Category: Investment Funds

What’s on the AMF’s Agenda this Year? 2023-2024 Annual Statement of Priorities Published

In 2021, the Autorité des marchés financiers (AMF) released its 2021-2025 Strategic Plan, which declared the AMF’s four key guiding principles (called orientations in the plan) that will inform its decisions and actions for the four-year period.

On April 27, 2023, the AMF set out its key initiatives for the period from April 1, 2023, to March 31, 2024, for each of its four orientations, in its Annual Statement of Priorities (SoP).

Specifically, for 2023-2024, the AMF intends to target, among others, the following key initiatives for each respective orientation:

Orientation 1 – A proactive regulator that is relevant to consumers in an ever-changing environment:

Under Orientation 1, the AMF aims to focus on continuing to enhance services to assist financial consumers, promote and provide financial education to the public, and target its oversight,

supervision and enforcement capabilities on key areas of concern.

Specifically, the AMF aims to continue to consolidate the various public registers of individuals and firms authorized to practice through a registration with the AMF into a single register, adopt a regulation to streamline the complaint process for financial consumers, and to further its commitment to combating financial mistreatment of older and vulnerable clients by updating certain resources for market participants. Financial education efforts include holding a 10th Financial Education Day and continuing  its public awareness campaigns on fraud prevention and cryptoassets. As part of its oversight, supervision and enforcement capabilities, the AMF aims to continue its work in understanding and addressing the digital transformation of the financial industry by publishing a framework for the use of artificial intelligence in the industry with educational materials for consumers. It will also continue its work in the social media and “finfluencer” space, including optimizing its approach for detecting illegal product offerings on social media.

Orientation 2 An influential regulator supporting Quebec’s financial sector:

Under Orientation 2, the AMF takes aim at issues of compliance burden, upcoming regulatory changes, initiatives in the fintech space and assessing the digital transformation of industry participants, and environmental, social and governance (ESG) issues.

As part of its efforts to reduce compliance burden, of note to investment fund reporting issuers, the AMF in collaboration with the Canadian Securities Administrators (CSA) aim to finalize the project to modernize the prospectus filing model, through the proposed amendments to National Instrument 41-101 General Prospectus Requirements, National Instrument 81-101 Mutual Fund Prospectus Disclosure and related instruments, which will allow investment funds in continuous distribution to file a prospectus every two years rather than on an annual basis. For non-investment fund issuers, the AMF and the CSA intend to finalize the draft amendments to National Instrument 51-102 Continuous Disclosure Obligations, which are aimed at changing the annual and interim filing requirements, specifically targeting and streamlining the disclosure requirements for the management discussion and analysis and the annual information form. Other upcoming regulatory initiatives include the changes to enhancing total cost reporting to investors of investment funds and segregated funds, and the AMF’s aim to continue to work with the CSA to determine whether amendments to National Instrument 81-105 Mutual Fund Sales Practices are required following the ban on deferred sales charges and the coming into effect of the Client Focused Reforms. In addition, the AMF also aims to consult with market participants and fintech companies to determine opportunities for innovation in the financial sector. With respect to ESG-related initiatives, the AMF intends to create a separate unit which will be dedicated to the ESG-space – a first for a Canadian securities regulatory body. Other initiatives include finalizing proposed National Instrument 51-107 Disclosure of Climate-related Matters, which will impose disclosure requirements on non-investment fund reporting issuers and beginning work to determine how to regulate ESG ratings providers.

Orientation 3 A high-performing regulator in the pursuit of its mission:

Under Orientation 3, the AMF takes aim at continuing to develop its strategy around the use of its data to enhance operational performance, enhance its risk governance framework and implement an improved risk management process, and modernize its information systems. Other initiatives include the AMF and CSA’s ongoing work involving SEDAR+, which in future phases will involve replacing the System for Electronic Disclosure for Insiders (SEDI) and the National Registration Database (NRD).

Orientation 4 A regulator committed to its human capital:

Under Orientation 4, the AMF intends to implement a diversity, equity and inclusion program, enhance its development programs aimed at its managers, and define and implement its employer brand, designed to attract and retain talent. It will also continue its work to implement a new hybrid work arrangement, responsive to its employees’ needs.

A full list of the items included in the SoP can be accessed on the AMF’s webpage.

May 31, 2023

OSC Investor Advisor Panel Report Focuses on Citizen (AKA Investor) Protection

On May 30, 2023, the Ontario Securities Commission’s Investor Advisory Panel (IAP) released its report with respect to its activities in 2022 (the IAP Report). The IAP’s mandate is to solicit and represent the views of investors on the OSC’s policy and rule-making initiatives. It is noted in the IAP Report that the IAP held 11 meetings with OSC staff, made eight submissions or reports on proposed policies (four to the securities regulators and four to other bodies), and held 22 meetings with outside organizations.

The IAP Report focused on a number of areas where investor protection could be enhanced, including by:

  • Granting binding decision making authority to the Ombudsman for Banking Services and Investments (OBSI) and mandating the use of OBSI as the single, fully integrated dispute resolution service for banking and investment related complaints;
  • Providing investors with accurate information about the risks of the crypto asset market and clear information about the costs of products and services they purchase; and
  • Using technology (such as what has been proposed in various access equals delivery proposals described here) to provide information to investors in an efficient and environmentally responsible manner and in a way that reduces costs and unnecessary burdens for issuers.

For 2023, the IAP intends to focus on continuing to review the impact of disruptive technologies for retail investors, as well as encouraging the OSC to prioritize investor protection within its multi-branched mandate.

Comments on the application and related documents are due by June 27.

May 31, 2023

Sunny CSA Report on SRO Oversight

The CSA released the annual report (Report) summarizing its key activities in 2022 with respect to its oversight of what was then known as the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) and their respective investor protection funds. The Report covers the period prior to the consolidation of the two self-regulatory organizations into the New Self-Regulatory Organization of Canada (New SRO) at the start of 2023.

During the period, most of the CSA’s efforts related to dealing with the amalgamations of the former self-regulatory organizations, however staff also continued to oversee the SROs under the then-existing regulatory framework.

Of note, at the end of 2022 there were 173 IIROC member firms with 31,646 approved persons, and 83 MFDA member firms with 77,341 approved persons. Six IIROC rule amendments were approved, and five other rule amendments were still under review. A number of key subjects impacting member firms were discussed between staff of the CSA and IIROC, including IIROC’s market surveillance infrastructure, order execution only service levels, and advertising and social media guidance. The Report notes that IIROC is developing a proposal to update existing guidance on advertising and social media, particularly with respect to influencers, gamification and research reports based on non-traditional inputs such as social media sentiment indicators. It is also mentioned that new rules, guidance and compliance procedures relating to crypto assets are expected to be developed by staff of the CSA and the New SRO.

Key subjects discussed with CSA staff and the MFDA included cybersecurity, continuing education and expanded cost reporting.

Post-amalgamation, the CSA will continue its work on post-close transition activities, harmonization of the New SRO rulebooks and policy work related to directed commissions. Staff will also consider whether there can be improvements to the SRO complaint resolution process, enforcement and registration practices.

April 28, 2023

Time Flies: New SRO Proposes Amendments for T+1 Settlement

The New Self-Regulatory Organization of Canada (New SRO) has proposed amendments to the Universal Market Integrity Rules (UMIR) and the Investment Dealer and Partially Consolidated Rules (IDPC Rules) to help facilitate the move from a T+2 settlement cycle to a T+1 settlement cycle. The U.S. Securities and Exchange Commission has already adopted rule changes to amend the settlement cycle to T+1, which industry must comply with by May 28, 2024. Collectively, the proposed New SRO amendments harmonize the rules with the T+1 settlement cycle by shortening delivery and settlement periods by one day.

Certain other changes are also being proposed to modernize the IDPC Rules relating to buy-ins and conform to industry settlement periods for mortgage-backed securities. In addition, the New SRO intends to repeal requirements for dealers to file broker-to-broker trade matching exception reports, similar to what the CSA proposed earlier for institutional trade matching exception reports. In the notice of the proposed amendments, the New SRO recommended that dealers review their executed agreements (such as custodian agreements and lending agreements) to determine whether there are any delivery or payment obligations, or interest calculations, specific to a T+2 settlement cycle that will need to be amended.

Comments on the proposal are due by June 19, 2023.

April 28, 2023

Don’t Stay Away too Long – Revised Guidance Published for Issuers Relying on the Offering Memorandum Prospectus Exemption

On March 8, 2023, staff of the Canadian Securities Administrators (other than Ontario), published revised Multilateral CSA Staff Notice 45-309 (the Notice), first published in 2012, which provides guidance for preparing and filing an offering memorandum (an OM) under National Instrument 45-106 – Prospectus Exemptions (NI 45-106). The Notice is relevant to issuers that rely on the offering memorandum prospectus exemption (the OM Exemption) and summarizes common deficiencies that have been observed in OMs prepared in accordance with Form 45-106F2. The Notice also discusses potential consequences of non-compliance with the terms of the OM Exemption.

The Notice was published in conjunction with the effective date of the amendments to NI 45-106 applicable to issuers relying on the OM Exemption that are “collective investment vehicles” and “real estate issuers” (the Amendments). We wrote about the Amendments in our January bulletin.

The CSA remind issuers that an OM must comply with the requirements of the OM Exemption when it is prepared, when it is delivered to prospective purchasers and when the issuer accepts an agreement to purchase the security from the purchaser. This means that the OM must be in the correct form, not contain any misrepresentations and provide sufficient information to enable a prospective purchaser to make an informed investment decision.

Staff have observed issuers making distributions under the OM Exemption using an OM that no longer meets the requirements, which is not permitted. This can occur if an issuer fails to update the OM to reflect a material change or to include more recent financial statements. If distributions under the OM Exemption are ongoing, the OM is required to be amended to include annual audited financial statements for the issuer’s most recently completed financial year no later than 120 days after the issuer’s financial year-end. For ongoing distributions to Ontario residents, the OM must be amended to include financial statements for the issuer’s most recently completed six-month interim period no later than 60 days after the end of that period, unless the issuer qualifies for the exemption set out in the Amendments.

The CSA also remind issuers that disseminating material forward-looking information (such as expected returns) to prospective purchasers during the course of a distribution without disclosing such information in the OM is prohibited.

Other common issues with OMs discussed in the Notice include the following:

  • Failing to file an OM on time;
  • Failing to provide balanced disclosure;
  • Inadequately disclosing available funds and use of available funds;
  • Omitting key terms of material agreements;
  • Omitting compensation disclosure;
  • Omitting key elements of financial statements;
  • Omitting required interim reports;
  • Failing to obtain required audits; and
  • Improperly certifying the OM.

Issuers relying on the OM Exemption should ensure that their OM complies with the requirements of NI 45-106. Now that the Amendments are in effect, any update to an OM will require a “form check” to ensure the OM complies with the Amendments. An updated OM must be filed with the regulators no later than 10 days after the first distribution under that OM. If you have any questions or would like our assistance with reviewing your OM, please contact us.

March 31, 2023

Eat, Beach, Sleep, Repeat – New SRO Compliance Priorities Report Repeats Importance of Conflict Documentation

On March 20, 2023, the New Self-Regulatory Organization of Canada (New SRO) published its New SRO Compliance Priorities Report for 2022/2023: Helping Firms with Compliance. The report highlights what the New SRO believes are issues and challenges faced by the industry, and the key areas of focus of its compliance reviews in 2023.

In 2022, the New SRO’s predecessor self-regulatory organizations and the Canadian Securities Administrators (CSA) conducted a sweep of the industry to examine compliance with the Client Focused Reforms (CFR) Conflict of Interest (COI) requirements. The results of the sweep for dealer firms were promising, in that the New SRO praised the fact that most dealers had controls in place that satisfied the requirements to identify, disclose, and address conflicts while adhering to the best interest standard. However, consistent with findings from the CSA (see our bulletin last month for more information here), the report noted gaps relating to the sale of proprietary funds, deficiencies relating to undocumented assessments of material conflicts and insufficient disclosure to clients. More specifically:

  • The assessments of material conflicts, and how the dealer (i.e., documented process steps) would address the conflicts in accordance with the best interest standard, were not adequately documented, and
  • Mandated disclosure to clients missed key components, such as:
  • the nature and extent of the COI;
  • the potential impact on and the risk the COI posed to the client; and
  • how the firm planned to address the COI, or how they had already dealt with the matter.

The report reminds readers that simply providing disclosure to clients does not in itself satisfy the requirements.

The CSA and the New SRO will publish a report later this year detailing the deficiencies found from their CFR reviews and provide further guidance for the industry. Firms are expected to review the guidance once published and review their policies and procedures, especially COI disclosures, and determine whether they may have gaps in their internal controls and remediate them accordingly.

Also later in 2023, as part of a co-ordinated review with the CSA, the New SRO will participate in “CFR-Phase II”, which we expect will assess compliance with, and internal processes relating to the following requirements: Relationship Disclosure, KYC, Suitability, Know Your Product/Product Due Diligence, Misleading Communications and Outside Activities.

In addition to its reminders with respect to conflicts of interest, the New SRO included a number of other items in its report. For example, the New SRO has placed continued emphasis on adequate education and reporting surrounding cybersecurity risks. The cybersecurity self-assessment tool published by IIROC in 2022 is now available to all dealers regulated by the New SRO, to help assess preparedness and identify areas of improvement related to cybersecurity risks. While the tool is not mandatory, the New SRO does recommend using it at least once every two years.

The New SRO will continue to conduct examinations on investment dealers to evaluate how dealers are demonstrating their compliance with the cybersecurity incident reporting requirements (CIRR) and how cybersecurity risks are being managed. The New SRO continues to find insufficient evidence from dealers to demonstrate their compliance with the CIRRs.

The report also advised that where the cybersecurity functions of a group of entities were centralized, policies did not address the specific requirement to conduct a separate assessment of materiality, substantial harm, significance, and other thresholds on an individual basis.

Following amendments to National Instrument 33-109, outside activities will also remain an area of focus during New SRO examinations. Dealers should be familiar with the new framework brought about by these amendments, particularly as it relates to the reporting of outside activities and the codification of new rules surrounding the definition and handling of positions of influence. The New SRO pointed to a significant increase in deficient filings uncovered as part of its ongoing reviews, particularly with respect to reportable activities.

Another item covered in the report included digital engagement practices. Given the increasing sophistication of digital engagement strategies, the New SRO will be closely monitoring potential instances of improper advertising and sales communication practices. This includes gamification strategies which may oversimplify complex products, encourage reckless behaviour, and imbue investors with a false sense of confidence.

Improper delegation was also noted; while delegation of supervisory controls/tasks is permitted under the Universal Market Integrity Rules, the New SRO continues to find instances where delegated responsibilities have not been formally documented in detail. Ambiguity around who is responsible for supervisory controls can have obvious negative consequences for investors and the market. As such, any such delegation must be clearly demarcated and well documented.

March 31, 2023

Title Protection Frameworks Ramp Up – No Time for a Breather

As summarized way back in our August, 2021 bulletin, the Financial and Consumer Services Commission of New Brunswick (FCNB) has previously consulted on a framework for the protection of titles used by financial professionals in that province. That consultation ended in October of 2021, but the government of New Brunswick has now taken the next step and introduced a bill entitled the Financial Advisors and Financial Planners Title Protection Act. As currently formulated, a person who is not a financial advisor or financial planner with an approved credential from a credentialling body will not be permitted to use the title “financial advisor” (conseiller financier) or “financial planner” (planificateur financier), a title prohibited by regulation, a variation or abbreviation of any of those titles or an equivalent in another language or a title that implies a person is entitled to use any such titles.

The government would need to further consult on rules based on the final version of the legislation enacted.

Meanwhile, in Ontario, where the title protection framework has been in place since March, 2022, the Financial Services Regulatory Authority of Ontario (FSRA) and the New Self-Regulatory Organization of Canada (New SRO) are continuing to look at how the New SRO can become a credentialing body for financial advisors. Approved credentialing bodies must oversee conduct of their credential holders and enforce compliance with minimum requirements. FSRA, the Ontario Securities Commission (OSC) and the New SRO are trying to ensure there is no regulatory duplication, and that the New SRO’s fees would be reduced to recognize the fact that the OSC already oversees its activities.

FSRA will continue to maintain a list of existing approved credentialing bodies and credentials on its website and monitors the market for changes in title usage.

March 31, 2023

BLG’s Resource Corner

March 31, 2023

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

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

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

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

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

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

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

February 28, 2023

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

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

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

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

February 28, 2023

BLG’s Resource Corner

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

February 28, 2023

Changes to Offering Memorandum Prospectus Exemption – Will New Issues be Grounded?

On December 8, 2022, the Canadian Securities Administrators (CSA) published amendments (the Amendments) to National Instrument 45-106 Prospectus Exemptions relating to the offering memorandum (OM) prospectus exemption (the OM Exemption). The Amendments will impose significant new and additional disclosure requirements on issuers that are engaged in “real estate activities” (Real Estate Issuers) and issuers that are “collective investment vehicles” (CIVs). The Amendments are intended to clarify the disclosure framework for Real Estate Issuers and CIVs, with the objective of providing better information for investors. We wrote about the proposed amendments (the Proposals) when they were introduced in September 2020.

The Amendments are expected to take effect on March 8, 2023.

1. New Requirements for Real Estate Issuers

The Amendments define “real estate activities”, subject to certain exceptions, as activities, the primary purpose of which is to generate for security holders income or gain from the lease, sale or other disposition of real property. The definition includes property development and real estate activities conducted by subsidiaries of the issuer. Activities relating to mineral, oil and gas projects are excluded from the definition, as are in Québec activities relating to the forms of investments subject to the Regulation Respecting Real Estate Prospectus and Registration Exemptions (Québec).

Independent Appraisal: The Amendments require Real Estate Issuers relying on the OM Exemption to provide to the purchaser, and file with the relevant securities regulatory authorities, an independent appraisal of an interest in real property if one or both of the following apply:

  • the issuer proposes to acquire an interest in real property from a related party and a reasonable person would believe that the likelihood of the issuer completing the acquisition is high;
  • a value for an interest in real property is disclosed in the OM (other than in the financial statements).

Unlike the Proposals, the appraisal requirement no longer applies to a completed acquisition of an interest in real property from a related party. Similarly, the appraisal requirement will not apply only if the issuer intends to spend a material amount of the proceeds from the offering on an interest in real property.

New Disclosure Schedule: Subject to the de minimis exemption noted below, OMs for Real Estate Issuers relying on the OM exemption will have to include the disclosure required by new Schedule 1 to Form 45-106F2 – Additional Disclosure Requirements for an Issuer Engaged in Real Estate Activities. The schedule applies to each interest in real property held or proposed to be acquired by the issuer (provided a reasonable person would believe that the likelihood of the issuer completing the acquisition is high) and includes the following:

  • a detailed description of each property including disclosure of material encumbrances, current and proposed use and occupancy levels;
  • detailed disclosure about real estate development projects, such as costs, objectives, timelines and any required approvals;
  • the purchase and sale history of real property involving a related party;
  • penalties, sanctions, criminal or quasi-criminal proceedings, and/or bankruptcy or insolvency proceedings for parties such as the developer; and
  • information about any future cash calls required by investors.

De Minimis Exemption: Most of the disclosure requirements in Schedule 1 will not apply to an interest in real property, or to more than one interest in real property taken together, that when considered in relation to all interests in real property held by the issuer, is not significant enough to influence a decision by a reasonable investor to buy, hold or sell a security of the issuer.

2. New Requirements for Collective Investment Vehicles

The amendments define “collective investment vehicle” as an issuer whose primary purpose is to invest money provided by its security holders in a portfolio of securities other than securities of subsidiaries of the issuer. Issuers that hold portfolios of mortgages, other loans, or receivables would be considered CIVs. The definition also includes investment funds, to the extent they are permitted to use the OM Exemption.

New Disclosure Schedule: New Schedule 2 to Form 45-106F2 – Additional Disclosure Requirements for an Issuer That is a Collective Investment Vehicle will require such issuers to disclose in the OM, among other things:

  • the issuer’s investment objectives, strategy and investment criteria;
  • detailed description of the portfolio;
  • portfolio performance information;
  • disclosure of penalty, sanction, criminal or quasi-criminal proceedings, and/or bankruptcy or insolvency proceedings for persons involved in the selection and management of the investments; and
  • conflicts of interest.

January 31, 2023