client expectation issue that has come up in the past.
Notwithstanding the above, I think this area will be an ongoing topic of discussion throughout the year through implementation guidance and FAQs.
February 26, 2021
On September 28, the Canadian Securities Administrators (CSA) published guidance in the form of responses to frequently asked questions (FAQs) about how to interpret and implement the client-focused reforms (CFRs) to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). As our readers already know, the conflicts-related CFRs must be implemented by June 30, 2021 and the remaining CFRs must be implemented by December 31, 2021. If you need a refresher on the CFRs, you can download our recently updated publication In a Nutshell: Implementing the Client-Focused Reforms.
The CSA recently released additional FAQs on December 18, 2020. We have noted with interest the following topics:
- KYC 2.0 Timing: In what can only help alleviate registrant stress, CSA Staff have made it explicitly clear that registrants do not need to both: (i) update their KYC and suitability process; and (ii) re-paper all their client accounts by December 2021. Registrants must only update their KYC and suitability process based on the CFR requirements by December 2021. Re-papering client accounts can occur after that date based on when a specific registrant is obligated to conduct a KYC update.
- Conflicts of Interest and Disclosure: The CFRs require registrant firms to compile an inventory of all their material conflicts and how they will mitigate those conflicts. Subsequently, the registrant firm must then disclose those conflicts in their relationship disclosure. CSA Staff have now clarified that where a registrant firm addresses a conflict by avoiding the conflict altogether, they do not need to include this conflict in their relationship disclosure. This clarification gives registrant firms some control over their required disclosure to clients and makes their choice of approach to conflict mitigation all that more important.
- Registrant Employee Oversight: For registrant firms that seek to provide a multi-discipline offering to their clients (e.g. a family office that provides services such as financial planning, securities advisory and insurance), CSA Staff have clarified that registrants have a broader due diligence obligation that just securities law oversight. CSA Staff have indicated that if a registrant employee holds themselves out as appropriately registered with another regulator, registrant firms have an ongoing obligation to ensure that this license is appropriate and that the registrant employee is in good standing with that regulator. This expectation may broaden existing due diligence procedures for registrant firms.
Implementing the CFRs will require changes to your policies, procedures, internal controls, record-keeping protocols, client-facing documentation and compliance training. Giving our clients practical advice on compliance with NI 31-103 is one of our core services. We can help you develop a project plan, work with you to systematically review and make any needed changes, and train your employees so that you are ready as the CFRs are phased in. In fact, our very own Richard Roskies is part of the Portfolio Management Association of Canada (PMAC) CFRs implementation committee. If you have any questions about the Guidance, please do not hesitate to contact us.
January 29, 2021
As a proud member of the Canadian Association of Alternative Strategies and Assets (CAASA), AUM Law is pleased to contribute to CAASA’s ongoing educational programming. On November 23, our very own Jason Streicher contributed his expertise to CAASA’s webinar Client Focused Reform – A Closer look at KYP. The webinar shared discussions of changes to KYP coming from the Canadian regulators, with new rules taking effect in 2021.
December 11, 2020
The Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC) have both published a set of proposed changes to self-regulatory rules designed to conform to the provisions of the Canadian Securities Administrators’ (CSA) effort to enhance investor protection.
As we have reported previously, on October 3, 2019, the CSA published, in final form, the client-focused reforms (CFRs) which require the industry to put their clients’ interests before their own. The CFRs include a number of changes to investor protection rules, including conflicts of interest, suitability, KYC/KYP and disclosure obligations. IIROC has now published its own proposed rule amendments for public comment intended to make its requirements uniform in all material respects with the CFRs. In a notice published on November 19, IIROC stated that the objectives of the rule changes is to better align the interests of industry firms and reps with their clients, to improve client outcomes and to enhance clients’ understanding of the terms of their relationship with the industry. IIROC has published two sets of proposals: measures that are out for public comment until January 18, 2021, as well as a set of so-called housekeeping amendments which are required to conform with the CSA’s amendments but don’t add further material requirements on industry participants. The more substantive amendments subject to public comments include enhancements to IIROC’s suitability rules and changes to its account appropriateness requirement to ensure that client’s interests come first, along with measures setting out CFR exemptions from the core regulatory obligations of account appropriateness, KYC, suitability determination, product due diligence and KYP for certain account types, client types or service arrangements, as well as other changes of a consequential nature.
Similar to the approach taken by IIROC, on November 19, the MFDA published two sets of amendments. One set addresses housekeeping changes that are relatively minor and the other is a more significant set of proposals that must go out for public comment before they can be approved. The public comment proposals include changes to the MFDA’s rules on suitability, KYC/KYP and account supervision, as well as covering the guidance set out in various MFDA staff notices. The MFDA proposals are out for comment until January 18, 2021. The MFDA has indicated that it is seeking comments on the drafting of its own amendments to ensure that they are clear and properly applied to the business model of fund dealers. As with the CSA’s reforms, the proposed changes will, among other things, require that fund dealers resolve all conflicts of interest in the best interests of clients and provide conflicts disclosure to clients.
The CFRs are to be fully implemented by the end of 2021, with the conflicts of interest provisions taking effect as of June 30, 2021. It is expected that IIROC and MFDA rule changes will be implemented along the same timeline.
December 11, 2020
How do you summarize a year like no other in history? Well, the shift to a remote work environment didn’t do much to slow our regulators who, along with the Canadian asset management industry, rose to meet the multi-faceted challenges presented by the COVID-19 pandemic.
A. Burden Reduction and Capital Markets Modernization Initiatives
Regulators moved forward with initiatives intended to reduce regulatory burdens and modernize the regulatory framework, including the following:
Crowdfunding: In February, the Canadian Securities Administrators (CSA) proposed a harmonized, start-up crowdfunding regime. In July, after the comment period closed on the CSA proposal, the Ontario Securities Commission (OSC) issued an interim class order (Order) providing prospectus and registration exemptions for start-up crowdfunding that are similar to the exemptions already in place in a number of other provinces. The Order is expected to remain in place until the earlier of the date the new CSA regime is adopted or January 31, 2022.
SRO Reform: When market participants and regulators weren’t coming to grips with remote work arrangements, they were debating whether and how to reform Canada’s self-regulatory organizations (SROs) for registrants. The Mutual Fund Dealers Association of Canada (MFDA) kicked things off in February when it published its Proposal for a Modern SRO. The CSA followed up in June with its own consultation paper on SRO reform, and the Ontario Government’s Capital Markets Modernization Task Force (Task Force) set out its draft recommendations on the subject in its July consultation report.
OSC Burden Reduction Initiatives: In early 2019, the OSC kicked off a multi-year process to identify and implement actions to reduce regulatory burdens in Ontario and improve the investor experience. Check out our December 2019 regulatory recap if you’d like to refresh your memory. In May 2020, the OSC provided a progress report on its regulatory burden reduction initiatives and provided a further update in the June 2020 Interim Progress Report on its 2019-2022 priorities. We also reported on several specific projects, including the following:
- In June, the CSA announced changes designed to make it easier for advising representatives (ARs) of portfolio managers (PMs) to register as client relationship management (CRM) specialists.
- In July, the CSA published guidance on flexible CCO arrangements.
- In August, the CSA published final amendments that raise the threshold for when non-venture reporting issuers are required to file business acquisition reports.
- In October, the Ontario government proposed changes to the Business Corporations Act (OBCA) that, if enacted, will eliminate director residency requirements for OBCA corporations and introduce a more flexible regime for privately held OBCA corporations regarding written shareholder resolutions.
B. Business Continuity and Risk Management
Business continuity planning and risk management have been top of mind for firms and regulators this year, and not just because of the COVID-19 pandemic.
- In March we discussed pandemic-related business continuity issues for firms to consider in the short and medium and term.
- In July, we highlighted an interesting publication by the North American Association of Securities Administrators (NAASA) focusing on the need for firms to be prepared to deal with colleagues experiencing diminished capacity.
- In September, we discussed the CSA’s guidance on liquidity risk management for investment fund managers as well the discussion paper issued by Office of the Superintendent of Financial Institutions (OSFI) on core principles for operational resilience in a digital world.
C. Crypto Assets
Crypto-currency issues remained in the news in 2020.
- In January, we highlighted CSA Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets.
- In February, we discussed U.S. Securities and Exchange Commission (SEC) Commissioner Hester Pierce’s informal proposal for a safe harbour for token offerings.
- In July, we wrote about the OSC’s approval of a settlement agreement with Coinsquare Ltd and its executives regarding market manipulation on a crypto-asset trading platform.
- In August, we highlighted the CSA’s first decision registering a crypto-asset trading platform under its regulatory sandbox program.
- In October, we discussed the settlement reached by Kik Interactive with the SEC regarding its unregistered token offering.
Regulators responded to the COVID-19 pandemic in impressive fashion by, among other things, extending regulatory deadlines, granting temporary relief from certain requirements, and scaling back certain initiatives. They also turned their attention to compliance and other risks affecting market participants that were specific to, or exacerbated by, the pandemic.
A number of the pandemic-related regulatory actions we wrote about in 2020 were temporary in scope, so we have highlighted below the pandemic-related articles we wrote in 2020 that continue to be relevant for market participants.
- In March, we wrote about factors for registered firms to consider in the short to medium term after they activated their business continuity plans.
- In April, we reported that the CSA had extended the deadline for implementing the CFRs concerning conflicts of interest and related relationship disclosure information (RDI) reporting requirements by six months to June 30, 2021.
- In May, we wrote about guidance provided by the Financial Services Regulatory Authority of Ontario (FSRA) to mortgage brokers and administrators regarding their disclosure and other obligations in respect of mortgage-based investments during significant market disruptions, such as the COVID-19 pandemic.
- In August, we wrote about the U.S. SEC’s risk alert on COVID-related compliance risks relevant to dealers and advisers as well as the task force established by the North American Securities Administrators Association (NASAA) to target COVID-19 fraudsters.
- The CSA and FSRA extended the expected deadline for implementation of changes to the regulatory framework for syndicated mortgages in April and again in August. As recently announced, the new framework is now expected to take effect on July 1, 2021.
- In October, we wrote about the CSA’s biennial report on their continuous disclosure review program, which included guidance for reporting issuers on how to disclose COVID-19 impacts.
E. Cyber-Security and Data Privacy
Cyber-security and data privacy continued to be hot topics, with the shift to remote work arrangements due to the pandemic presenting increased risks for inadvertent cyber-security failures as well as opportunities for hacking. AUM Law addressed these and other privacy and cyber-security issues in a number of articles, including the following:
- Cyber-Resilience: We touched on cyber-resilience in our March FAQ on business continuity planning and wrote a more detailed article in our April bulletin. In September, we reported on the Office of Superintendent of Financial Institutions’ consultation paper on operational resilience in a digital world, which includes recommendations regarding cyber-resilience, and in October, we reported that the international Financial Stability Board (FSB) had finalized its cyber incident recovery and response toolkit.
- Artificial Intelligence: In February we wrote about the consultation paper on the regulation of artificial intelligence published by the federal Office of the Privacy Commissioner (OPC), and in June we discussed the consultation paper published by the International Organization of Securities Commissions (IOSCO) regarding potential regulatory measures addressing asset managers’ and market intermediaries’ use of artificial intelligence.
- Privacy: In August, we reported that the Ontario government had launched a consultation to determine whether reforms to Ontario privacy legislation are warranted. See also our article in this bulletin regarding the Canadian government’s proposed Digital Charter Implementation Act, 2020.
F. Compliance Review and Enforcement Report Cards
The summary reports that regulatory staff publish about their oversight of market participants are valuable tools that can help firms learn more about recent and proposed regulatory initiatives, what staff consider to be problematic (or, conversely, beneficial) practices, and how staff interpret legislation and rules. In 2020, we wrote about:
- Alberta Securities Commission (ASC) staff’s review of issuers’ and registrants’ compliance with the offering memorandum exemption (January);
- Insights from staff of the OSC’s Compliance and Registrant Regulation (CRR) Branch regarding their compliance program, shared during a webinar hosted by the Portfolio Management Association of Canada (PMAC) in May;
- The annual enforcement report published by the Investment Industry Regulatory Organization of Canada (IIROC) in May;
- The CRR Branch’s annual Summary Report for Dealers, Advisers and Investment Fund Managers (September) – a ‘must read’;
- The CSA’s biennial report card on reporting issuers’ continuous disclosure practices (October); and
- The OSC’s Corporate Finance 2020 Annual Report (discussed later in this bulletin).
G. Cases and Enforcement Sweeps
In 2020, we wrote about a number of regulatory decisions that we think offer lessons for our readers.
- In January, we wrote about IIROC’s decision to fine a representative for his failure to follow through on red flags regarding a client account being handled under a power of attorney.
- In March, we discussed the IIROC decision to fine TD Waterhouse $4 million for deliberate non-compliance with relationship disclosure information requirements. In the same month, the Ontario Court of Appeal upheld Daniel Tiffin’s conviction for trading in promissory notes without registration and distributing securities without a prospectus, but overturned the lower court’s decision sentencing him to six months in jail. (PS: if you’re ever tempted to conclude that a particular instrument is not a security, first read Tiffin).
- In May, we highlighted the enforcement action initiated by OSC staff against a mutual funding dealing representative who agreed to serve as executor for a client’s will even though he was alleged to have known that he was a beneficiary under that will. We also discussed undertakings given by two issuers to the Alberta Securities Commission (ASC) regarding internal controls, training and other requirements to ensure compliance with prospectus exemptions.
- In June, we discussed a significant decision issued by the Federal Court of Appeal regarding the constitutionality and application of Canada’s Anti-Spam Legislation (CASL).
- in July, we wrote about the OSC’s approval of a settlement agreement with Coinsquare Ltd and its executives regarding market manipulation on a crypto-asset trading platform.
- In September, we reported that the Financial Institutions Regulatory Authority of Ontario (FSRA) had fined Fortress Real Developments for operating without a license.
- And, as mentioned in Section C above, we wrote about two crypto-asset-related enforcement decisions, concerning market manipulation on a crypto-asset trading platform (Coinsquare) and an unregistered token offering in the U.S. (Kik Interactive).
In 2020, we published a number of FAQs offering practical insights on various topics. Although many of them touched on issues arising out of the COVID-19 pandemic, we think the insights will continue to have relevance in other contexts.
- In January, we discussed whether an advising representative (AR) can act as the executor of an estate on behalf of a client.
- In February, we discussed things to watch out for when firms describe themselves and their representative on social media.
- In March, we outlined issues for registered firms to consider, in light of the COVID-19 pandemic, regarding their know-your-client (KYC) and suitability determination obligations.
- In April, we discussed the use of electronic signatures for subscription documents, investment management agreements and similar agreements with the firm’s clients.
- In May, we addressed the issue of whether an associate advising representative can work remotely or in a one-person branch office.
- In July, we described how a registered firm’s ultimate designated person (UDP) can certify the firm’s RAQ responses if they do not have online access to the survey.
- In July, we also discussed whether registered individuals (and applicants for registration) have to disclose offenses they have been charged with, if the matter hasn’t adjudicated yet. (This issue was also covered later in the year in an Advisor’s Edge interview with our Erez Blumberger).
In 2019, the CSA published its own FAQ guidance, this time focusing the client-focused reforms (CFRs). We discussed those FAQs in our September and October bulletins.
Although the COVID-19 pandemic delayed implementation of the revised oversight framework for syndicated mortgages to July 2021, the good folks at FSRA kept busy in 2020 with a number of initiatives, including:
- In August, FSRA published for comment an oversight framework, including proposed rules and guidance, regarding the use of financial planner and financial titles.
- Also in August, FSRA and the OSC published for comment proposed local rules and guidance regarding syndicated mortgages, while the CSA finalized its amendments for the syndicated mortgages regime.
- In September, FSRA published proposed service standard for comment.
- In October, FSRA published its 2021-22 Statement of Priorities for comment.
December 11, 2020
On September 28, the Canadian Securities Administrators (CSA) published guidance in the form of responses to frequently asked questions (FAQs) about how to interpret and implement the client-focused reforms (CFRs) to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). As our readers already know, the conflicts-related CFRs must be implemented by June 30, 2021 and the remaining CFRS must be implemented by December 31, 2021. If you need a refresher on the CFRs, you can download our recently updated publication In a Nutshell: Implementing the Client-Focused Reforms.
On September 30, we published an article sharing our first look at some of the FAQs. In this article, we’ll highlight additional FAQs that we think our readers will find relevant as they work on their implementation plans.
Know-Your-Client (KYC) and Suitability Requirements
- Collecting Information about Outside Holdings: In their response to FAQ 2, CSA staff provide guidance on how they expect registrants to handle situations where they do not have access to information about a client’s outside holdings, which may be relevant to the registrant’s assessment of the client’s capacity for loss. In particular, CSA staff expect dealers to obtain a breakdown of the client’s financial assets and net assets to ensure that the information collected accurately reflects the client’s financial circumstances and to assist the registrant in determining the availability of prospectus exemptions the suitability of any investment made. Outside investments may be particularly important to an assessment of whether a particular investment could lead a client to become over-concentrated in a security. Staff indicated, however, that if a client refuses to provide or update the requested information, that refusal does not automatically prevent the registrant from servicing the client. The registrant should use professional judgment in deciding whether it has sufficient information to meet its suitability determination requirement and whether that information is sufficiently current. Furthermore, staff expect dealers to make further inquiries where there is a reasonable doubt about the accuracy of information provided by the client or the validity of the client’s claim to be an accredited investor or eligible investor.
- Unsolicited Orders: In their response to FAQ 2, CSA staff also remind registrants of the new requirement, set out in section 13.3(2.1) of NI 31-103, regarding unsolicited orders. If the registrant believes that a client order or instruction isn’t suitable, it’s insufficient to mark the order as unsolicited. The registrant must advise the client in a timely manner against proceeding, indicate the basis for that determination, and recommend an alternative that satisfies the suitability requirement in subsection 13.3(1). In order to provide such advice, the registrant must have sufficient KYC information.
- Evidencing Compliance with KYC Update Requirements: In their response to FAQ 3, CSA staff emphasize that they have not prescribed how registrants must evidence their compliance with obligations to keep KYC information current. They note that methods for documenting a client’s confirmation of the accuracy of information, including significant changes, may include maintaining notes in the client’s file or more formal methods such as obtaining the client’s digital or handwritten signature. In some cases, notes of a phone call will be enough but in other situations (e.g. where there are significant changes in KYC information), staff expect that information to be repapered. Also, when a periodic review takes place, CSA staff expect all KYC elements to be reviewed. It wouldn’t be reasonable to update a client’s income or employment without asking questions to revisit their risk tolerance and time horizon.
- Reassessing Suitability When Team Membership Changes: Section 13.3.(2)(a) of revised NI 31-103 (the Revised Rule) requires a registrant to review a client’s account and reassess the suitability of the securities in that account if, among other things, a registered individual is designated as responsible for the client’s account. In FAQ 26, CSA staff provide guidance on how that requirement can be interpreted where a firm assigns teams, rather than specific individuals, to client accounts. They indicate that professional judgment must be exercised in deciding whether a change in team membership triggers a suitability review. For example, a change of one registered individual will not necessarily trigger the requirement but individual team members’ roles and responsibilities, to the extent they differ, should be considered. For example, if there is a team leader who approves other team members’ recommendations and that team leader changes, it is likely that a review would be appropriate because that individual is effectively designated as responsible for the client’s account.
Best Interests Standard: In FAQ 4, market participants sought more guidance on how they can ensure that they are addressing material conflicts of interest in the best interests of their client. CSA staff’s response, however, does not provide much additional information. Staff reiterate their prior statements that determining best interests is a facts and circumstances-specific exercise, point to their guidance in NI 31-103CP regarding conflicts, and stress that a registrant’s conflicts analysis should take into account materiality, reasonability and professional judgment, taking into account the client-registrant relationship and the registrant’s business model.
Conflicts Disclosure: FAQ 15 asks whether conflicts can be grouped for disclosure purposes or whether they must be specifically enumerated. In their response, CSA staff stress that they do not want the disclosure to overwhelm clients but that some specificity is needed to help clients evaluate their relationship with the registrant. Registrants should use their professional judgment in deciding whether grouping certain conflicts together will result in the client being able to more easily understand the disclosure.
Relationship Disclosure Information (RDI) Requirements
- Timeline: Now that the deadline for implementing the revised RDI requirements has been extended to December 31, 2021, CSA staff expect all new and existing clients to receive updated RDI in line with that deadline (FAQ 21).
- Delivery Mechanisms and Content: CSA staff’s response to FAQ 21 also emphasizes that registrants have flexibility about how they deliver the revised RDI. For example, the information could be provided to a new client during onboarding, while an existing client could receive the information when the registrant first interacts with that client after the implementation date. If an existing client has opted to receive correspondence electronically, firms should provide the s. 14.2 disclosure to that client by December 31, 2021 to the extent feasible. Staff also stress that, to satisfy s. 14.2, registered individuals must spend enough time with the client to adequately explain the information being delivered to the client, including an explanation of any changes to the RDI being delivered to the client. Finally, CSA staff encourage registrants to assess the effectiveness of the disclosure they provide to clients by considering behavioural economics principles and tactics to simplify the content.
- Standalone Conflicts Disclosure: FAQ 22 doesn’t expressly incorporate a question, but it seems to seek the CSA’s confirmation that firms will not have to mail out a separate disclosure document disclosing material conflicts of interest by June 30, 2021. In their response, CSA staff point out that the required conflicts disclosure to new and existing clients cannot be delayed past the June 30, 2021 deadline. However, the disclosure can be provided electronically or on paper, provided that it meets the CFRs’ plain language requirements. In addition, registrants that are not required to be members of the Investment Industry Regulatory Organization of Canada (IIROC) do not have use a prescribed RDI document to deliver the account opening conflict of interest disclosure.
- Disclosure about Fees, Expenses and Operating Charges: CSA staff’s responses to FAQs 23 and 24 go beyond the guidance in revised NI 31-103CP to set out some additional factors and principles to consider in crafting RDI to meet the requirements in sections 14.2(2)(b)(ii) and 14.2(2)(o). Among other things, staff state the following:
- Since fee models and products and services offered to clients vary widely, registered firms will have to exercise professional judgment as to the extent they can standardize disclosure, how client-specific it can be, and how much detail is needed. They also will need to strike the right balance between providing “enough information” and not overwhelming the investor.
- Subparagraph 14.2(2)(b)(ii) of NI 31-103 does not require the firm to provide the client with a list of all investment funds and other products with ongoing fees and expenses. Rather, it is to inform clients who may be invested in such products or services that those investments have ongoing fees and expenses. For example, staff would expect disclosure in plain language about how fees and expenses are taken from the fund as a percentage of its total assets, how the fees and expenses will be deducted from the fund’s returns (and therefore will affect the client’s returns on their investment for as long as they hold the fund), and that when the client gets information about the value of their investment in the fund, the fees and expenses have already been taken into consideration.
- The requirements for transaction charge disclosures in RDI are for “a general description” of the types of transaction charges that the client might be required to pay. This means that types of fees that the firm does not currently use for clients like the individual receiving the RDI should be excluded. It also means that the details of the amounts relating to a specific security should not be included in RDI.
- The requirement to disclose operating charges is not qualified as a “general description”. It is specific to what the firm might charge the client related to the account. This is because RDI is deliverable at account opening and the specific details about the cost of having the account are therefore relevant at that time.
- The requirement relating to the potential impact of fees and charges is for a “general description” but it is specific to the types of transaction charges and the actual operating charges (if any), as well as the investment fund management fees or other ongoing fees the client may incur in connection with a security or service, applicable to the client’s account. The most evident impact is that investment returns will be reduced in proportion to the fees and charges.
- Firms should not provide generic summaries of the kinds of charges that are used in the industry or a sector of it.
- A firm with a simple AUM-based fee model can be much more specific and more readily use numerical examples than one that relies on a mix of transaction fees and trailing commissions paid on products that it sells to clients.
- Firms are encouraged to use graphics as well as text in order to make the information understandable to as many clients as possible.
Training: In their response to FAQ 1 regarding training on conflicts of interest, CSA staff indicated that registrants should exercise professional judgment in developing training materials and determining which staff require the training. They also said that:
- They expect firms to train “all appropriate staff” on conflicts of interest generally, and this would include all registered individuals, all supervisory staff, and additional staff (including compliance staff) depending on their roles and responsibilities.
- Training on the firm’s code of conduct, which generally includes training on conflicts of interest policies, procedures and controls may be sufficient to evidence training of staff on conflicts of interest generally.
- Specific training modules for certain material conflicts also may be required for certain staff (e.g. training on compensation-related conflicts may be needed for all registered individuals and compliance/supervisory staff).
If/When Updates to Guidance Can Be Expected: FAQ 27 asks whether there is a comprehensive list of guidance and staff notices that the CSA and/or the self-regulatory organizations (SROs) expect to revise or rescind. In particular, market participants asked if guidance published by IIRCO and the Mutual Fund Dealers Association of Canada (MFDA) regarding personal financial dealings will be revised or rescinded. CSA staff state that:
- If there is an inconsistency between language included in prior CSA guidance and the CFRs, the CFRs prevail to the extent they impose requirements or set out more current guidance.
- The CSA proposes to review earlier guidance and may revise it or rescind it at a later stage. The FAQ guidance does not provide any specifics about what will be reviewed or when such a review will take place.
- IIROC does not expect to issue new guidance on personal financial dealings.
- The MFDA intends to revise “all [presumably relevant] guidance”. In particular, MSN-0047 Personal Financial Dealings with Clients will be revised but no changes to MSN-0031 Control or Authority over the Financial Affairs of a Client are expected.
If you would like to discuss the FAQ Guidance and its relevance to your business, or if you have other questions about the CFRs or would like our assistance on implementation matters, please do not hesitate to contact us. Please contact your usual lawyer at AUM Law for assistance, or if you’re new to the firm, please contact us for a free consultation.
October 9, 2020
A. Priorities for the Coming Year
On June 25, the Ontario Securities Commission (OSC) published its annual Statement of Priorities (SOP). As we mentioned in our April bulletin, COVID-19 and the related market uncertainty caused the OSC to forego its usual substantive consultation on priorities. Instead, the OSC used last year’s SOP, its plans flowing from its burden reduction initiative and its routine engagements with stakeholders to develop its 2020-21 priorities. Consequently, there are very few surprises in this year’s final SOP. We’ve summarized below key initiatives that we believe will be of interest to our readers.
Client-focused Reforms: The OSC will work with other members of the Canadian Securities Administrators (CSA) and the self-regulatory organizations (SROs) to help registrants operationalize the amendments.
Seniors Strategy: The OSC will continue to implement its Seniors Strategy, including continuing with its consultation on proposed changes to the regulatory framework to address financial exploitation and cognitive decline among older and vulnerable investors. (See our March 2020 article on this consultation.)
Leverage in the Asset Management Industry: Working with other members of the International Organization of Securities Commissions (IOSCO), the OSC plans to design and implement enhanced data collection to monitor vulnerabilities associated with the asset management industry’s use of leverage.
OTC Derivatives: The OSC plans to:
- Publish (with Ministry pre-approval) amendments to the business conduct rule for over-the-counter (OTC) derivatives, limiting the rule’s scope and outlining jurisdictions that will be granted equivalency;
- Work with the CSA on the next version of the proposed OTC derivatives dealer registration rule;
- Conduct compliance reviews of the OTC derivatives rules on trade reporting, clearing, segregation and portability; and
- Develop and implement a framework to analyze OTC derivatives data for systemic risk and market conduct purposes.
Continue Policy Work on Embedded Commissions: The OSC will continue working within the CSA and on its own regarding rule reforms affecting mutual fund deferred sales charges (DSCs) and order execution-only embedded commissions.
Retrospective Reviews of Rulemaking: As part of its efforts to enhance its economically-focused rulemaking, the OSC plans to conduct restrospective reviews of past regulatory changes to see if the intended objectives were achieved.
Re-Consider the SRO Framework: As discussed elsewhere in this bulletin, the CSA has launched a consultation on the SRO framework. The OSC also plans to work on clarifying and streamlining the SROs’ recognition orders and memoranda of understanding.
Office of Economic Growth and Innovation (OEGI): The OSC plans to have the OEGI fully operational and delivering on its mandate by fiscal year-end 2021. This includes having the OEGI conduct outreach with market participants to identify further, potential burden reduction opportunities.
CSA National Systems: The OSC will support the CSA in its implementation of revised national systems (i.e. SEDAR, SEDI and NRD) under the name SEDAR+. It also will work with CSA members to amend the operational and fee rules governing CSA systems.
Modernize the OSC’s Technology Platform: The OSC will continue redeveloping its website, implementing its information security program, and adding more tools and technology to enable to staff to work more effectively and efficiently from home.
B. 2019-2020 Report Card
The OSC also published its 2019-2020 OSC Statement of Priorities Report Card (Report Card). Chief Compliance Officers (CCOs) may find it useful to skim the Report Card because it consolidates into a single document status reports on the OSC’s regulatory and operational initiatives from the past fiscal year. It also highlights some “in progress” initiatives that the OSC expects to deliver in the coming year. Notably, the Report Card indicates that the OSC expects proposed reforms to the regulatory framework governing registrants’ other business activities (OBAs) to be published for comment in the fall of 2020.
C. Be Prepared for the OSC to Shift Its Stated Priorities
Market participants should always be prepared for the OSC to adjust its priorities in light of significant emerging issues. This year more than ever, however, market participants should be prepared for surprises. The OSC has also indicated that it expects to adjust and re-align its priorities throughout the coming year to accommodate changes resulting from the impact of COVID-19 as well as the outcomes of the Ontario Government’s Capital Markets Modernization Task Force.
Please contact us if you would like to discuss how the OSC’s priorities and goals for the coming year might affect your business.
June 30, 2020
As we discussed in our October 2019 special bulletin, the Canadian Securities Administrators (CSA) have finalized their client-focused reforms (CFRs) to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). The CSA initially set an implementation deadline of December 31, 2020 for the conflict of interest provisions and related relationship disclosure information (RDI) requirements in the CFRs.
On April 16, CSA members announced that they are shifting that implementation deadline to June 30, 2021. Registrants will have to comply in the interim period with the comparable provisions in NI 31-103, as they read on December 20, 2020.
Although we expect registrants to welcome this extension of the deadline, we encourage firms to continue making steady progress toward implementation of the new requirements. In the current environment, where so many registrants and their service providers have their employees working remotely and are dealing with emerging risks resulting from the COVID-19 pandemic, projects like these may take longer than expected to complete. AUM Law is already helping many of our clients systematically prepare for the new regime and we can help you, too. Please do not hesitate to contact us.
April 30, 2020
To make your life easier, we have consolidated the articles we’ve written to date on the client-focused reforms (CFRs) to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations into a snappy, little(ish) guide, Client-Focused Reforms in a Nutshell. If you would like to receive a copy, please contact us and we’ll subscribe you to our publications (if you haven’t already signed up).
February 28, 2020
On February 20, the Canadian Securities Administrators except the Ontario Securities Commission (Participating Jurisdictions) published a notice (Multilateral Notice) announcing amendments to National Instrument 81-105 Mutual Fund Sales Practices and related instruments to prohibit deferred sales charges (DSCs) for investment funds (Amendments). The OSC, like somebody who someone in Fleetwood Mac was dating unhappily, has decided to go its own way and restrict rather than ban DSCs outright. We’ve set out below the key features of the Participating Jurisdictions’ ban, and the OSC’s proposed restrictions, on DSCs.
A. Participating Jurisdictions
- In the Participating Jurisdictions, the Amendments will prohibit fund organizations from paying upfront sales commissions to dealers, which will result in the discontinuation of all DSC options.
- The Amendments will take effect on June 1, 2022 (Effective Date). The redemption schedules for mutual fund investments purchased under a DSC option before the Effective Date will be allowed to run their course until their scheduled expiry.
- As we discussed in our October 2019 bulletin, the conflict of interest provisions in the client-focused reforms (CFRs) to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) come into effect on December 31, 2020. Regulators in the Participating Jurisdictions will exempt dealers from these new requirements as they apply to DSC options until the Effective Date. Instead, dealers will be required to comply with the conflict of interest provisions that are currently in effect under NI 31-103 in relation to DSC options.
- Regulators in the Participating Jurisdictions view the discontinuance of the DSC option as a material change. So, for prospectuses that contemplate a DSC option, are receipted before the Effective Date, and lapse after the Effective Date, disclosure can be handled in one of two ways.
- Option 1: Amend the simplified prospectus and fund facts documents as of the Effective Date to remove references to the DSC option.
- Option 2: Include disclosure in simplified prospectus and fund facts documents indicating that the DSC option will not be available in the Participating Jurisdictions after the Effective Date.
B. Proposed OSC Rule 81-502 – Restrictions on the Use of the Deferred Sale Charge Option for Mutual Funds
- Proposed OSC Rule 81-502 is intended to address the “lock-in” effect associated with the DSC option and reduce the potential for miss-selling while continuing to allow dealers to offer the DSC option to clients with smaller accounts. Restrictions will be imposed at the investment fund manager (IFM) and dealer levels.
- IFM-level restrictions: OSC Rule 81-502 will limit the redemption schedule to three years. Clients will be permitted to redeem up to 10% of their investment annually without redemption fees (on a cumulative basis). IFMs will have to create a separate DSC series so that investors who purchase funds on a no-load or front-end charge basis do not incur any costs related to financing the upfront commissions typically associated with the DSC option.
- Dealer-level restrictions: Dealers won’t be able to sell funds with a DSC option to clients who are either aged 60 or over or have an investment horizon that is shorter than the DSC schedule. In addition, DSC option funds can only be sold to clients with accounts not exceeding $50,000, and clients will not be able to use borrowed money to buy mutual funds with a DSC option. Upfront commissions will be permitted only for new contributions to client accounts and no such commissions will be payable on reinvested distributions. Finally, no redemption fees will be payable in connection with investor redemptions in specified circumstances (g. involuntary loss of full-time employment, permanent disability, critical illness, or death).
- Effective date: OSC Rule 81-502 is expected come into effect when the DSC ban comes into effect in the Participating Jurisdictions.
- Conflict of interest: The OSC considers it a conflict of interest for registrants to accept upfront commissions associated with the sale of securities under a DSC option. Therefore, it expects registrants to address that conflict consistent with their obligations under NI 31-103, in its current state, and as amended by the CFRs, when those amendments take effect at the end of this year.
- Deadline for comments: Comments are due on proposed OSC Rule 81-502 by May 21, 2020.
In light of the forthcoming ban on DSC options in most jurisdictions and the narrowly defined scope for them contemplated in OSC Rule 81-502, we imagine that fund organizations and dealers are assessing whether it will be worth it to continue DSC option funds in Ontario once the ban in the Participating Jurisdictions takes effect. If you would like to discuss how the Amendments and OSC Rule 81-502 might affect your business, please contact us.
February 28, 2020
In this bulletin:
- Client-Focused Reforms: A Closer Look at the Misleading Communications, RDI, Compliance Training and Record-Keeping Rules
- IIROC and FINRA Publish Their Compliance Priorities for 2020
- Get Ready to RAQ and Roll
- IIROC Fines Registered Representative for His Shoulda Woulda Could KYC
- ASC Schools Registrants on Compliance with OM Exemption
- Like Rats in a Maze: Navigating the Application of Securities Laws to Crypto Assets
FAQ Corner: Can an advising representative act as the executor of an estate on behalf of a client?
In Brief: CSA Consults on Access Equals Delivery Model for Disclosure Documents
News and Events: Lexology Recognizes AUM Law Again for Thought Leadership in Our Publications
Click the link to access a PDF of our full, monthly bulletin summarizing these recent developments. >> Monthly Bulletin | Year of the Rat | January 2020
As we reported in our October 2019 special bulletin, the Canadian Securities Administrators (CSA) have finalized their client-focused reforms (CFRs) to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and its related Companion Policy (NI 31-103CP) (Policy). These provisions came into force late last year and will take effect in two phases, beginning on December 31, 2019.
This month, we highlight the new prohibitions on misleading communications as well as the relationship disclosure information (RDI), compliance training and record-keeping requirements. The RDI requirements will come into effect on December 31, 2020 and the other provisions discussed in this article will come into effect on December 31, 2021. To streamline our discussion, we refer to NI 31-103 and NI 31-103CP in their current form as the Current Rules and Policy and to the amended versions as the Revised Rules and Policy.
This article is the third in our series of closer looks at the CFRs. We discussed the conflict of interest provisions in our October 2019 bulletin and the know-your-client (KYC), know-your-product (KYP) and suitability provisions in our November 2019 bulletin.
A. Misleading Communications
Securities regulators and investor advocates have been concerned for years that some registered firms and individuals use confusing or misleading titles, designations, awards and/or other descriptions of themselves and their services. The securities regulatory framework already incorporates prohibitions that are broad enough to capture at least some of this conduct. For example, subsection 44(1) of the Ontario Securities Act prohibits people and companies from making statements that a reasonable investor would consider relevant in deciding whether to enter into or maintain a trading or advising relationship with that person or company if that statement is untrue or omits information necessary to prevent the statement from being false or misleading. Section 2.1 of National Instrument 31-505 Conditions of Registration requires registered dealers, advisers and representatives to deal fairly, honestly and in good faith with clients. And in 2011, the Canadian Securities Administrators (CSA) outlined their specific concerns and provided guidance to portfolio managers regarding the use of trade names and individual titles in marketing materials in Staff Notice 31-325 Marketing Practices of Portfolio Managers.
New section 13.18 of NI 31-103 reflects the securities regulators’ conclusions that this principles-based approach is inadequate. The new rule, scheduled to come into effect on December 31, 2021, will prohibit registrants from holding out their services in any manner that could reasonably be expected to deceive or mislead any person as to:
- Their proficiency, experience or qualifications;
- The nature of the person’s relationship or potential relationship with the registrant; or
- The products or services provided or that might be provided.
It also will prohibit registered individuals who interact with clients from using from any title or designation without their sponsoring firm’s approval. In addition, they will be prohibited from using corporate officer titles unless appointed to that office under corporate law, and they will not be able to use any title, designation, award or recognition based on their sales activity or revenue generation.
The Revised Policy emphasizes that particular scrutiny should be given to titles that may convey an expertise in seniors’ issues or retirement planning. It also recommends that firms consider whether a particular designation has a rigorous curriculum, examination process and experience requirements issued by a reputable or accredited organization when deciding whether to approve the designation’s use.
As registrants develop their project plan for implementing these new requirements, they should also take into account the following:
- The CSA has indicated that there is potential for further rulemaking on the use of titles and designations. And in 2020, the Financial Services Regulatory Agency of Ontario (FSRA) intends to consult stakeholders and publish draft rules to implement the Financial Professionals Title Protection Act, which will regulate individuals’ use of “financial planner” and “financial advisor” titles in Ontario. AUM Law will monitor these developments and keep you informed.
- As noted above, there are principles-based laws already on the books that could support enforcement action against a firm or individual for misleading communications. Therefore, although the official effective date for the new rules is December 31, 2021, we encourage firms to review their policies, procedures and practices in this area sooner rather than later.
B. Updated RDI Requirements
Section 14.2 of NI 31-103 has been amended to reflect changes with other CFRs (e.g. relating to conflicts of interest, KYC, KYP and suitability determination requirements) and, according to the CSA, to “better implement” the principle in subsection 14.2(1) that a registrant must deliver to the client “all information that a reasonable investor would consider important about the client’s relationship with the registrant.” Among other things, when revised section 14.2 comes into effect it will:
- Expand the existing requirement for registrants to provide a general description of the products and services that the firm offers to the client to include, as applicable, descriptions of any restrictions on the client’s ability to liquidate or resell a security and any investment fund management expense fees or other ongoing fees the client may incur;
- Require registered firms to describe generally any limits on the selection of products or services that the registrant will offer to the client, including whether the firm will primarily or exclusively use proprietary products in the client’s account;
- Require registered firms to explain generally the potential impact of operating charges, transaction charges, investment fund management fees, and any other ongoing fees the client might occur; and
- Expand the requirement for pre-trade disclosure to expressly require disclosure of investment fund management expense fees or other ongoing fees that the client may incur.
Also, the existing requirement to describe compensation paid to the registered firm in relation to the types of products a client might purchase will be broadened. It will require a general description of any benefits received or expected to be received by the registrant from anyone other than the registrant’s client, in connection with the client’s purchase or ownership of a security through the registrant.
The Revised Policy includes expanded sections on:
- Information to be included in the description of the nature or type of a client’s account;
- Factors to consider in describing limits on the selection of products or services, including guidance emphasizing that a registrant is required to tell a client if it does not have products or services suitable for them; and
- When a firm is expected to provide a client with the KYC information it has collected (i.e. at the time of account opening and when the firm collects updated information).
The new RDI rules will take effect on December 31, 2020. AUM Law can help you prepare for the new regime by reviewing and updating your existing disclosure materials for clients, as well as the related policies, procedures and controls.
C. Compliance Training
Under the Current Rules and Policy, training is specifically addressed through:
- Prohibitions on registered individuals performing registrable activities, and chief compliance officers (CCOs) performing their responsibilities as CCOs, without having the education, training and experience that a reasonable person would consider necessary to perform the activity competently; and
- Language in the Current Policy indicating that registered firms should provide training, including ongoing communication and training on changes in regulatory requirements or the firm’s policies and procedures, to ensure that everyone at the firm understands the standards of conduct and their role in the compliance system.
Section 11.1 of NI 31-103 has been amended to introduce a broadly worded requirement for registered firms to provide training to their registered individuals on compliance with securities legislation, including without limitation the KYC, KYP, suitability determination and conflicts of interest requirements. This new rule is supplemented with guidance in the Revised Policy, which emphasizes the following concepts:
- A firm’s compliance training will depend on the nature, size and complexity of its business. For some small firms, a formal compliance training program or written training materials might be unnecessary. However, the CSA will expect firms to exercise professional judgment in determining what training is appropriate for their operations.
- Although Section 11.1 of the Revised Rules speaks only to the need for firms to train registered individuals, the Revised Policy retain the concept that CSA members expect firms’ training programs to ensure that everyone at the firm understands the standards of conduct when dealing with clients and understands their role in the compliance system. In our view, this broader definition of the firm’s training responsibility can be seen as flowing from the existing requirement in section 11.1 for registered firms to have a system of controls and supervision sufficient to provide reasonable assurance that the firm and every individual acting on its behalf complies with securities legislation.
- Although the Revised Rule calls for compliance training on securities legislation generally, it and the Revised Policy specifically highlight the need for compliance training on the KYC, KYP, suitability, and conflicts of interest provisions. According to the Revised Policy, training should provide examples of how to:
- Identify existing and reasonably foreseeable, material conflicts of interests between registered individuals and their clients;
- Address material conflicts of interest in the client’s best interest; and
- Put the client’s interest first when making suitability determinations.
- Consistent with the KYP requirements, firms also will be expected to assess whether any additional training or proficiency requirements are needed so that their registered individuals understand the securities and can make appropriate determinations.
- Firms can outsource elements of their training programs but remain responsible for demonstrating that their registered individuals have been trained on the firm’s policies and procedures.
- Training programs should include “ongoing” communication and training on changes in regulatory requirements or the firm’s policies and procedures.
- Firms will need to document their compliance training programs.
Although these specific, new compliance training requirements won’t come into effect until December 31, 2021, we recommend that firms begin enhancing their compliance training programs in 2020, so that your employees become familiar with the CFRs. AUM Law offers compliance training programs tailored to your firm’s needs. We can help you identify compliance gaps or topics that need reinforcement, determine who needs to be trained and when, develop the content for training sessions, update your compliance manual to reflect the new training requirements, and prepare the needed documentation to show that the compliance training requirements have been met.
D. Record-Keeping Requirements
Section 11.5 of NI 31-103 has been expanded so that registered firms will have to maintain records that:
- Demonstrate compliance with the new KYP and suitability determination requirements;
- Demonstrate compliance with the conflict of interest provisions in Part 13, Division 2;
- Demonstrate compliance with the requirements relating to misleading communications;
- Document training actions conducted by the firm; and
- Document the firm’s sales practices, compensation arrangements and incentive practices as well as any other compensation arrangements and incentive practices from which the firm, any of its registered individuals or any of its affiliates or associates, benefit.
The Revised Policy provides detailed guidance on the kinds of records that it expects registered firms to keep. It also stresses the importance of firms maintaining adequate documentation to support the firm’s supervision of its compliance processes in these areas. We expect that some of the more challenging aspects of these new requirements will include:
- Documenting suitability determinations and related supervisory measures (e.g. to address patterns of unsuitable trades); and
- Documenting the KYP process, including where the firm concludes that using proprietary products and services as opposed to a third party’s products and services puts the client’s interests first.
In addition to presenting some conceptual challenges, some of the new record-keeping requirements (such as those documentation of conflicts of interest, sales practices, compensation arrangements, incentive practices) will require a substantial deployment of firm resources to design and maintain.
AUM Law can help you implement these new requirements by, for example, assessing your existing record-keeping practices, identifying any gaps and developing new protocols and record types to cover the elements listed above.
E. Now What?
This is the last article in our introductory series highlighting the CFRs. Giving registered firms practical advice on compliance with NI 31-103 is one of AUM Law’s core services, and we have already started with working with some of our clients on implementation. We can help you understand the implications of the CFRs for your business, develop a pragmatic implementation plan, revise any of your policies and client-facing documentation that are looking a little “ratty” in light of the recent reforms, update your record-keeping protocols, and train your employees on the new requirements. Please contact your usual lawyer at AUM Law for assistance or, if you’re not already a client, request a free consultation.
January 31, 2020