Category: Investment Funds
Canada has a long and storied mining heritage and continues to be a global leader for mineral investment. However, since the last 2011 amendment to National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101) (the governing set of rules on the scientific and technical disclosure standards required for mineral projects), there have been major updates and advances in the mining industry. These range from the techniques used for mineral exploration, to emerging investor demand for information regarding environmental and social impact, to changing global disclosure standards in other major mining jurisdictions and updated Canadian professional industry best practices. As such, on April 14, 2022, the Canadian Securities Administrators (CSA) published a consultation paper seeking public commentary to improve and modernize NI 43-101 and Form 43-101F1 Technical Report, to address key concerns expressed by stakeholders and disclosure deficiencies noted by the CSA.
The consultation paper sets out 38 questions on various elements of the disclosure regime for public comment. Interested investment fund managers and advisers looking to incorporate or expand their environmental, social, and governance (ESG) offerings will welcome that the CSA has highlighted the need to provide more meaningful project specific ESG-risk disclosure, and is considering whether disclosure of community consultations should be required at all stages of technical reports. The CSA have also highlighted the need to include specific disclosures regarding the risks surrounding the impact of a project on the rights of Indigenous Peoples, and whether additional experts are required to validate an issuer’s disclosure of those risks. Some other concerns highlighted to assist investors include the need for improved disclosure of data verification procedures and results by qualified persons, changes to the disclosure regime surrounding project cost estimates, and improved methods of presenting economic analyses.
The 90-day comment period will conclude on July 13, 2022. If you have any questions or are interested in learning more, please contact us.
April 29, 2022
On April 12, the Canadian Securities Administrators (CSA) published final changes to harmonize the interpretation of the financial statement requirements for a long form prospectus, such as in an issuer’s initial public offering. The changes come in the form of amendments to Companion Policy 41-101CP to National Instrument 41-101 General Prospectus Requirements (41-101CP) along with consequential amendments to Companion Policy 51-102CP to National Instrument 51-102 Continuous Disclosure Obligations (51-102CP) (the Changes).
Form 41-101F1 Information Required in a Prospectus (Form 41-101F1) requires an issuer that is not an investment fund to include certain financial statements in its long form prospectus. The required financial statements include the financial statements of the issuer and any business or businesses acquired, or proposed to be acquired, if a reasonable investor reading the prospectus would regard the primary business of the issuer to be the business or business acquired or proposed to be acquired (the Primary Business Requirements). The purpose of the Primary Business Requirements is to provide investors with financial history of the business of the issuer even if the financial history spanned several legal entities over the relevant time period.
The Changes attempt to reduce the regulatory burden on issuers by removing the uncertainty about the interpretation of the Primary Business Requirements.
The CSA previously consulted the industry on this topic and in April 2017 published CSA Consultation Paper 51-404 Consideration for Reducing Regulatory Burden for Non-Investment Fund Reporting Issuers. Comment letters received on that consultation were summarized in CSA Staff Notice 51-353. Then on August 12, 2021, the CSA published a Notice and Request for Comment proposing changes to 41-101CP, as we previously wrote about in our August 2021 bulletin. The CSA has not made any material amendments to the changes proposed in 2021.
If you have any questions regarding the Changes or the amendments to 41-101CP or 51-102CP please contact a member of our team.
April 29, 2022
In our November bulletin we wrote about the Ontario Securities Commission (OSC) draft Statement of Priorities (SoP), which helps inform its business planning for the year ended March 21, 2023. The 2022-2023 SoP has now been finalized, setting out the OSC’s four strategic goals and its priority initiatives for the upcoming fiscal year. As set out in the initial draft, one of the OSC’s goals remains promoting confidence in Ontario’s capital markets, which includes developing a rule setting out climate change-related disclosures for reporting issuers. It is noted in response to comments on the draft SoP that the CSA will continue to focus on these disclosures, with broader environmental factors and other sustainability topics to be considered in the future.
In addition, registrants will be interested to note that priorities under the first goal also include strengthening dispute resolution services for investors (such as OBSI) through policy and oversight activities, and developing a total cost reporting disclosure regime for investors (i.e. CRM 3). The latter proposals are being developed in collaboration with the self-regulatory organizations, the Canadian Council of Insurance Regulators (CCIR), and the regulatory bodies in the CCIR, and impact the disclosure for mutual fund investors and segregated fund holders. It is noted that the focus will be on requirements for dealers and advisers to provide periodic reporting to clients, which shows the total amount of fees (such as management fees) after the initial sale of the investment and is intended to be built up on existing disclosure documents. The approach under the securities and insurance regimes is intended to be as consistent as possible. We will have more to say about these proposals, released on April 28th, shortly.
Other goals in the SoP remain modernizing the regulatory environment, facilitating financial innovation, and strengthening the organizational foundation of the OSC. The SoP goes on to outline the other of the 23 priority areas that the OSC will focus on during the year. Based on comments received on the initial draft, a new priority has been added which addresses how the OSC balances the importance of each of its mandates (to provide protection to investors from unfair, improper or fraudulent practices, to foster fair, efficient and competitive capital markets and confidence in the capital markets, to foster capital formation and to contribute to the stability of the financial system and the reduction of systemic risk) in its decision-making and other work. In addition, there are new statements regarding more engagement with Indigenous communities and reflecting the spirit of reconciliation within the OSC’s internal culture in response to comments to the effect that Indigenous reconciliation was not specifically mentioned in connection with inclusion, equity and diversity initiatives. The response to comments also notes that the SoP now includes specific actions to engage in consultations, including with Indigenous organizations, as part of the climate-related disclosure rule development process.
Under the goal of modernizing the regulatory environment, the SoP continues to state that the OSC will implement annual surveys of both private and public investment funds about their portfolio exposure to assess relevant systemic risks, focusing on asset classes and leverage information.
The numerous priorities set out in the SoP, together with other regulatory initiatives underway (such as the consideration of the draft Ontario Capital Markets Act, which we also wrote about in our November bulletin, and the operationalization of the changes to the governance and organizational structure of the OSC as set out in the Securities Commission Act, 2021) mean a very busy year ahead for registrants and other market participants.
April 29, 2022
You just got a formal request from the Ontario Securities Commission (OSC) that they would like to come by for a visit, accompanied by a request for all the inner workings of your firm, what do you do?! First, respond. Second, get ready, any regulatory review will be much smoother if you are prepared. Below are a few frequently asked questions we receive from firms.
Question: Why Me? Why is the OSC Targeting Our Firm?
Answer: The OSC is required to review each registered firm on a regular basis. With more than 1000 registered firms, it is impossible to review all firms each year. To narrow their focus, one technique employed by the OSC is to send out risk assessment questionnaires (RAQ) to the industry, and firms are then risk ranked based on their responses. Selections are then made from each registration category. Registrants can also be subject to a targeted review or “sweep”, specific to an issue/trend in the industry. Over the last three years the OSC has focused their sweeps on issues such as the following: seniors/vulnerable investors, crypto currency use, continuous disclosures, marketing/sales practices, and derivatives use. Registrants could also be selected due to a complaint received, a referral from another regulatory body, or randomly.
Question: What Do They Typically Ask For and Do During a Compliance Review?
Answer: The OSC will send a written notice to the CCO requesting the firm’s Books and Records (lists per registration category are posted on the OSC website), for a specified period. The OSC will schedule a kick-off meeting with senior management. A typical OSC review can take six weeks to conclude (especially if the firm has branch offices) but in our experience can go on for even longer depending on the complexity of the organization. During the review the OSC will want to interview senior management and key employees, assess the firm’s compliance systems, disclosures, internal controls, marketing materials, and all policies and procedures, as well as any outstanding deficiencies noted during a previous review.
Question: What Happens After the Review?
Answer: Once the OSC has completed the assessment portion of the review, they will schedule an exit interview with senior management to go over their preliminary findings. The OSC typically takes about three to five weeks to send their final written report. If they have identified significant deficiencies during their review, they will inform the firm immediately. There will usually be a deficiency report advising the firm of the deficiencies that have to be addressed, and the time within which the firm must either correct and/or correct and send proof of the required changes. If the deficiency is significant (i.e. a material breach of securities law) then OSC staff can take stricter action, such as impose terms and conditions on the firm’s registration or activities, refer the matter to the Enforcement Branch, or even suspend or revoke the registration of the firm or impacted individual.
Question: What Are the Top Deficiencies Identified by the OSC?
While each audit and audit results are unique, firms that require some remediation of their compliance activities could expect at least some of the following deficiencies to be noted on an audit report:
Compliance Systems and Supervision
- Out of date, or inadequate compliance manuals/policies and procedures;
- Inadequate disclosures, no or insufficient internal mechanisms to report and address conflicts of interest;
- Misleading or inaccurate statements in marketing materials and inappropriate sales practices, or materials lacking appropriate approvals from management; and
- Insufficient oversight over service providers.
Registration and Business Operations
- Inadequate monitoring for insider trading and early warning reporting (e.g. with respect to personal trading monitoring); and
- Client confusion regarding services provided by the firm and services provided by a referral agent.
Know Your Client (KYC), Know Your Product (KYP) & Suitability
- Missing or inadequate collection and documentation of KYC information and financial circumstances resulting in the inability to truly assess suitability;
- Missing proof that client is an accredited investor to qualify for the accredited investor prospectus exemption (if applicable);
- Missing or incomplete Investment Policy Statement (IPS) or Investment Management Agreement (IMA) or an incomplete suitability assessment;
- Missing or inadequate relationship disclosure information (RDI); and
- Missing or inadequate disclosure to clients in respect of referral arrangements.
AUM Law has extensive experience helping firms prepare for and respond to regulatory audits. Please contact your usual lawyer at AUM Law for more information.
April 29, 2022
Earlier in March, the Investment Industry Regulatory Organization of Canada (IIROC) released its 2021/2022 Compliance Priorities Report, outlining its past actions and current issues that are impacting IIROC-regulated firms that should be a compliance focus for those firms in 2022. The report notes that these initiatives, including those related to cybersecurity, client focused reform sweeps and proficiency requirement updates, are in the context of the ongoing SRO consolidation with the Mutual Fund Dealers Association of Canada (MFDA), which is currently scheduled to occur by year-end.
In connection with the work of the Financial and Operations Compliance group (FinOps), the report noted that cybersecurity remains a key risk for all dealer firms and thus FinOps looks at how such risks are managed during regularly scheduled reviews. The importance of self-assessments is mentioned, as is the fact that IIROC has engaged Deloitte to create a cybersecurity self-assessment checklist for firms to assess their own risk and identify potential improvements. The reliance on technology and associated risks has also been incorporated into the FinOps risk model. It is noted that FinOps intends to review supply chain risks, and systemically important vendors to the industry, with a view to identifying and managing these risks.
The report indicates that IIROC, together with the Canadian Securities Administrators (CSA) and the MFDA, is conducting reviews to look for compliance with the new conflict of interest requirements that were enacted in connection with the client focused reforms back in June 2021. The objective of the review is stated to be to determine if dealers have met the “spirit” of the new rules and implemented controls to address material conflicts in the best interest of clients (rather than disclosure alone, which is not sufficient). IIROC (and we suspect, the CSA), will focus next on KYC and suitability requirements. IIROC, along with the CSA, has a prohibition on using a corporate officer title unless a person has been appointed as an officer pursuant to corporate law. In its reviews, the Business Conduct Compliance (BCC) group of IIROC will also look at the substance and nature of the relationship between an Approved Person and the dealer where the person uses a corporate officer title in dealing with clients to ensure it is appropriate – such as whether the individual is really part of the mind and management of the dealer. In its exams, BCC staff will also assess compliance with the amended rules regarding older and vulnerable clients, which are intended to address issues of diminished mental capacity and/or financial exploitation of clients.
Dealers are required to have a supervisory framework to ensure management of all significant areas of risk within a firm. IIROC has existing guidance to help dealers with these policies and procedures, and it is expected to publish additional guidance regarding permitted delegation of the responsibilities of executives to manage these risks shortly. IIROC will also be focusing in on order-execution-only firms and any advertising done through social media platforms.
Finally, the report notes that IIROC is working on amendments to some of the registration and proficiency provisions within the IIROC rules, to clarify expectations. In addition, while draft competency profiles have been released for Directors, Executives, UDPs, CCOs and CFOs, IIROC is continuing to work on all other approved person categories (i.e. supervisors, associate PMs, PMs and traders). There is a lot for dealers to focus on in 2022, in addition to any forthcoming changes in advance of the SRO consolidation.
March 31, 2022
At a Glance: Earlier this month, the Ontario Divisional Court decision in Boal v. International Capital Management Inc. provided some clarity on the scope and nature of the duty owed by financial advisors to their clients, and their obligations under the client focused reforms (CFRs), introduced by the Canadian Securities Administrators (CSA) in 2019 (and subsequently integrated into the rules and policies of the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada) (IIROC and MFDA, respectively). Specifically, the court re-affirmed that a fiduciary duty between financial advisors and their clients is ad hoc, established on an individual, case-by-case basis, and is dependent on a multi-factorial analysis as required by common law. As such, a fiduciary duty does not arise solely due to regulatory standards and professional rules which require advisors to act in the “best interest” of the client.
Background: The plaintiff, a former client of the defendant, a registered member of the MFDA, commenced a class action against the investment advisor claiming breach of fiduciary duty, knowing receipt and knowing assistance, stemming from losses sustained from an investment in promissory notes. The certification judge denied the motion, holding that the Statement of Claim did not establish the material facts necessary to support a finding of a fiduciary relationship between the class members and the financial advisor. Further, it would not be possible to establish an ad hoc fiduciary relationship with the class, unless it could be shown on an individual, case-by-case examination that each individual of the class evidenced the traditional common law hallmarks of a fiduciary relationship. The plaintiff then appealed the decision to the Divisional Court.
Issue: On appeal, the primary issue was whether an ad hoc fiduciary relationship could be established between the class members and the defendant based on the “best interest” regulatory standard enshrined in the rules, regulations and by-laws of the MFDA and the FP Canada Standards Council Code of Ethics (professional standards).
Decision: In a 2 to 1 decision, the majority of the Divisional Court held that because ad hoc fiduciary relationships arise based on the specific circumstances of a given relationship, a fiduciary duty between a financial advisor and a client will only be found where the multi-factor test stated in the Ontario Court of Appeal decision of Hunt v. TD Securities Inc. (taken from the Supreme Court of Canada test in Hodgkinson v. Simms) is satisfied, on an individual basis. The Hunt test considered five factors: a) the client’s degree of vulnerability; b) the degree of trust between the client and advisor; c) the history of reliance and any representations of special skills and knowledge by the advisor to the client; d) the extent of the advisor’s discretion over the client’s account; e) and any professional rules or codes of conduct which inform the duty owed by the advisor and the standard of care. As such, the majority found that a fiduciary duty could not be established on a class wide basis as strictly the result of standards imposed by regulatory rules and regulations which require advisors to act in the “best interest” of the client.
The key distinction between the dissent and majority opinions centered around the weight afforded to the fifth factor (professional rules or codes of conduct). Sachs J. in dissent, placed a strong emphasis on a self-regulating body to set the standard for their profession, relying on the remark in Hodgkinson, that “It would be surprising indeed if the courts held the professional advisor to a lower standard of responsibility than that deemed necessary by the self-regulating body of the profession itself.” While in the majority’s view, the dissent had reduced the five-factor analysis to a “’one-size-fits-all’ duty that would apply to every investor, regardless of discretionary authority over the account, or sophistication of the client.” The majority also took the view that imposing a fiduciary duty in the absence of the other four indicia would negatively impact both investors and capital markets.
Additional points and takeaways: It is important to note that the dissent of Sachs J. opens the door for the plaintiff to appeal the Divisional Court’s decision to the Ontario Court of Appeal. Even so, parties should keep in mind, as the majority notes, that even if the “best interest” regulatory standard does not impart a fiduciary relationship between financial advisors and their clients, “duties of good faith, care, confidentiality and disclosure apply to a variety of non-fiduciaries as well.”
-  Hunt v. TD Securities Inc. (2003), 66 OR (3d) 481 (CA), at para 40.
-  Hodgkinson v. Simms,  3 SCR 377 at 425.
-  Boal v. International Capital Management Inc., 2022 ONSC 1280 at para 68.
-  Ibid at para 70.
March 31, 2022
On March 15, 2022, OBSI released its annual report for 2021, declaring the year its busiest year on record, with 7,593 consumers reaching out to complain, a 33% increase from 2020. Of that record number, 568 were investment related, a 24% increase compared to the 459 complaints reported in 2020.
The investment related complaints resulted in $1.9 million in payouts to consumers, seven times more than the payouts on the banking services side. The average payout was $8,896, the highest payout was $156,635, the lowest $50. In six of the cases, the consumer accepted either a letter of apology or an explanatory letter to the consumer’s creditors to resolve the matter.
The highest number of complaints (16%) related to technical and non-technical service issues. Concerns about investment suitability, and misrepresented or inaccurate disclosure about a product, were tied at 14% of the complaints. Of note, investment suitability concerns were down from 19% in 2020. A look at complaints by product shows that common shares (equities) had the highest amount of complaints. The top three issues noted were transaction errors, investment suitability and margin issues. Mutual funds had the second highest number of complaints, and the top three issues identified in the report were instructions not being followed, investment suitability and transfer delays.
OBSI constantly gathers information, from day-to-day inquiries, or information gleaned during an investigation, that helps identify trends in the industry. Trends that affect multiple consumers in the financial services sector are known as “systemic issues” that impact a wider base of consumers. In 2021 OBSI reported on a few specific systemic issues, including understating and misrepresenting the risk of a fund and disregarding documented investor risk tolerance.
In addition to specific case related reports, OBSI provides trending data on products, outcomes, and complaint sources (phone, email, website) to the regulators, providing information to the regulators and the financial services industry as a whole.
March 31, 2022
As reported in a number of previous AUM Law bulletins, the Financial Services Regulatory Authority of Ontario (FSRA) had released Rule 2020-001 Financial Professionals Title Protection under the Financial Professionals Title Protection Act, 2019, the purposes of which are to ensure that people providing financial planning or financial advisory services are qualified to do so and to help alleviate consumer confusion. The Financial Professionals Title Protection Rule and a related fee rule have now been approved by Ontario’s Minister of Finance and the Act was proclaimed into force on March 28, 2022. As a result, individuals operating in Ontario will no longer be able to call themselves “financial planner”, “financial advisor”, or any title that can reasonably be confused with those titles, without holding a recognized credential from a FSRA approved credentialing body. As such, individuals will be required to meet minimum educational requirements and abide by a code of conduct set out by the credentialing body.
An appendix to the Approach and Interpretation Guidance – Financial Professionals Title Protection – Supervisory Framework (Supervision Guidance) provides examples of titles that FSRA considers could reasonably be confusing to clients, to help provide clarification to market participants. It is expected that approved credentialing bodies will be announced shortly. There are a number of requirements set out for approval as a credentialing body, including having policies and procedures in place to ensure that credential holders put the client’s interests first and to ensure the fair treatment of consumers.
There are transition periods available to persons not yet holding a recognized credential; four years for the financial planner title and two years for the financial advisor title from March 28, but only if those titles were already in use as of January 1, 2020. Please contact your usual lawyer at AUM Law if you have any questions on the implementation of these new rules.
March 31, 2022
Answer: As set out in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (31-103), as a registrant you are now required to follow all the new KYC and suitability requirements. Section 13.3(2) of NI 31-103 provides, among other things, that a registrant must take reasonable steps to ensure it has sufficient information about its clients regarding certain factors to enable it to meet its suitability determination, including the client’s personal and financial circumstances, and the client’s investment needs, objectives, investment knowledge, risk profile and investment time horizon. In addition, Section 13.2(4) of NI 31-103 specifically provides that you must “take reasonable steps” to keep the KYC information current, including updating the information within a reasonable time after becoming aware of a significant change in the client’s information that you have in your files.
As noted in the CSA’s FAQs on the Client Focused Reforms, CSA staff have stated that they expect registrants to schedule KYC updates in accordance with the triggers set out in Section 13.2 (4.1). CSA staff specifically note that as a registrant, you must use your professional judgement, when interacting with clients, to determine if you need to ask about any significant changes to the client’s circumstances and then update the KYC information accordingly. With respect to how often you need to reach out to clients (assuming they do not reach out to you to let you know of a significant change), the expectation is that you will periodically confirm with clients that the information you have is current. One suggestion provided is that you consider having more frequent interactions at set intervals; again, all depending on your relationships and mandate with your clients. In all cases, your policies and procedures must demonstrate that you have taken reasonable steps to keep KYC information up to date. Your firm must also provide training to all registered individuals on compliance with securities legislation, including the KYC obligations.
March 31, 2022
On January 27, 2022 the Canadian Securities Administrators (CSA) announced that they are adopting Amendments to National Instrument 94-101 Mandatory Central Counterparty Clearing of Derivatives and Changes to Companion Policy 94-101 Mandatory Central Counterparty Clearing of Derivatives (the Amendments).
NI 94-101, which came into force in 2017, requires that certain market participants clear prescribed over-the-counter derivatives through a central clearing counterparty, subject to exemptions, in order to reduce counterparty risk. The Amendments are in response to feedback received by the CSA and are intended to refine the scope of market participants that are subject to the clearing requirements and reduce regulatory burden. The CSA had published proposed amendments to NI 94-101 back in September 2020 (the 2020 Proposed Amendments) and the current Amendments differ from those 2020 Proposed Amendments in a few ways. These differences include the new transition period (see coming into force date below), removal of a requirement relating to affiliates having to enter into an agreement to rely on the intragroup exemption that was considered an unnecessary burden, and additional guidance on the CSA’s expectations regarding the multilateral portfolio compression exemption. Amendments were also made to Appendix B Laws, Regulations or Instruments of Foreign Jurisdictions Applicable for Substituted Compliance (Appendix B) that now includes the relevant laws and regulations of the United Kingdom to reflect Brexit.
Provided that all necessary approvals are obtained, the Amendments will come into force on September 1, 2022, except for Appendix B which will come into force earlier on April 12, 2022.
If you have any questions about the Amendments, please contact a member of our team.
February 28, 2022
As the next group of products under scrutiny by various regulators, insurers and intermediaries should be aware of proposed guidance recently released by The Canadian Counsel of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO). The proposed Incentive Management Guidance is intended to provide illustrations and guidance on how incentive arrangements related to the sales and servicing of insurance products should be designed in order to meet the expectations of the existing CCIR-CISRO Guidance involving the fair treatment of customers, which came into force in 2018. Since that time, insurance regulators have determined that some practices may present risks to the fair treatment of customers and that additional guidance is needed.
The proposed guidance is principles-based and provides flexibility to design policies and controls to support fair customer outcomes based on the nature, size and complexity of the activities of insurers and intermediaries. “Intermediaries” include individual agents, brokers and business entities authorized to distribute insurance products and services, including managing general agencies. In the guidance, “incentives” include both monetary and non-monetary compensation offered by insurers and intermediaries to their employees and other persons acting on their behalf in the sale and servicing of insurance products. Among other expectations, CCIR and CISRO note that insurers and intermediaries’ governance culture must place the fair treatment of customers at the center of decisions concerning the design and management of incentive arrangements. It is also suggested that as part of the management of these arrangements, appropriate deterrents should be established to actively discourage behaviours that could cause unfair outcomes to customers, and provide arrangements for recovering, when appropriate, the compensation once it has been paid out. Post-sale controls should also be established to identify inappropriate sales resulting from incentive arrangements.
An appendix to the guideline contains examples where certain components of incentive arrangements (without appropriate controls) may increase the risk of unfair outcomes for customers. Examples include:
- arrangements with excessive incentives for cross-selling optional products;
- bonus rates that increase with predetermined sales volumes thresholds without adequate consideration to the fair treatment of customers;
- lifetime vesting of renewal commissions to intermediaries which can result in eventual client orphaning; and
- incentive arrangements which can result in penalties (e.g. exit fees) for the customer.
Earlier this month, the same regulators announced their position on the use of Deferred Sales Charges in segregated fund contract sales. They further indicated that insurers should refrain from new DSC sales with an eye on the June 1, 2022 ban of mutual fund DSC sales and expect a transition to stopping such sales on seg funds by June 1, 2023. They also indicated an intention to consult on other upfront commissions in individual variable insurance contracts later this year.
Comments on the proposed guidance are due April 4, 2022.
February 28, 2022
A number of CSA jurisdictions have begun their promised registrant reviews relating to the client-focused reforms. These jurisdictions have sent out very extensive questionnaires relating specifically to the conflicts of interest provisions that came into force at the end of June, 2021. The questions include those relating to the formation of a firm’s conflicts inventory, inquiries about fee arrangements and proprietary products, and ask for documentation and proof of changes made to policies and procedures to demonstrate compliance with the new requirements. We suspect the result of these reviews will result in further guidance to the industry on baseline regulatory expectations.
Registered firms with clients in Québec should also soon be hearing from the AMF, if they haven’t already. The AMF is currently conducting a normal course focused review with a number of questions being asked of firms that do not have a physical presence in Québec. The stated purpose of the review is to get a better understanding of a firm’s activities in the province.
In addition to regulatory reviews, the OSC has begun the process of individually reminding registrants of the 2022 risk assessment questionnaire (RAQ), which will be sent out in early May and is due by mid June. The 2022 RAQ will ask about information for the period ended December 31, 2021. While the questions are expected to be substantially similar to those in the 2020 RAQ and some fields that relate to information unlikely to change from year to year will be pre-populated, significant time and resources will still be required to complete all sections of the questionnaire fully. The OSC email includes a link to a copy of the 2020 questions in order to help get firms started on collecting the necessary information. The OSC will also be providing a list of FAQs and user guides for each section of the questionnaire and is setting up a webinar as part of its Registrant Outreach to be held in May. We would urge clients to begin thinking about and planning for this project. As the form requires certification from a firm’s UDP, it is important to leave enough time for the c to review the form prior to submission.
As a reminder, firms in Ontario that are registered as investment fund managers must also complete the OSC’s Investment Fund Survey (which has already been sent out) by April 29th.
We are assisting a number of clients with responding to these reviews, and we would be pleased to answer your questions about this or any other regulatory sweeps occurring.
February 28, 2022
Answer: Registered firms sometimes ask us if they can provide account statements and reports on a household basis to families where multiple family members are clients of the firm. According to regulatory guidance, the answer is a qualified yes, but… registered firms may choose to provide supplementary reporting at the household level to clients that request it, but only if they also separately provide account-level reporting. This means that registered firms are permitted to provide account statements and cost and performance reports on a household basis to clients that want it, but only as additional reports to account-level statements and reports for each individual in the household.
February 28, 2022
As the capital markets continue to evolve, the Ontario Securities Commission (the OSC) and its regulatory priorities have to change with them. The OSC charges market participants two types of fees: participation fees, which serve as a proxy for use of the Ontario capital markets and are based on the costs of a range of OSC services that can not be attributed to individual entities or activities, and activity fees which are generally charged when specified documents are filed with the OSC. To reflect the growth in Ontario’s derivatives over-the-counter (OTC) market activities, and with a view to reducing the regulatory burden on smaller and medium-sized businesses, the OSC is proposing amendments to OSC Rule 13-502 Fees, OSC Rule 13-503 (Commodity Futures Act) Fees and their related companion policies (collectively, the Fee Rule). The Fee Rule will introduce a new fee for entities that enter into OTC derivatives transactions but reduce participation fees for certain reporting issuers and registrants, and eliminate certain activity and late fees.
The new derivatives participation fee is intended to help fund some of the OSC’s multi-year initiatives, including a derivatives regulatory oversight program and technology modernization projects. The consultation draft for the Fee Rule notes that there is over $60 trillion of outstanding notional and over 3.7 million OTC derivative transactions outstanding, which is monitored and analyzed by the OSC, along with 2.4 billion records a year that they receive. In order to monitor systemic risk, including identifying vulnerabilities such as market fragmentation, access to liquidity and price formation trends, the OSC will add participation fees payable by entities engaged in the trading of OTC derivatives, which will be a tiered fee based on an entity’s outstanding average daily notional of all transactions that are required to be reported under OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting over a one year period (provided the fee payer’s average outstanding notional is over $3 billion). It is anticipated that the new fee will mainly impact banks that are derivatives dealers. The tiers range from a $3,000 fee for entities with outstanding notional amounts from $3 billion to under $7.5 billion, to a whopping $1.9 million annual fee for entities with outstanding notional amounts of $10 trillion and over. The OSC expects to raise approximately $13.5 million annually through the new participation fee. The new fee will eliminate the cross-subsidization of regulatory oversight costs by other market participants.
On the other hand, the OSC expects that over 5,500 market participants will save approximately $5.6 million annually through reductions in specific fees, approximately $3.1 million of which would come from modest reductions in certain participation fees paid by registrants and reporting issuers. For example, the lowest participation fee tier for registrants with specified Ontario revenues for the year of under $250,000 would be reduced from $835 to $700. Of note, the fee payable on exempt distribution filings under National Instrument 45-106 Prospectus Exemptions (NI 45-106) would be reduced from $500 to $350, and the calculation based on gross proceeds for distributions of securities of an issuer using the offering memorandum exemption under section 2.9 of NI 45-106 would be replaced by the $350 fee. Certain infrequently used activity fees would be eliminated. Perhaps most welcome would be the proposal to permanently eliminate late fees on filings for certain registration form updates, including outside business activities (soon to be outside activities – see article below).
Also welcome news is the proposal to simplify the annual capital markets participation fee calculation. Currently, registrants are required to estimate their specified Ontario revenues, and adjust the filings if needed based on actual revenues. The proposals would instead accept a fee calculation based on the most recent completed financial statements – i.e. actual financial information based upon the most recently audited financial statements. The deadline for registrant firms to file would be moved from December 1 to anytime between September 1 and November 1. It should be noted that while some late fees would be eliminated under the proposal, the calculation of the late fees for those that will still be imposed would be calculated based on calendar days, and not business days.
If the Fee Rule moves forward, the fee changes are anticipated to become effective on April 3, 2023. Comments on the proposal will be accepted until April 21, 2022.
January 31, 2022
On January 20, the Canadian Securities Administrators (the CSA) published CSA Notice and Third Request for Comments on Derivatives Business Conduct (the Notice), the CSA’s draft publication setting out rules intended to better protect OTC derivatives market participants. The two earlier consultations were published on April 4, 2017 and June 14, 2018.
The Notice sets out Proposed National Instrument 93-101 Derivatives: Business Conduct and Proposed Companion Policy 93-101CP Derivatives: Business Conduct (collectively, the Proposed Instrument). The Proposed Instrument is intended to create a uniform approach to derivatives markets conduct regulation in Canada and promote consistent protections for over-the-counter (OTC) derivatives market participants, while also ensuring that derivatives dealers and advisers operating in Canada are subject to consistent regulation. The Proposed Instrument is also intended to meet IOSCO’s international standards.
The Proposed Instrument applies to a person or company if it meets the definition of “derivatives adviser” or a “derivatives dealer”, even if they are not required to be registered as such because they don’t meet the business trigger for registration (yes – “that” business trigger test), or can utilize an exemption in the Proposed Instrument. The Proposed Instrument would thus apply to federally regulated Canadian financial institutions.
The Proposed Instrument sets out a principled approach to regulating the conduct of participants in the OTC derivatives markets, including requirements relating to fair dealing, conflicts of interest, know-your-derivatives party, suitability, pre-transaction disclosure, reporting, compliance, senior management duties, recordkeeping, and the treatment of derivatives party assets. The CSA notes that many of these requirements are similar to the existing requirements applicable to securities dealers and advisers in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). Further, similar to NI 31-103, the Proposed Instrument takes a two-tiered approach to investor protection by: a) having certain obligations apply in all cases when a derivatives firm is dealing with or advising a derivatives party, regardless of the level of sophistication of that derivatives party; and b) having certain additional obligations apply if the derivatives party is not an “eligible derivatives party” (EDP), and apply, but subject to being waived, if the derivatives party is an EDP that is an individual or a “specified commercial hedger”.
We wrote about the June 14, 2018 second consultation in our June 2018 Bulletin. The Notice includes a summary of changes to the Proposed Instrument since the 2018 consultation. These changes include, among others, the addition of a new foreign liquidity provider exemption for foreign dealers when they transact with derivatives dealers in Canada, a new exemption for foreign sub-advisers that is similar to the exemption for international sub-advisers in NI 31-103, a five year transition period to allow derivatives firms to treat existing permitted clients and similar entities as an EDP, a new exemption for registered advisers from certain requirements if they comply with corresponding requirements in NI 31-103 in order to leverage existing compliance systems, revisions to the rules around senior derivatives managers, and the application of a limited sub-set of requirements to certain derivatives dealers that are Canadian financial institutions with respect to short-term foreign exchange (FX) contracts in the institutional FX market. As an example of some of the changes, the proposed requirement to have a senior derivatives manager will now only apply to certain derivatives dealers with a specified notional amount of derivatives outstanding. Many of these changes are intended to address comments received on earlier consultations to the effect that there could be negative potential impacts on derivatives market liquidity as a result of the application of certain provisions. The complaint handling provisions and tied selling provisions, on the other hand, have been extended to apply to all derivatives parties.
In addition to comments on all aspects of the Proposed Instrument, the CSA is also seeking feedback on eight specific questions that include such topics as: the foreign liquidity provider exemption, the foreign derivatives dealer and adviser exemptions, the commercial hedge category of the EDP definition, exemption from the designation and responsibilities of a senior derivatives manager, short-term FX contracts in the institutional FX market, treatment of registered advisers under securities or commodity futures legislation, and conflicts of interest. The CSA is requesting comments to be submitted by March 21, 2022. Once the Proposed Instrument is released in final form, there will be a delayed effective date of one year.
Please contact a member of our team if you would like to discuss the Proposed Instrument or its potential impact on your business.
January 31, 2022