Category: Investment Funds

Discussion Paper Released on Upfront Compensation for Segregated Funds and IVICs: Transition Time

The Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO) are consulting on concerns they have regarding upfront commissions used in the sale of segregated funds and individual variable insurance contracts (IVICs). Earlier this year, CCIR and CISRO stated that the use of Deferred Sales Charges (DSCs) in segregated fund contract sales was inconsistent with treating customers fairly, highly discouraged and should cease fully by June 1, 2023.

The current consultation paper notes that upfront commissions in the sale of segregated funds create potential issues relating to conflicts of interest where consumers rely on advisors to sell them a suitable product and the advisor is paid by the insurer for the sale and servicing of those products. These concerns are similar to those raised in connection with the sale of other financial products including mutual funds. In the paper, “upfront compensation” is defined as:

“any compensation, including money, arrangement for financing a payment similar to upfront commission or anything else of value, an Insurer or Intermediary provides to another Intermediary immediately after a Customer invests in an IVIC, because of the investment.”

An insurance intermediary can be a licensed individual, or a business, authorized to sell and service IVICs.

As noted, some of the concerns raised are similar to the discussions previously held in the securities industry relating to the sale of mutual funds, but others are unique to the insurance industry. One example provided in the consultation relates to an intermediary having to repay some or all of their compensation because a customer withdraws from an IVIC (the “advisor chargeback option”, discussed below) and the intermediary does not have funds to do so. In that circumstance, the intermediary may become a creditor to an insurer or managing general agency. This relationship could possibly motivate the intermediary to sell products of a different insurer to avoid a reduction in compensation from new sales from the creditor, even if the creditor’s products are most suitable for a customer.

The primary purpose of the consultation is to better understand compensation arrangements in segregated funds and IVICs, and what changes to upfront compensation may be needed to improve customer outcomes. A number of targeted customer outcomes are outlined in the consultation, including a regulatory approach which effectively addresses conflicts created by upfront compensation which can misalign the interests of insurers, intermediaries and customers, as well as enhance customer awareness of intermediary compensation. Other targeted outcomes include reducing the risks of mis-selling segregated funds and IVICs over securities products by dually licensed intermediaries due to different upfront compensation arrangements.

The paper spends time discussing the “advisor chargeback option”, which is similar to DSCs where the insurer pays an intermediary an upfront commission, except that in the event a customer redeems an investment in a segregated fund prior to the expiry of the fixed schedule, it is the intermediary rather than the customer who must reimburse the insurer for the cost of intermediary compensation. In effect, the intermediary would have to return all or a portion of the commission the intermediary received from the sale of segregated funds to the insurer. It is noted that other compensation may also be paid to intermediaries, such as bonuses based on sales placed with any particular insurer. Licensed individuals may also be compensated by intermediaries for sales placed with an insurer through the intermediary. Concerns have been raised that not all of these arrangements are required to be disclosed, especially not on an ongoing basis, which could be very relevant to a customer if a chargeback period continues to exist.

A potential supervision gap is also noted in the consultation, as licensed individuals are not restricted in most jurisdictions from distributing products for more than one intermediary or insurer. As a result, those intermediaries and insurers responsible for overseeing licensed individuals may not know what IVICs were sold to customers nor be aware of any monetary influences on those sales.

Many of the specific questions in the paper are targeted at gathering information about the current environment in which segregated funds and IVICs are sold as well as particulars about sales charge options. It will be interesting to follow these developments as the CCIR and CISRO express their desire to keep the regulatory regime for financial products as harmonized as practical and appropriate, to avoid regulatory arbitrage and provide similar investor protection for both segregated funds and other financial products. The deadline to provide comments is November 7, 2022.

September 28, 2022

Back to the Books: OSC Study Finds Many Investors Overestimate Their Knowledge

The Ontario Securities Commission’s (OSC’s) Investor Office leads the OSC’s efforts in investor engagement, education, outreach and research. The Investor Office launched a survey that ran between September 27 to October 4, 2021, to assess the financial literacy of Canadian investors. The overall objective of the survey was to determine how Canadian investors’ perceptions of their financial knowledge compare to their ability to answer questions measuring financial literacy. The survey polled 2,591 Canadians nation-wide, and on September 7, 2022, the OSC released the results and insight gathered from the survey results.

In the introduction to the report, the OSC notes that as Canadians are taking on more responsibility for their own investing, to do this effectively they must have the financial acumen to participate in Canada’s capital markets. The results of the survey revealed some interesting tidbits, including the following key highlights:

  • Investors have the least knowledge when it comes to investment costs and investor protections;
  • About 3-in-10 Canadian investors self-assessed their financial knowledge too highly; and
  • On average, self-directed investors were the most financially-literate.

There were 27 questions, which were broken up into 5 financial literacy themes:

  1. Organization for Economic Co-operation and Development (OECD) Core Questions – these questions are used by the OECD internationally as a benchmark for financial literacy. They are used to gauge basic understanding of the importance or impact of investment risk, diversification, compound interest, inflation, diversification, bond vs. interest rate, and that mutual fund returns are not guaranteed. Of the Canadians polled, 68% of these questions were answered correctly.
  2. Core Investing Principles and Concepts – these questions tested the understanding of investing principles and concepts, such as leveraged investing, past performance, time horizon, and break-even calculation. These questions were answered correctly about half of the time.
  3. Investment Costs – these questions gauged awareness of the link between fees and returns, Management Expense Ratio (MERs), advisor costs, and the different types of funds. This section received the lowest number of correct responses, with only 36% correctly answered. While respondents correctly answered the question about whether fees are linked to returns 76% of the time, the impact of MERs only had 35% correct responses, and advisor cost questions received only 22% correct responses.  The results of this portion of the study may help to explain some of the emphasis by regulators on current initiatives such as the proposals relating to total cost reporting.
  4. Registered Accounts – the key features of these questions centered around the differences between registered account types (RRSPs, TFSAs, and RESPs). While respondents answered 69% of the questions correctly, one question pertaining to RESPs was only answered correctly 38% of the time.
  5. Protecting Your Portfolio – of the questions posed about investor rights and responsibilities, complaint handling (internal and external), and checking registration, on average 44% of these questions were answered correctly.

The survey results will help the OSC’s Investor Office understand the identified knowledge gaps of the respondents and direct its efforts in helping Canadians improve their investing knowledge, by re-engineering its investor resources, outreach efforts, and policy developments going forward.

September 28, 2022

Amendments to National Instrument 45-106 on the Horizon as the Listed Issuer Financing Exemption Takes Flight

In the Canadian Securities Administrators’ (CSAs’) ongoing efforts to reduce regulatory burden and better provide for cost-effective capital raising mechanisms, the CSA has developed the Listed Issuer Financing Exemption (Exemption), a prospectus exemption aimed at providing reporting issuers, and particularly smaller issuers, the ability to raise capital through smaller-sized offerings. The Exemption was created in response to the impediments noted by many market commentators who highlighted that the short form prospectus regime created to facilitate capital raising for reporting issuers was often seen as a barrier and too costly, particularly for smaller issuers. The Exemption balances investor protection and the fostering of capital formation and efficient capital markets by incorporating the continuous disclosure regime for reporting issuers while also allowing eligible issuers to raise a limited amount of capital through the filing of a more cost-effective offering document (Form 45-106F19 Listed Issuer Financing Document or the Offering Document).

We previously reported on some of the features of the Exemption in our August 2021 bulletin. Since then, the following changes to the Exemption have been made:

  • Restricting certain issuers from using the exemption, including investment funds and issuers that are or had been capital pool companies, among others.
  • Reducing the dilution limit on distributions using the exemption from 100% to 50% of the issuer’s outstanding securities.
  • Limiting the type of securities that can be distributed using the exemption to listed equity securities and units consisting of listed equity securities and warrants convertible into listed equity securities.
  • Requiring that the news release announcing an offering using the Exemption contain prescribed language on where an investor can access the Offering Document (e.g., on their website).
  • Requiring that the Offering Document contain prescribed language on the risks of investing, on its cover page.
  • Requiring that the Offering Document be signed by the chief executive officer and chief financial officer of the issuer.
  • Requiring that the Form 45-106F1 Report of Exempt Distribution filed in connection with distributions using the Exemption include a completed Schedule 1 with purchaser information.

The exemption will come into effect on November 21, 2022. If you have any questions or are interested in learning more, please contact us. For additional insights from BLG’s Capital Markets team, please refer to the article under “BLG’s Resource Corner” below.

September 28, 2022

It’s Getting Cooler but the Regulators are Heating Up: Review of Mutual Fund Sales Practices

In early September, the Canadian Securities Administrators (CSA) began reviewing the sales practices of certain mutual funds, namely those that have a relationship with a registrant to act as a principal distributor of those funds. According to National Instrument 81-102 Investment Funds, a principal distributor is a person or company through whom mutual fund securities are distributed under an arrangement with the fund or its manager that provides either (i) an exclusive right to distribute the securities in a particular area, or (ii) a feature that gives or is intended to give the person or company a material competitive advantage over others in the distribution of the securities of the fund. The review is tied into a long-awaited potential review of National Instrument 81-105 Mutual Fund Sales Practices, which among many other provisions deals with permitted dealer compensation. Readers will want to follow any published results and next steps closely.

September 28, 2022

Things to Contemplate Post-Equinox: IIROC Releases Third Phase of Competency Profiles for Comment

In late August, IIROC released the final phase of its multi-year consultation to set base line competency profiles for all of its registration categories. This third phase deals with Supervisors, Traders, Associate Portfolio Managers and Portfolio Managers and comments will be accepted on the proposal until December 28th. In IIROC’s parlance, a “competency” is a set of knowledge, behaviour and skills that an individual must have to perform effectively in their role.

Each proposed profile consists of high-level competencies along with numerous sub-competencies specific to the role. For example, the proposed profile for Supervisors consists of three high-level competencies associated with their oversight responsibilities, related to the general regulatory framework, supervisory firm responsibilities and specific supervisory responsibilities related to the individual. With respect to Portfolio Managers and Associate Portfolio Managers, there are a proposed six categories of high-level competencies related to expected relationship, regulatory and technical skills, which focus on the regulatory environment and ethics, investment policy, research and analysis, portfolio construction, portfolio monitoring and servicing institutions. In addition to all of the specific knowledge requirements set out in the relevant sub-competencies, Portfolio Managers and Associate Portfolio Managers must also meet the competencies that had been proposed for Registered Representatives in Phase 1 of the project, as these individuals are also permitted to carry out Registered Representative activities.

IIROC intends to publish the final profiles in advance of the expiry of the current contract held by IIROC’s education service provider; a request for expressions of interest will be sent out later this year as a first step in the procurement process for potential education service providers moving forward.

September 28, 2022

Keeping Fit: OSC’s Investor Advisory Panel Releases Report

On July 7, the Ontario Securities Commission’s independent Investor Advisory Panel (IAP) released its 2021 report outlining its activities for that calendar year. The IAP’s mission is to provide input to the Ontario Securities Commission (OSC) throughout its policy development process, including identifying issues for consideration, providing input to the OSC on policies to pursue, and responding to requests for comment, all with the voice of investors at the forefront. The OSC Investor Office acts as a liaison between the IAP and the OSC and is the IAP’s secretariate – the IAP however conducts activities without direction from the OSC. It is noted that during the year, the IAP held 24 meetings with external organizations, had 11 meetings amongst themselves and made 6 submissions to the OSC/Canadian Securities Administrators and other regulatory bodies.

Much of the IAP’s focus was placed on disruption and the future of regulation, and, in particular, the entry of big-tech firms into retail wealth management, digital self-sovereignty including the ownership of personal information, biased AI and demographic changes expected to result in a shortage of retail advisors. The IAP expressed concerns to regulators that the fragmentation and responsive nature of securities regulation (as well as product-specific mandates) do not leave regulators well positioned to address the decentralized, fast-spreading evolving marketplace.

The IAP continued to review recommendations made by the Ontario Capital Markets Modernization Task Force and the new mandate for the OSC to include growing capital markets in Ontario. See our summary of some of these recommendations here. The IAP indicated such a mandate would introduce conflict and confusion especially with respect to another of the OSC’s mandates to foster fair capital markets. The IAP submitted to the OSC that it should develop clear guidelines as to how fairness will be maintained under the revised mandate and confirm whether investor protection was still a central focus.

Further concerns were expressed with respect to the Financial Services Regulatory Authority of Ontario’s (FSRA) final frameworks for title protection, on the basis that too many titles could still be used that are confusing with the protected titles of “financial planner” and “financial advisor”. In addition, a preference for FSRA to conduct proactive monitoring of improper title use, rather than relying on public complaints, was expressed. On the issue of dispute resolution, the IAP reiterated its support for binding authority to be granted to the Ombudsman for Banking Services and Investments (OBSI).

The IAP intends to focus its efforts in 2022 on items such as the new self-regulatory organization to be formed upon the consolidation of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA), and the role that model disruption is having in the investment space, including cryptocurrencies and ESG products.

August 17, 2022

Don’t Stress Out: We’ll Explain the Expansion of the Self-Certified Investor Prospectus Exemption

At the end of July, the Alberta Securities Commission (ASC) and the Financial and Consumer Affairs Authority of Saskatchewan (FCAA) amended the self-certified investor prospectus exemption that is available in Alberta and Saskatchewan under ASC Blanket Order 45-538 Self-Certified Investor Prospectus Exemption and FCAA General Order 45-538 Self-Certified Investor Prospectus Exemption (collectively, the Orders).

The exemption allows purchasers in the two provinces to invest alongside persons who qualify as accredited investors on a number of conditions, the primary condition being a self-certification that they meet alternative criteria with respect to their financial and investment knowledge. For example, the qualification criteria includes holding a CFA or Chartered Financial Analyst Charter from CFA Institute or any predecessor or successor organization or holding a CPA or Chartered Professional Accountant designation from CPA Canada (there are many additional permitted categories of educational/financial experience that will allow someone to self-certify for the purposes of the exemption).

The amendments to the exemption are meant to further facilitate its use in Alberta and Saskatchewan to allow the resale of a security on the basis of the exemption – i.e. not only an issuer but a selling security holder can utilize the exemption to distribute a security. The amendments also allow for the distribution of securities to a special purpose vehicle (SPV) without the SPV having to meet the investment limits that individual purchasers are subject to (i.e. not more than $10,000 per issuer per calendar year and not more than $30,000 across all issuers per calendar year). The new carve out for SPVs require that (i) all of the owners of interests, direct, indirect or beneficial, except the voting securities required by law to be owned by the directors, are accredited investors and self-certified investors; (ii) the SPV distributes its securities to self-certified investors in compliance with the exemption; and (iii) self-certified investors have not contributed more than 25% in total of the funds invested in the SPV.

The other conditions of the exemption all still apply, including that the head office of the issuer of the security must be located in either Alberta or Saskatchewan, the purchaser must be provided access to substantially the same information about the securities as would be provided to an accredited investor, and the seller must obtain from the purchaser a statutory declaration in prescribed form acknowledging the criteria on which the purchaser is relying on the exemption. If the distribution is made by the issuer of the security, the issuer must file a report of exempt distribution and pay applicable fees on or before the 10th day after the closing of the distribution.

August 17, 2022

IIROC Enforcement Report 2021-2022: Trends to Note

The Investment Industry Regulatory Organization of Canada (IIROC) released its annual Enforcement Report (Report) for the fiscal year 2022 (April 1, 2021 to March 31, 2022). The report highlighted IIROC’s commitment to protect clients, namely senior and vulnerable clients, its achievements in strengthening its legal authority across Canada, and the results of the inaugural use of Early Resolution Offers to speed up enforcement matters.

The Report references the main benefits of introducing Early Resolution Offers as 1) speeding up the enforcement and remediation process most notably the cooperation from member firms and 2) freeing up resources both at IIROC and at member firms as a result of speedier resolutions. It noted that firms are further incentivized to participate in the process by the 30% reduction in sanctions imposed. During the inaugural year of the program, IIROC entered into four offers with member firms. The main themes of these enforcement matters related to strengthening market integrity and improving industry standards.

For one member firm, its failure to comply with trading supervision obligations to detect and prevent a client interfering with fair market operations lead it to accept an Early Resolution Offer option. The matter was discovered by the IIROC enforcement team. Once brought to the firm’s attention, it cooperated fully with the investigation and remediation efforts, resulting in a reduced fine of $150,000, which was resolved in weeks instead of months.

The other matters resolved involved lapses in industry standards. The member firms involved were cited for failing to establish and maintain a system to supervise the activities of their employees, or the failure to establish internal controls and supervision that would reasonably allow for compliance with IIROC by-laws and requirements and failure to implement adequate supervisory controls when onboarding accounts of clients trading in crypto currencies and other assets.

In one case, the firm discovered the issue and notified IIROC. The issues involved an inconsistency in the fees charged to clients in fee-based accounts which differed from what was documented in the clients’ fee agreements. The firm’s cooperation with IIROC assisted in the reduction of the fine imposed.

In total IIROC reported an increase in fines, disgorgement and costs imposed by hearing panels on IIROC-regulated persons (individuals and firms) during fiscal 2022. Over $4 million in fines were imposed industry wide, with individuals ordered to disgorge $211,736.87 of ill-gotten gains, an increase from prior years.

IIROC’s right to impose and collect fines from coast to coast has been confirmed with Newfoundland and Labrador becoming the final jurisdiction to allow IIROC the authority to collect fines through the courts. The report highlights IIROC’s efforts to strengthen the effectiveness of its enforcement authority and its efforts to request that provinces grant the ability to collect evidence during investigations and provide IIROC protection against malicious lawsuits when acting in accordance with its mandate.

Finally, the report notes that even as the announced merger of IIROC and the MFDA comes closer into being, enforcement efforts under the new SRO will continue to strengthen regulatory efforts to protect the Canadian markets. It will be interesting to keep a close eye on the new SRO’s enforcement powers and actions moving forward.

August 17, 2022

Making Changes: Saskatchewan Republishes Title Protection Rules for Comment

It’s been a year since we wrote about proposed draft regulations under Saskatchewan’s The Financial Planners and Financial Advisors Act. The title protection framework was initially based primarily on Ontario’s title protection framework, requiring approval for credentialing bodies (CBs) and their financial planner and financial advisor credentials. However, the latest request for comment released by The Financial and Consumer Affairs Authority of Saskatchewan (FCAA) introduces a number of changes in response to comments received on the initial consultation which would de-harmonize the regulations from those that have already been finalized in Ontario.

As part of the credentialing process, both jurisdictions have proposed baseline competency profiles in order for a financial planner (FP) or financial advisor (FA) credential to be approved. The FCAA is considering changing the competency profiles for the financial advisor credential to be closer to that of a financial planner. Originally, the FA credential would have required education relating to products and services provided by the individual, along with education requirements relating to a broad overview of the Canadian financial services marketplace, among other topics. Some commentators, however, felt that the profile was too limited for the FA credential and that it should include proficiency in multiple technical areas and not take a product focused view. The commentators indicated that FAs should take a broad approach to financial advice where the advice would be focused more on specific strategies or approaches and not specific products. The new language would require a broader expertise when providing suitable recommendations to a client and thus would require a financial advisor credential to have educational requirements related to estate planning, tax planning, retirement planning, investment planning, finance management and insurance and risk management. As noted in the consultation, the key difference between the competency profiles for an FP and FA would be that:

“an FP will require knowledge and competency in respect of developing and presenting an integrated financial plan for the client; whereas an FA will require knowledge and competency in respect of providing suitable recommendations to a client with respect to broad-based financial and investment strategies.”

A question is also raised as to whether FAs should be required to disclose the product(s) they are authorized to sell (along with their title).

Comments are also being sought on the appropriate transition period. It was originally contemplated that there would be a transition period for people already using one of the titles as of July 3, 2020, which would be four years from the date the regulation comes into force for the financial planner title, and two years for the financial advisor title. Given the proposed changes to the financial advisor credential, the FCAA has asked whether the transition period for FAs should be extended to match those that will be available to FPs (i.e. four years from the date the regulation comes into force). They are also asking whether the date of July 3, 2020 (the cut-off date for when individuals must have already been using one of those titles in order to be able to rely on the transition period) should be moved up to closer to the present date.

Interesting questions have also been posed with respect to the process the FCAA should follow in the event the approval of a CB is revoked, or the operation of a CB otherwise ceases, and how the FCAA should transition credential holders to a CB in good standing.

We suspect the proposed fee schedule will also be the subject of industry comment, as CBs operating in more than one jurisdiction will be required to pay separate fees (some of which can be substantial if there are a large number of credential holders) to each jurisdiction.

Comments on the proposed regulations are due September 20, 2022.

August 17, 2022

No Interference – IIROC Sets Priorities for 2023

As we reported in our May 2022 Bulletin, the Canadian Securities Administrators (CSA) are consulting on the application to consolidate the Investment Industry Regulatory Organization of Canada (IIROC) with the Mutual Fund Dealers Association of Canada (MFDA) by the end of the year. Within the context of this transaction, IIROC released a notice summarizing the initiatives it intends to prioritize in the next year, which includes advancing commitments related to investor protection, supporting industry transformation, and working towards the closing of the amalgamation and creating a new, enhanced self-regulatory organization.

Amongst other activities relating to investor protection, IIROC is looking at the potential to return disgorged funds collected from disciplined firms and advisors to harmed investors and anticipates publishing a proposal later this year. A working group has also made recommendations on how to improve IIROC’s current arbitration program and plans to seek stakeholder comments on issues such as increasing the award limit and publication of decisions later on this year. Staff are also continuing their review of order-execution only services, particularly the point at which interrupted access would become an explicit investor protection issue. IIROC has paused its work on its Expert Investor Issues Panel in light of the new, proposed Investor Advisory Panel that will be established by the new SRO.

With respect to supporting industry innovation, IIROC created a new membership intake team to review new member applications (including with respect to crypto asset trading platforms) with the intent to increase review process efficiencies. IIROC has similarly created a compliance modernization group to look at ways to streamline activities across compliance teams. IIROC has also created cybersecurity self-assessment checklists for IIROC firms to assist them in building operational resilience.

Other previously announced priorities that IIROC will continue to work on include its derivatives rule reform, proposed competency profiles for supervisors, portfolio managers, associate portfolio managers and traders, and its EDI and Anti-Racism programs.

June 30, 2022

Got Game? Independent Evaluation of OBSI Released

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

Important Reminders: Don’t Double Fault: F4 Updates and Exempt Trade Reports Take Time

As referenced in our article above, the amendments to National Instrument 33-109 Registration Information (NI 33-109) are now in force. As a result, any changes required to be made to an individual registrant’s Form 33-109F4 must be done no later than June 6, 2023. However, if a change to the form is required to be reported prior to such time, the entire form must be reviewed, updated and filed within the relevant filing deadline. This may include completing answers to questions that could previously be left blank on the form. As a result, we are recommending that clients (especially those with a large number of registrants and permitted individuals) have a plan to download, review and update such forms well in advance of the June 2023 deadline to avoid filing delays.

There are other frequently filed forms in a different context that may also take some time to complete. For example, exempt trade reports are often required to be filed for exempt distributions of securities (other than investment funds under certain prospectus exemptions) within 10 days of the distribution. These forms can be complicated to complete and require detailed information about the issue, the investors, compensation paid to dealers, etc. It may also take some time to set up the issuer’s filing profile on SEDAR, the OSC’s Electronic Filing Portal or, if required, on the BCSC e-services profile (the later usually takes at least 24 hours to set up a profile). These reports and profiles should be completed and set up as early as possible, again to avoid possible delays and late filing fees.

June 30, 2022

Kicking Off a New Regime – Application for Recognition of New Self-Regulatory Organization

The Canadian Securities Administrators (CSA) has taken one step closer to realizing on its recommendations to consolidate the two existing self-regulatory organizations (SROs), IIROC and the MFDA, into a single SRO (New SRO) in CSA Staff Notice and Request for Comment 25-304 Application for Recognition of New Self-Regulatory Organization. The New SRO would be amalgamated under the Canada Not-for-profit Corporations Act. Current members of the MFDA and IIROC will be members of the New SRO.

The CSA has an ambitious agenda to work towards establishing the New SRO by December 31, 2022. The Chair of the Board of the New SRO, along with industry and independent board members, was also announced along with the publication of the CSA Staff Notice. The CEO of the New SRO remains to be announced.

The New SRO would have an expansive mandate to act in the public interest, including protecting investors from unfair, improper or fraudulent practices by its members and fostering public confidence in the capital markets. Other aspects of its mandate will include facilitating investor education, administering a fair, consistent and proportionate continuing education program, and recognizing and incorporating regional considerations and interests from across Canada.

Initially, the New SRO will have two classes of members, the first being Dealer Members, who are comprised of investment dealers and/or mutual fund dealers. The second class would be Marketplace Members, comprised of recognized exchanges, quotation and trade reporting systems and others that facilitate trading of securities or derivatives in Canada in the enumerated circumstances.

The application for recognition of the New SRO includes a draft by-law, draft interim rules, draft terms of reference for the New SRO Investor Advisory Panel, and new requirements for Québec. The application also includes a draft recognition order and draft Memorandum of Understanding among regulators regarding oversight of the New SRO.

The application and draft approval order sets out the proposed governance structure for the New SRO, including a requirement for the board and committees to be composed of a majority of independent directors and independent chairs, with the governance committee composed of all independent directors. It is proposed the initial board will consist of 15 members, six of which will represent the members and 8 of which will be independent, plus the President and the CEO of the New SRO. The New SRO will also have policies and procedures to manage actual, potential or perceived conflicts of interest of its directors, officers, employees and members of its disciplinary panels.

The current IIROC District Councils will be replaced by Regional Councils, which will have an advisory role to staff of the New SRO on regional regulatory policy matters. It is proposed that there be a National Council and seven Regional Councils, comprised of Dealer Members from each region (as defined). The National Council would be comprised of the Chairs and Vice-Chairs of the Regional Councils to act as a forum for cooperation among the councils and make recommendations to the CEO and Chair of the New SRO. A new Appointments Committee will have responsibility for appointing members of the District Hearing Committees.

In addition, the new SRO will have new formal investor engagement mechanisms, including an Investor Advisory Panel and investor office. The investor office will support rule development and provide investor education and outreach, while the Investor Advisory Panel will provide independent research or input on regulatory and public interest matters. The Investor Advisory Panel will provide input to the New SRO with respect to its annual priorities, strategic plans, policies, and other regulatory initiatives, and may also raise current and emerging policy issues that it identifies. Members of the panel will be selected by a public application process administered by staff of the New SRO and will consist of 5-11 members. The Chair of the panel must meet with the New SRO board at least once a year and will publish a public report annually to be posted on the New SRO’s website.

The New SRO continues its planning to develop an appropriate fee model post amalgamation. On an interim basis, the existing fee structures and models of IIROC and the MFDA will initially be maintained by the New SRO, as will the existing criteria for access to membership and the provision of regulation services.

With respect to rules, the New SRO will initially adopt interim rules which incorporate the regulatory requirements in the rules of IIROC and the MFDA, which include:

  • Investment Dealer and Partially Consolidated Rules;
  • Mutual Fund Dealer Rules;
  • Mutual Fund Dealer Form 1; and
  • Universal Market Integrity Rules.

The Interim Rules include proposals to (i) amend the current IIROC proficiency requirements to allow dual registered firms to employ mutual fund only licensed persons without having to upgrade their proficiencies to those required of a securities licensed person, and (ii) permit introducing/carrying broker arrangements between mutual fund dealers and investment dealers.

The SRO will work toward harmonizing CE programs, but for now the existing CE requirements will continue to apply. Mutual fund dealers will continue to be exempt from the CE requirements of the New SRO for their activities in Québec. Furthermore, the power to make decisions relating to the supervision of the New SRO’s activities in Québec will be exercised mainly by persons residing in Québec, and complaints will be referred to staff of the New SRO in Montreal or to the Autorité des marchés financiers or the Chambre de la sécurité financière. Members of the hearing panels of the New SRO in respect of Québec residents will themselves be Québec residents. While firms registered as mutual fund dealers in Québec will join the New SRO, there will be a transition period for their activities in Québec and their fees will be prorated to the services offered to them by the New SRO.

Comments on the materials are due shortly, by June 27.

May 31, 2022

Investor Protection Funds in the Limelight – Application for Approval of the New Investor Protection Fund

In mid-May, the Canadian Securities Administrators (CSA) released CSA Staff Notice 25-305 Application for Approval of the New Investor Protection Fund. The release of the application is the next step following the recommendations in CSA Position Paper 25-404 to amalgamate the two existing contingency funds, The Canadian Investor Protection Fund and the MFDA Investor Protection Corporation into a single compensation fund (New IPF) for customers of investment dealers and mutual fund dealers who are members of the new self-regulatory organization (SRO). The New IPF will be amalgamated under the Canada Not-for-profit Corporations Act and will be independent from the new SRO. The New IPF’s objective will be to either return assets to customers upon an insolvency of an SRO member, or if the assets are not available, provide compensation for their value as at the date of the insolvency.

The New IPF is also to be established by December 31, 2022. The Chair of the Board of the New IPF, along with industry and independent board members, was announced along with the publication of the CSA Staff Notice. The CEO of the New IPF remains to be announced.

The application for approval of the New IPF includes a draft by-law, coverage policy, claims procedures and draft appeal committee guidelines, as well as a draft approval order and draft Memorandum of Understanding among the CSA members regarding oversight of the New IPF. Members of the New IPF would be the persons who compose the board from time to time, and membership is consistent with the current structure of each existing compensation fund.

The application and draft approval order sets out the proposed governance structure for the New IPF, including the composition of the board, proposed to be a mix of Industry Directors, Public Directors (as such terms are defined) and the CEO. It is proposed that the number of Public Directors must exceed the number of Industry Directors by at least one. Various committees of the board are also proposed, each of which must be constituted by a majority of Public Directors, including the chair. With respect to conflicts, the New IPF’s mandate indicates it must identify and avoid “real, potential or perceived conflicts of interest between its own interests, or the interests of its directors, officers, or employees and the New IPF Mandate”.

The funding and investment of the assets in the New IPF is also addressed. The New IPF will be required to publish its methodologies of establishing assessments for contributions from each category of SRO members. It will also conduct a risk analysis associated with each category in order to determine whether a single assessment methodology is appropriate. Until the review is completed, it is contemplated that the funds available to satisfy potential claims for coverage by investment dealers (or dually registered investment fund dealers and mutual fund dealers) and mutual fund dealers will remain separate and be subject to separate assessments. There will be a moratorium on changes to the current assessment methodologies that would result in a material increase to the assessments levied on each category. The money in each fund must be invested in accordance with the relevant policies applicable to that fund and require safety of principal and a reasonable income while assuring sufficient liquidity for potential claims.

The draft coverage policy describes eligible customers, the losses and property covered, limits on coverage and how claims can be made.

Similar to the proposal for the new SRO, a separate regime is contemplated for mutual fund dealers in the province of Québec given their existing regulatory framework and the fact that such dealers are not currently registered with the MFDA. It is proposed that the New IPF will not provide coverage for mutual fund dealer customer accounts in Québec and SRO members will not be subject to assessments to contribute to the mutual fund dealer fund of the New IPF in respect of those accounts, but instead will continue to contribute to the existing Québec financial services compensation fund. The Autorité des marchés financiers (AMF) has published for comments its proposed transition plan for mutual fund dealers, described in more detail below.

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

May 31, 2022