On June 13, 2022, the Independent Evaluation of the Ombudsman for Banking Services and Investments (OBSI) [investments mandate] was released. In accordance with its Terms of Reference and a Memorandum of Understanding between the Canadian Securities Administrators (CSA) and OBSI (the MOU), OBSI must have an independent evaluation for its investment-related complaints function every five years. The purpose of the review, which was conducted by Professor Poonam Puri, was to determine whether OBSI is fulfilling its obligations as outlined in the MOU and whether any operational, budget and/or procedural changes in OBSI would be desirable. We discussed the evaluation late last year in our November Bulletin.
The evaluation report concluded that OBSI had met or exceeded its obligations under the MOU overall. The evaluators were particularly impressed with OBSI’s handling of cases in a timely matter and with the skill and candidness of the case investigators. Mention is also made of significant improvements in operation since the last review in 2016, and that OBSI managed a high case volume during the pandemic without delays in investigations. In addition, OBSI’s reasons for decision were stated to be fair, proportionate and explained in plain language, with conclusions flowing from the evidence.
Despite the positive conclusions, the report does contain 22 recommendations for improvement relating to some of the aforementioned areas. Some of these recommendations relate to a review of its governance structure, to ensure that key stakeholder interests are effectively considered in board oversight and decision making. Specific recommendations are made with respect to the content of closing letters to complainants, such as a clearer description of limitation periods for further action. Still other recommendations relate to OBSI’s identification of systemic issues and indicates that OBSI should report annually on the number of such potential issues it has identified with a generic description, with the goal of working with regulators to issue a public report on what steps have been taken to deal with the potential systemic issues they’ve identified.
The report ultimately suggests that OBSI should be given authority to render binding decisions (with a higher compensation limit of $500K), which would increase legitimacy and be more consistent with international best practices for dispute resolution services.
June 30, 2022
Despite the impending consolidation of IIROC and the MFDA discussed earlier in this bulletin, staff of the Canadian Securities Administrators (CSA) are required to assess both self-regulatory organizations (SROs) and their respective investor protection funds (IPFs) for their compliance with securities legislation requirements. The latest report, released on April 28, covered the period from January 1 – December 31, 2021. Staff were generally of the view that the CSA continues to fulfill its oversight obligations, and the report sets out key highlights of some of these activities, including:
- Work related to the consolidation of the two SROs and two IPFs, including nine specific workstreams to manage the integration project and hiring Deloitte as an integration manager;
- Continuing to deal with issues arising from the COVID-19 pandemic;
- A project to streamline and modernize various orders and memoranda of understanding relating to CSA oversight;
- A project to identify and implement improvements to the CSA methodology for coordinated oversight, including updates to the CSA risk assessment framework; and
- Conducting a risk-based desk review of IIROC, targeting specific processes within IIROC’s equity market surveillance and debt market surveillance functions.
The Staff Notice reports that during regular meetings held with IIROC, key subjects were discussed including IIROC’s COVID-19 response, order-execution only service levels (particularly client complaints with respect to delays and service disruptions), crypto assets, and the client focused reforms (CFRs). Of interest, it is stated that the CSA, IIROC and the MFDA intend to publish findings from their coordinated review of the CFR conflicts of interest rules and provide implementation guidance to the industry on these enhanced requirements.
With respect to the MFDA, topics such as the COVID-19 response (focusing on the MFDA’s process in granting exemptive relief), the CFRs and the MFDA’s targeted review on performance data reporting to clients by members was discussed.
Going forward, CSA Staff intend to publish an activities report on the new SRO and new IPF on an annual basis.
May 31, 2022
Our colleagues at Borden Ladner Gervais LLP publish a wealth of information every month. All are available on the BLG’s website, under Insights. Some selected Insights published in June that may be of interest to you include a primer on M&A in Canada, an update on privacy legislation in Ontario and an article and webinar on the future of Ontario’s new iGaming markets. For more information, please visit the following links:
June 30, 2021
Investment fund managers that have obtained approval from the Ontario Securities Commission to self-trustee pooled funds and/or exemptive relief for fund-on-fund structures may have selected fund custodians that meet the requirements of National Instrument 81-102 Investment Funds (NI 81-102) in order to comply with the terms of those regulatory orders. The custodian requirements in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) that took effect in June 2018 are more flexible than those in NI 81-102 in that IIROC dealers that are permitted to hold investment fund assets are qualified custodians for investment funds. As well, there is an exception for securities recorded on the books of the security’s issuer in the name of the investment fund which may alleviate the need for a fund to retain a custodian for the units of an underlying fund held by the top fund. Investment fund managers with custody arrangements that were put in place to comply with the terms of an order issued prior to the NI 31-103 custody amendments coming into force may wish to consider reviewing their fund custody arrangements in light of the more flexible custodian requirements under NI 31-103. For more information, please contact Stacey Long or a member of our team.
January 29, 2021
On November 12, the Ontario Securities Commission (OSC) published OSC Notice 13-708 whereby it informed market participants that after reviewing current fee levels and projected cash flows, it has determined that no changes to OSC Rule 13-502 (Fees) and OSC Rule 13-503 (Commodity Futures Act Fees) (together, the Fee Rules) are required at this time, even as it anticipates an impact on its revenues due to the Covid-19 pandemic. An OSC analysis leads it to believe that maintaining current fee levels and leveraging its cash position will ensure that it can continue to deliver on its priorities. Fees will be reviewed after markets stabilize and the outcomes of the Capital Markets Modernization Taskforce (Taskforce) are known. The final report containing the Taskforce’s recommendations is expected before the end of the year and it will then be up to the provincial government to determine which recommendations to adopt. The OSC typically reviews its fee levels every three years, and recently completed its review for its next fiscal year, which starts in April 2021.
AUM Law will monitor these developments and keep you informed as to any changes to the Fee Rules.
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 October 29, the Canadian Securities Administrators (CSA) published their biennial report (Report) on staff reviews of reporting issuers’ continuous disclosure (CD). Although the Report focuses mainly on staff’s findings for the fiscal years ended March 31, 2019 and March 31, 2020, CSA staff also have included guidance on how issuers should consider reporting the impact of COVID-19 on their operating performance, financial position, liquidity and future earnings. Staff’s recommendations in this area address the following topics among others:
- Financial statements: CSA staff note that given the rapidly changing environment, it may no longer be appropriate for issuers to condense or omit certain disclosures in their interim financial statements because the information disclosed in the latest annual financial statements may be less relevant. Issuers also must consider, as new information becomes available, whether their judgments and estimates must be updated and prospectively reflected in their interim financial reports.
- Forward-looking information (FLI): Due to the uncertainty arising from COVID-19, issuers may need to revise or withdraw previously announced FLI or outlooks.
- Don’t blame COVID-19 for everything: Staff emphasize that issuers’ MD&A should be entity-specific and transparent and provide a detailed explanation and breakdown of the impact not just of COVID-19 but of any other factors contributing to variances.
- Liquidity and capital resources: Issuers whose liquidity or capital resources are significantly affected by COVID-19 should provide a comprehensive assessment of the pandemic’s current and expected impacts and quantify that impact where possible.
- Material change reports: Staff reminded issuers to consider whether COVID-19 or resulting government or regulatory policies are having unique or more significant impacts on them compared with others in their industry and listed examples of developments that might require a material change report.
If you have questions about the Report or would like to discuss a potential disclosure issue, please do not hesitate to contact us.
October 30, 2020
On August 12, the Office of Compliance Inspections and Examinations at the U.S. Securities and Exchange Commission (SEC) published a Risk Alert outlining compliance risk considerations for broker-dealers and investment advisors. Although the Risk Alert is most relevant for firms subject to the SEC’s jurisdiction, we think it is a helpful compilation of pandemic-related compliance and supervisory risks for Canadian firms to consider, too, and a possible indicator of the kinds of themes that Canadian securities regulators might also decide to pursue in compliance audits in the coming year.
August 31, 2020
On August 19, the North American Securities Administrators Association (NASAA) reported on the activities of its COVID-19 Enforcement Task Force (Task Force), which has initiated actions to disrupt 200 schemes intended to profit fraudulently from the pandemic. Modelled on NASAA’s 2018 Operation Cryptosweep, the Task Force includes investigators from 44 jurisdictions in Canada, Mexico and the United States. Canadian Task Force members accounted for more than one quarter of the actions taken to date.
According to the Task Force, many of the fraudulent offerings share characteristics, such as preying on fear while promoting safety amid uncertainty, promising monthly payments to appeal to cash-strapped investors, and/or involving cryptocurrency-related investment products, foreign exchange, and/or other products unfamiliar to inexperienced investors. We think the Task Force’s work may of interest to participants in Canadian capital markets, since it shows how North American securities regulators can act swiftly, in a coordinated way, to address emerging risks.
August 31, 2020
In our February 2020 bulletin, we reported on proposed National Instrument 45-110 Start-up Crowdfunding and Registration Exemptions (NI 45-110), which is intended to create a nationally harmonized regime. The comment period for that proposal ended on July 13. On July 30, the Ontario Securities Commission (OSC) adopted an interim class order (Order) that provides prospectus and registration exemptions for start-up crowdfunding that are substantially similar to the local exemptions already in place in Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Québec, and Saskatchewan (collectively, the Crowdfunding Orders).
In the news release accompanying the Order, the Canadian Securities Administrators (CSA) noted that start-ups and other small businesses are facing significant funding challenges due to COVID-19 and might benefit from more unified regulatory requirements to expand their access to capital. The Order will remain in place until the earlier of the date that NI 45-110 is adopted or January 31, 2022. If you wish to learn more about the Crowdfunding Orders and their potential usefulness for your business, please contact us.
July 31, 2020
On May 30, the Canadian Securities Administrators (CSA) announced that most member regulators including the Ontario Securities Commission (Participating Jurisdictions) had issued temporary blanket relief (Temporary Relief) from certain financial statement and information delivery requirements for periodic filings normally required to be made between June 2, 2020 and September 30, 2020. The blanket relief extends the deadlines for 60 days. It applies to registrants and, in Ontario, unregistered capital markets participants (such as unregistered investment fund managers and unregistered, exempt international firms) that rely upon certain registration exemptions. The conditions of the Temporary Relief are substantially the same as the temporary relief granted on March 23 (Prior Relief), as we described in our March 2020 article on this topic. Firms cannot rely on the Temporary Relief to extend any deadline previously extended under the Prior Relief.
Separately, the Manitoba Securities Commission and Québec Autorité des Marchés Financiers (AMF) issued temporary blanket relief from certain financial statement and information delivery requirements for registrants whose principal regulator is one of the participating jurisdictions.
Please contact us if you have any questions about the Temporary Relief, other requirements and temporary exemptions, and/or other operational changes adopted by CSA members regarding COVID-19 that may affect your business. We can help you assess your options and, if necessary, engage with regulators on your behalf.
June 30, 2020
On May 20, the Canadian Securities Administrators (CSA) issued substantially harmonized blanket orders giving investment funds and other issuers temporary relief from certain regulatory and filing obligations. The conditions of relief are similar to the blanket orders issued in late March, except that the relief applies only to issuers with filing deadlines as noted below:
- Investment fund issuers: The OSC’s blanket order for investment funds (Funds Blanket Order) provides a 60-day extension for certain filing, delivery and prospectus renewal requirements normally required to be made between June 2 and September 30, 2020. If an investment fund wishes to rely on the Funds Blanket Order, it must, as soon as reasonably practicable and in advance the relevant delivery, filing or renewal deadline: (a) notify its regulator by email that it is relying upon the Funds Blanket Order and each requirement for which it is relying upon that order; and (b) post a statement on its public website or public website of its investment fund manager indicating that it is relying upon the Funds Blanket Order and listing each requirement for which it is relying on upon that order.
- Non-investment fund issuers have a 45-day extension for certain filing, delivery and base shelf prospectus renewal obligations normally due or required to be made between June 2 and August 31, 2020.
- Issuers can’t further extend pre-June 2 deadlines: An issuer cannot rely on the blanket relief to further extend a deadline occurring before on or before June 1.
On May 29, the CSA issued substantially harmonized blanket orders giving registrants and certain unregistered capital markets participants relief from certain financial statement and information delivery deadlines. The blanket orders provide a 60-day extension for periodic filings normally required to be made between June 2, 2020 and September 30, 2020 by registrants and, in Ontario, unregistered capital markets participants that rely upon certain registration exemptions such as unregistered investment fund managers (IFMs) and unregistered exempt international firms. The extension applies automatically, without any terms and conditions. Registrants and unregistered capital markets participants that have already used the prior relief to extend their deadline for any financial statement or information delivery requirements occurring on or before June 1, 2020, cannot use this relief to further extend that deadline.
Please contact us if you have any questions about the blanket orders described above. We can help you assess your options and, if necessary, engage with regulators on your behalf.
May 29, 2020
During the Spring Regulatory and Compliance Webinar organized by the Portfolio Management Association of Canada (PMAC) on May 27, a member of the Compliance and Registrant Regulation Branch (Branch) at the Ontario Securities Commission (OSC) updated attendees on the Branch’s programs and what registrants can expect in the coming months. We think that our readers will be interested in the following:
- Compliance audits re-booted:The Branch is re-starting regulatory compliance audits this week. They will be conducted remotely, and firms can expect to have more time (e.g. 45 days as opposed to 30 days) to respond to deficiencies.
- Privacy and cyber security risks arising from the shift to remote work during the pandemic will be an area of regulatory focus in compliance audits. (See our March 2020 and April 2020 bulletin articles, which discussed these risks.) Among other things, if firms haven’t already done so, they should consider arranging for secure document removal from employees’ homes and destruction of files as appropriate.
- Working capital: Registered firms should stay on top of their working capital. If there are potential issues resulting from COVID-19, firms should engage proactively with their regulators.
- Are you registered everywhere you need to be? Branch staff have observed an uptick in registrable activity by registrants in jurisdictions where the firms and relevant individuals are not registered. OSC staff will report such activity to the local regulator.
- Some CCO reports need improvement: Branch staff have observed that some chief compliance officers (CCOs) are not complying with the requirement in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Requirements to provide the registrant’s board of directors with an annual compliance report (CCO Report) or are preparing only a cursory report. Branch staff expect all firms, even one-person firms, to produce comprehensive CCO Reports every year describing how their firms are meeting their securities law obligations.
- Registration of client relationship managers: We expect the OSC to announce very soon a protocol for registering client relationship managers as Associate Advising Representatives subject to certain terms and conditions.
Post-COVID work arrangements: Although the topic did not come up during the PMAC conference, it is our understanding that, to date, registered firms have not been expected to register any remote work locations (such as home offices) that have been set up in response to the authorities’ COVID 19-related restrictions or recommendations for workplaces. As COVID-19 goes on for an extended period, as well as Post-COVID-19, if any of a firm’s individuals make working from home, or another location that isn’t already approved as a branch office, more permanent, the firm should consider whether it needs to register new branch offices.
As the OSC moves toward a “business almost as usual” state, AUM Law stands ready to help registered firms meet their existing obligations and address emerging risks and evolving regulatory expectations. For example, we can conduct focused compliance risk assessments in areas of interest to the regulators and help draft (or improve) your CCO Report. We are also helping firms and individuals with registration applications, and we can help you, too. Please do not hesitate to contact us.
Correction: The paragraph on Post-COVID work arrangements reflects our understanding of expectations for registered firms on this topic. However, in an earlier version of this article (published on May 29), we incorrectly attributed those views to the OSC representative who spoke at the webinar.
June 9, 2020
On May 12, the Financial Services Regulatory Authority of Ontario (FSRA) issued guidance (Guidance) for mortgage administrators (Administrators) and mortgage brokers (Brokers) regarding their disclosure and other obligations in respect of mortgage-based investments during significant market disruptions, such as the COVID-19 pandemic.
The first notice, Mortgage Administrators – Responses to Market Disruptions (Administrator Notice), sets out FSRA’s interpretation of Administrators’ obligations under Mortgage Brokerages, Lenders and Administrators Act 2006 (MBLAA) to protect investors/lenders in mortgages/mortgage investments during significant market disruptions. For example:
- Notify investors/lenders:The Administrator must promptly notify investors/lenders of a borrower defaulting under the mortgage or any significant change to circumstances affecting a mortgage. If an investor/lender is a mortgage investment corporation (MIC) or other mortgage investment entity (MIE), the Administrator must notify that entity. The Administrator Notice includes examples of events that trigger this disclosure requirement, such as potential forbearance, a material delay in the development of a project being funded by the mortgage, or a change in the ability of investors or lenders to redeem prior to the mortgage investment’s maturity. The Administrator Notice also describes good practices that an Administrator should follow to keep current on the financial status of the mortgages and underlying properties in the portfolio and to communicate effectively with investors/lenders.
- Adhere to administration agreements:During the COVID-19 pandemic, more borrowers are requesting modifications to their mortgage terms. Administrators should review their administration agreements to confirm the scope of any discretion that they have to modify mortgage terms and they must adhere to those terms. They also should carefully document any exercise of such discretion. If the agreement does not authorize them to modify mortgage terms, an administrator faced with a request from the borrower to modify terms must review the requirements under the MBLAA and related regulations regarding the notice to be provided to the investors / lenders and obtain approval for the modifications.
The second notice, Mortgage Brokerage Disclosure and Suitability Assessments for Non-Qualified Syndicated Mortgage Investments (SMIs) – Responses to Market Disruptions (Broker Notice), discusses Brokers’ obligations to:
- Disclose material risks arising from the current market disruption to investors in non-qualified syndicated mortgage investments (NQSMIs); and
- Consider the current market disruption when assessing the suitability of an NQSMI to an investor.
The Broker Notice includes a non-exhaustive list of risks associated with a market disruption that FSRA considers material. These are similar to the “significant changes in circumstances” outlined in the Administrator Notice. The Broker Notice also emphasizes that Brokers must consider whether any property appraisals prepared for syndicated mortgage investments (SMIs) before the market disruption reflect the property’s market or current value and make investors/lenders aware of the risks of relying on any appraisal that either predates the market disruption or does not consider the market disruption’s impact on the property valuation. Also, if the appraisal contains any limitation statements, the Broker must bring those statements to the attention of the investor/lender. The Broker Guidance also states that Brokers must take into account the potential impacts of a market disruption on an SMI, its probable future performance, and the investor/lender’s unique circumstances when they assess the suitability of an SMI for an investor-lender.
Although not directly applicable to exempt market dealers (EMDs), the Guidance also may be useful to firms conducting suitability assessments with respect to MIE securities. Likewise, firms that operate MIEs might want to consider the Guidance when assessing whether to update the descriptions in their offering documents regardig risk factors, descriptions of the MIE’s mortgage portfolio, and/or changes to redemption rights.
AUM Law can help you assess the impact of the Guidance on your business, advise you on your disclosure obligations and help you prepare the required disclosures, as well as update your policies and procedures to incorporate these publications. Please do not hesitate to contact us for assistance.
May 29, 2020
In March, the Ontario Securities Commission (OSC) announced that due to COVID-19, it was postponing the 2020 Risk Assessment Questionnaire (RAQ) cycle until further notice. On May 28, chief compliance officers (CCOs) of registrants were notified that they will receive the RAQ on June 11, with responses due on August 6. The 2020 RAQ will ask for information for the periods ending December 31, 2018 and December 31, 2019.
In our January 2020 bulletin, we highlighted a number of changes that the OSC is introducing for the 2020 RAQ, including pre-population of the questionnaire with some of the answers from firms’ 2018 RAQ responses and data security enhancements.
But wait, there’s more: Because the 2020 RAQ will not cover the period when registrants were dealing with COVID-19, the OSC also will send out a short survey (Survey) on July 9, 2020 to gather information from January 1 to June 30, 2020 regarding COVID-19’s impact on each registered firm. The Survey will be sent to firms domiciled in Ontario, as well as to some firms where the OSC is not the principal regulator because the OSC is collecting the information for those other regulators. The deadline for completion also will be August 6, 2020.
We encourage firms to re-start their planning for this exercise now, if they haven’t already done so, and to schedule time with key individuals including the ultimate designated person (UDP) to review and sign off on the completed questionnaire. AUM Law has had extensive experience helping firms prepare their RAQs. If you would like us to help you complete this year’s RAQ and the Survey, please contact us for a fixed-fee quote.
May 29, 2020