Category: Investment Funds
On September 2, 2021, the Ontario Securities Commission (OSC) published its 2021 Annual Report – Promoting Confidence, Fostering Innovation (Report), along with its financial statements for the year ended March 31, 2021 and the accompanying MD&A. The Report highlights a busy year at the OSC.
There were 1,319 registered firms and 67,758 registered individuals in Ontario as noted in the Report. In the past year, the OSC reviewed 645 public company prospectuses, up more than 67% from the previous fiscal year, and a further 280 prospectuses from investment funds and structured products. The OSC Enforcement Branch assessed a record 807 cases and 164 tips were received under the Whistleblower Program. It issued 42 administrative sanctions, up from 22 in the previous fiscal year, handing down $11.1 million in monetary sanctions. The Quasi-criminal Serious Offences Team completed 11 cases, with two charges laid against 4 respondents.
The OSC continues to implement the Ontario government’s five-point capital markets plan focused on strengthening investment in Ontario, promoting competition, and facilitating innovation. In addition, following recommendations of the Capital Markets Modernization Taskforce, the Ontario government announced in its spring budget that it plans to move forward with legislative amendments to expand the mandate of the OSC and modernize its governance structure. The OSC is working to embed the new mandates to promote competition and foster capital formation into its work and is moving forward with key structure changes, including greater separation of its Tribunal under the OSC umbrella.
The Report included a 2020-2021 Report Card setting out how the OSC has fulfilled the obligations set out in its 2020-2021 OSC Statement of Priorities. The OSC sought to promote confidence in Ontario’s capital markets, reduce regulatory burden, facilitate financial innovation, and strengthen its organizational foundation. In furtherance of these goals, the Client Focused Reforms (CFRs) remain on schedule for implementation by the end of 2021. The OSC views these as fundamental reforms that provide retail investors with greater confidence that they are receiving investment products that are right for them and advice that puts their interests first.
Additionally, the OSC adopted final rules that prohibit order-execution-only (OEO) dealers from receiving trailing commissions from fund organizations where advice is not provided. Ontario joined other CSA jurisdictions to harmonize the ban on deferred sales charges taking effect on June 1, 2022.
The Report notes that activity in the crypto asset sector has accelerated, with global crypto asset market capitalization doubling from January to April 2021 to reach US$2 trillion. Along with its Canadian Securities Administrators partners and the Investment Industry Regulatory Organization of Canada (IIROC), the OSC announced steps that crypto asset trading platforms must take to comply with securities legislation. The OSC issued a deadline for platforms operating in Ontario to engage with it to start compliance discussions or face potential enforcement action.
Furthermore, the Report notes that the OSC has completed 62 of the initiatives set out in its 2019 report on reducing regulatory burden, with more than 20 on track to be completed by the end of 2021. The Report states that the OSC is embedding a culture of burden reduction across the OSC, which includes providing a detailed cost-benefit analysis of proposed rules, ten of which were published this year. In addition, following a comprehensive review of best practices in leading jurisdictions, the OSC published an updated service commitment that provides investors, registrants, and other market participants with added transparency on the standards and timelines to expect when interacting with the OSC.
With respect to facilitating financial innovation, the Report notes that the Office of Economic Growth and Innovation, first announced in 2019, is now fully staffed, including experts in capital raising and new financial intermediation technologies, allowing the OSC to support and encourage innovative business models. The OSC has also established a new Digital Solutions Branch (DSB) to lead the OSC’s data-driven transformation by building the data capabilities needed to support all aspects of its work.
If you would like to discuss the items highlighted in this summary or any aspect of the Report and its relevance to your business, please do not hesitate to contact us.
September 30, 2021
On August 31, the Investment Industry Regulatory Organization of Canada (IIROC) released another consultation paper with respect to draft competency profiles for its registration categories which is the second phase of a multi-year project. IIROC estimates that they will release the final publication for all profiles by early 2024. For these purposes, a “competency” refers to the knowledge, behaviour, and skills that a person must have to perform effectively in their role. Among other things, the competency profiles are intended to provide IIROC with a benchmark with which to evaluate course providers, give course providers guidance on course content, and help dealers and their representatives better understand IIROC’s expectations.
The competency profiles for directors, executives, and ultimate designated persons (UDPs) are generally the same. They consist of four categories of high-level competencies related to their oversight responsibilities, and focus on each of the general regulatory framework, corporate governance and ethics, duties, liabilities and defences and risk management and oversight. Within each of these high-level competencies are a number of sub-competencies. For the UDP, this would include understanding and applying UDP responsibilities.
In addition to the general competencies set out above which would be applicable to all executives, a registered firm’s Chief Compliance Officer (CCO) would be subject to five more categories of high-level competencies associated with their oversight responsibilities, comprised of: the compliance function and operations, risk management, regulatory reporting, examinations, investigations and actions, compliance responsibilities and CCO duties and obligations. Within these new competency categories are thirteen sub-competencies.
A member firm’s Chief Financial Officer (CFO) would be expected to meet the highest number of competency profiles. In addition to the general competencies for all executives, a CFO would be subject to seven more categories of high-level competencies related to their oversight responsibilities: general financial requirements, capital adequacy, books and records and reporting, credit risk management and customer accounts, inventory, pricing of securities and underwriting, operations and settlement, protection of firm and client assets and other capital provisions. It is proposed that there be thirty-one sub-competencies within those broader categories.
Appendices to the proposal set out the expected knowledge, behaviour, and skills for each competency within each category. IIROC is accepting comments on its proposal until December 29, 2021.
September 30, 2021
On September 9, the Autorité des marchés financiers (AMF) released a draft regulation relating to the processing of complaints in the financial sector in Québec. It is intended to create a common set of rules and practices for the fair processing of complaints, and would apply to a number of financial institutions, financial intermediaries (including securities dealers and advisers) and credit assessment agents. The draft regulation proposes a framework for complaint processing and dispute resolution obligations while working with the existing obligations.
The draft regulation sets out requirements for what must be included in a firm’s dispute resolution policy. For dealers, advisers and other financial intermediaries operating in the Province, the policy must include the establishment of a complaint process, training on the process, the designation of a complaints officer, the assignment of complaints to the staff responsible for processing them, and periodic reporting regarding the complaints process. The policy must also require that the firm analyze the underlying causes of complaints and address any issues raised. It is proposed that the policy would also contain a provision requiring the reasons supporting a complaint to be analyzed to determine if they could impact other clients and if necessary, provide a remedy.
The draft includes a process for keeping complaint records and sending them to the AMF for examination as required. Of note, it would be expected that the firm be required to provide a complaint drafting assistance service for those who indicate they need it. The draft also covers timelines and requirements for communication with complainants, and would require all complaints to be processed within no more than 60 days from the time the firm received the complaint until the final response is sent to the consumer. A simplified process is proposed for certain complaints where the offer to resolve is accepted within 10 days. The draft also prohibits certain actions, such as using the term “ombudsman” in referring to the complaint process. Finally, the draft regulation also sets out the various monetary administrative penalties that may be levied by the AMF for breaching the regulation.
Comments are being accepted until November 8, 2021 on the draft regulation. If you have any questions, please contact your usual lawyer at AUM Law.
September 30, 2021
The Financial Services Regulatory Authority of Ontario (FSRA) has released a proposed approach guidance, outlining its intentions with respect to how and when it will publish information about enforcement proceedings and investigations in the sectors it regulates, including the mortgage brokerage industry. The purpose of such publications are to inform the public about who is being sanctioned, but perhaps more importantly for discouraging similar behaviour, the conduct for which they are being sanctioned. Certain information would be made available on its web site and through news releases, including Notices of Proposal (e.g. to revoke a license) and Notices of Intended Decision when FSRA initiates an enforcement action for non-compliance with regulatory requirements and regulatory misconduct. The approach guidance also confirms that FSRA would not ordinarily disclose to the public the existence of an ongoing investigation, except in exceptional circumstances such as when there is credible evidence of ongoing behaviour that is likely to result in immediate harm to consumers. As set out in the notice, having a consistent and clear approach to transparency of enforcement is intended to result in even treatment for regulated entities and individuals, as they will know in advance when FSRA will let the public know it is taking action. The consultation period ends September 24, 2021.
August 31, 2021
On July 28, 2021, the Canadian Securities Administrators (CSA) announced a proposed new prospectus exemption for issuers listed on a Canadian stock exchange. The proposal is in response to comments received from CSA Consultation Paper 51-404 Considerations for Reducing Regulatory Burden for Non-Investment Fund Reporting Issuers, and reflects research on capital raising requirements in other countries as well as other stakeholder feedback about the prospectus system. The proposed Listed Issuer Financing Exemption is expected to reduce costs for issuers that would otherwise raise small amounts of capital through the public markets, usually through a short-form prospectus offering. The new exemption is expected to be used by such issuers as an alternative to the accredited investor and family, friends, and business associates prospectus exemption. The exemption would not be available to issuers that have been a reporting issuer for less than 12 months, nor to issuers that have not filed all continuous disclosure documents required under Canadian securities legislation. In addition, the exemption could not be used by an issuer whose principal assets are cash or its exchange listing, nor by an issuer that intends to use the proceeds for a significant transaction such as an acquisition that would require shareholder approval, on the basis that the issuer’s existing business should already be adequately described in its current disclosure documents.
To avail themselves of the proposed exemption, eligible issuers would need to file a short offering document (not expected to be longer than 5 pages) updating the existing public disclosure, including with respect to any new developments in the issuer’s business, and confirming that the issuer will have sufficient funds for at least 12 months after completion of the offering. Issuers could raise up to the greater of $5 million or 10% of the issuer’s market capitalization, to a maximum of $10 million, annually. In addition, the offering can not result in more than 100% dilution for existing shareholders. Purchasers under the exemption would have rights under the secondary market civil liability regime, and would also have a contractual right of rescission against the issuer for a period of 180 days in the event of a misrepresentation. As with many prospectus exemptions, the issuer would be required to report sales by filing a Form 45-106F1 Report of Exempt Distribution, but would not be required to complete the schedule that contains the names of the purchasers. If you have any questions about the availability of the proposed exemption or would like to comment on the consultation, please contact us.
August 31, 2021
On August 12, the Canadian Securities Administrators (CSA) released proposed amendments to the Companion Policy to National Instrument 41-101 General Prospectus Requirements that provides an interpretation of the financial statements that are required to be included in a long form prospectus where the issuer has or proposes to acquire a business that would be the primary business of the issuer. The existing requirements are intended to provide investors with information on the financial history of the issuer, even if the issuer’s history included multiple legal entities. In practice, many issuers have pre-filing consultation discussions with the regulators to determine exactly which financial statements are required to be included in the prospectus, which is a time consuming and costly exercise. The clarifications are intended to reduce the need for such consultations, including by explaining the regulators’ interpretation of a “primary business” and “predecessor entity”, and the time periods for which financial statements would be required. Helpfully, the proposed amendments include a number of examples of when a reasonable investor would consider an acquisition to be the “primary business” of the issuer and runs through the resulting expectations for inclusion of various financial statements. Comments on the proposed guidance are due by October 11.
August 31, 2021
The Canadian Derivatives Clearing Corporation (CDCC) has proposed amendments to its Rules, Operations Manual, Risk Manual and Default Manual to introduce the Gross Client Margin Model (GCM). The changes being proposed by the CDCC are intended to align with international standards on segregation and portability for futures accounts, namely Principle 14 of the Principles for Financial Market Infrastructures. Portability of client positions and collateral is the alternative to closing out the positions upon the insolvency of a clearing participant. The GCM model is a method of calculating the margin a clearing participant must post where the amount is the sum of the margin requirements for each client (i.e., its not a net calculation).Each clearing member would need to report client positions on a daily basis to determine the initial margin requirement. The purpose of the amendments is to allow each client equal protection from the CCDC, regardless of the credit quality of the respective clearing members. The GCM model is to be undertaken in phases and implemented in the second quarter of 2022.CDCC does not initially expect a large impact on stakeholders, as the GCM model is already used for the U.S. market.
The Investment Industry Regulatory Organization of Canada (IIROC) has proposed changes to its own rules and Form 1 relating to the futures segregation and portability protection regime, relating to the CDCC proposal. IIROC’s changes are also intended to make it easier to port client positions and the value of posted collateral in the event of a default of a clearing participant. The changes to IIROC’s rules are required because the CDCC model is separate from the existing IIROC-CIPF model, and the purpose of the amendments is to reduce “funding drain” on dealers and reduce linkages between a dealer’s futures business and securities business – i.e., the possibility that dealers would have to utilize margin from other accounts in order to post the higher requirements for futures that will be required under the CDCC model. The rules include additional client disclosure and daily reporting to IIROC to identify gross customer margin futures positions. The CGM model allows CDCC to port positions more quickly, but may result in higher margin requirements and restrictions on cross-product hedges involving futures for some institutional participants. To mitigate this impact, the proposals allow one business day grace period to collect margin calls. Comments on the CDCC proposal are due by September 3, and IIROC is accepting comments until shortly thereafter on September 7.
August 31, 2021
The Financial and Consumer Affairs Authority of Saskatchewan (FCAA) released draft regulations under The Financial Planners and Financial Advisors Act relating to title protection. The legislation and proposed regulations are based primarily on Ontario’s framework of requiring approval for credentialing bodies (CBs) and their financial planner or financial advisor credentials, but which recognizes provincial distinctions. The draft regulation establishes approval criterial for CBs as well as for credentials in order for a person to be permitted to use the title of financial planner or financial advisor. Examples of baseline competency profiles are set out in the consultation, including expected client outcomes when dealing with retail clients. The regulations include a “best interest” standard of care, including that a financial planner or financial advisor must put the client’s interest first when making a suitability determination. The FCAA is seeking comments on a number of specific questions, and is looking for some examples of titles that could reasonably be confusing with the title of financial planner or financial advisor. The transition period for persons already using one of those titles as of July 3, 2020 is proposed to be four years from the date the regulation comes into force for the financial planner title, and two years for the financial advisor title. The comment period ends October 1, 2021.
Following existing rules in Québec and proposed rules in Ontario and Saskatchewan, the Financial and Consumer Services Commission of New Brunswick (FCNB) has begun its own consultation on a framework for the protection of titles used by financial professionals. Some differences between the proposed regulations in Ontario and Saskatchewan are noted in the consultation, including that Saskatchewan will have different penalties and enforcement provisions for people who use protected titles without authorization and a process for approving CBs already approved in another province. The FCNB is seeking feedback on a number of questions, including whether New Brunswick should adopt enforcement powers similar to those available in the Saskatchewan legislation, and a simplified method for approving CBs already credentialled elsewhere. It is also considering setting out a list of prohibited titles as is currently the case in Québec, including titles such as “financial consultant” and “private wealth advisor” which are considered to be confusing to the “financial planner” title. Comments are being accepted until October 25, 2021.
If you wish to provide comments on any or all of the proposals affecting the use of the financial advisor or financial planner title, please contact your usual lawyer at AUM Law.
August 31, 2021
The Financial Services Regulatory Authority of Ontario (FSRA) proposed amendments to Rule 2019-001 – Assessments and Fees (the Fee Rule) in late July, which sets out the structure for fees to be charged to credentialling bodies (each, a CB) with respect to the title protection framework. FSRA’s proposed title protection framework was subject to an earlier consultation in May 2021 and described here. FSRA has proposed that fees be comprised of both application fees, and annual fees, as follows:
- $10,000 application fee upon the submission of an application for approval of a CB and $5,000 for each credential application for either a financial advisor or financial planner credential.
- An annual assessment, itself comprised of the following three components:
- A fixed annual CB fee of $25,000.
- A variable annual CB assessment. The variable annual assessment will allocate FSRA’s total budgeted expenses related to the financial professionals sector (currently anticipated to be $1.1 million / year), net of budged fixed fees, among CBs proportionally, based on their share of the total number of credential holders in the sector.
- A time limited annual assessment to recoup FSRA’s start-up costs. This time-limited annual assessment relates to FSRA’s costs incurred to implement the title protection framework, and are estimated to be $3.1 million. Again, FSRA proposes to allocate these costs to approved CBs in proportion to their share of the total number of credential holders, over a 5-year period. If new CBs are approved during the 5-year period, this portion of the annual assessment would be adjusted for all CBs.
The fees are based on the stated principles included in the Fee Rule, which include fairness, simplicity, consistency and transparency. The application fees are intended to be associated with the time FSRA staff will spend reviewing the applications. The annual assessment fees relate to FSRA’s recovery of costs, and will support its infrastructure for the oversight of CBs and help monitor individuals who use a financial advisor or financial planner title without an approved credential. As a bottom line, FSRA estimates that the annual average cost for the first five years of the framework could be $22 per credential holder, all assuming the costs set out above and 81,000 credential holders in Ontario.
Commentators on the earlier proposed amendments to the framework had expressed concerns that persons holding more than one approved credential might pay more than one fee under the Fee Rule, particularly as the Fee Rule only applies in Ontario and other jurisdictions are implementing their own title protection rules, and that smaller organizations might be disincentivized from applying as a CB, or wait to apply until start-up costs have been recouped by FSRA. Suggestions had been made earlier that FSRA should instead determine fees based on the number of title users, and not the number of credential holders. FSRA is seeking feedback on the fee rule, including how it should determine which credential holders would be subject to the fee payable by the CB, such as whether residency in Ontario or the conduct of business in Ontario should be a factor. If you have any questions on the proposal or wish to provide a comment, please contact your usual AUM lawyer. Comments are due October 20, 2021.
August 31, 2021
The Department of Finance Canada released a consultation paper on July 16 relating to the complaint handling process used by consumers for banking services and products. The consultation document follows a review of the process and Canada’s external complaint handling bodies completed by the Financial Consumer Agency of Canada (FCAC), and seeks views on the guiding principles and structural considerations for the system going forward. Currently, banks have a two-part complaint handling process involving an internal complaints process and external compliant handling system which relies on two external complaint bodies (an ECB) for those complaints that are not resolved by the bank’s internal process. The FCAC report, published in February 2020, identified some concerns regarding the current system including that the multiple model (with more than one ECB) may undermine consumer trust, add complexity, impact impartiality and complicate regulatory supervision. All banks in Canada must belong to an ECB, which must be approved by the Minister of Finance on the recommendation of the FCAC Commissioner.
The minimum operating standards for an approved ECB are set out in banking legislation, and they are required to be impartial and independent when dealing with a complaint. There are two approved ECBs, the ADR Chambers Banking Ombuds Office (whose parent firm operates on a for-profit basis) and the Ombudsman for Banking Services and Investments. The consultation paper suggests that a strong complaint handling system would empower consumers by ensuring they have the ability to clearly set out their complaint with evidence, and help them understand the reasons for the final decision by the ECB. The paper sets out that guiding principles for Canada’s complaint handling system includes accessibility, accountability, impartiality, timeliness, and impactful decisions. Questions in the consultation relate to the structural consideration of allowing banks to choose their ECB, and also solicits views on the attributes of an effective system, such as an ECB’s profit structure, funding model, functions, complainant assistance, governance structure, and whether recommendations should be binding. While the paper relates to the banking sector, other market participants may wish to follow the outcome as it may have an impact on complaint handling processes for registrants in future. Comments on the proposal are being accepted until October 14.
August 31, 2021
On August 10, 2021, staff of the Compliance and Registrant Regulation (CRR) Branch at the Ontario Securities Commission (OSC) published OSC Staff Notice 33-752 Summary Report for Dealers, Advisers and Investment Fund Managers (Report). The Report provides an overview of the CRR’s work for the 2020-2021 fiscal year and is a must-read for all registrants. The OSC encourages registrants to use the Report to learn more about recent and proposed regulatory initiatives, the OSC’s expectations for registrants and how staff interpret initial and ongoing requirements for registration and compliance.
1. Focus Areas for 2021-2022 Compliance Reviews
The OSC identified the following as focus areas:
- Firms identified as high-risk through the Risk Assessment Questionnaire (RAQ) process;
- Client Focused Reforms review, which will commence after the key implementation dates of June 30, 2021 and December 31, 2021;
- Firms offering online advice or online dealer platforms; and
- “Registration as the First Compliance Review” for crypto-asset trading platforms.
AUM Law’s focused and general compliance risk assessments can save you time and money by enabling you to proactively identify and address issues before they flare up into problems or you are audited by the OSC. Please contact us to learn more about these services.
2. Compliance Initiatives
- COVID-19 Survey: In July 2020, the OSC issued a COVID-19 Survey to gather information from registrants to better understand the initial impacts of the COVID-19 pandemic on registrants’ operations. Overall, the information gathered from the survey demonstrated that registrants adapted well.
- Remote Work and Business Location Registration Considerations: Questions on whether individuals working remotely are required to identify their personal residence as a “business location” in accordance with NI 33-109 have popped up. The Report notes that the OSC continues to take a flexible and practical approach on this issue considering many firms have established work-from-home (WFH) arrangements with their registered individuals. However, registered firms that allow staff to work remotely must have compliance systems in place, including appropriate policies and procedures related to supervision, that adequately address the WFH arrangements.
- Business Continuity Planning: The operational challenges arising out of the COVID-19 pandemic demonstrated the importance of business continuity plans (BCPs). It is important that senior management is involved in the creation and approval of the firm’s BCP. Senior management’s ongoing communication and participation regarding the firm’s BCP will demonstrate a positive and strong tone at the top.
- 2020 Risk Assessment Questionnaire: In June 2020, the OSC issued the 2020 RAQ to over 1,000 firms. The RAQ is the OSC’s primary tool to obtain information about a registrant’s business operations, which supports the OSC’s risk-based approach to select firms for compliance reviews or targeted reviews. Registrants can expect to receive the next version in April 2022.
3. Compliance Deficiencies
What follows are highlighted topics we think will be of particular interest to our readers.
- Representatives servicing clients without required registration: The Report notes instances of representatives of registered firms conducting registerable activities in Ontario without being registered as either ARs, AARs or dealing representatives. If a firm is not in compliance with the registration requirements in Ontario, this may raise concerns regarding the adequacy of the firm’s compliance system and may reflect poorly on the firm’s continued fitness for registration. This may also raise concerns that the firm is not adequately supervising its representatives.
- Policies and procedures not tailored to the firm’s operations: For instance, (a) written policies and procedures did not address Ontario regulatory requirements, such as CRM2 guidelines for client account reporting and minimum timelines for retention of books and records, (b) the annual compliance report to the Board of Directors (or equivalent) did not address the firm’s compliance with Ontario securities regulatory standards or was signed by someone other than the firm’s CCO, and (c) confidentiality provision language in employment agreements, such as non-disclosure agreements and whistleblower policies, did not permit exceptions for voluntary communication with Ontario regulatory authorities.
- Inadequate disclosure when using benchmarks: Staff noted instances of registered firms presenting benchmarks in marketing materials to compare to the performance of their investment strategies, without adequate accompanying disclosure for a client to draw correct conclusions from the comparisons.
- Misleading marketing material: Several firms included claims in marketing material that were misleading. Registrants must ensure that all claims included in marketing material can be substantiated, are factually correct and are up to date to ensure that existing and prospective clients are not misled.
- Prohibited representations: The Report identifies instances where firms made prohibited representations in their marketing material that (a) implied the OSC had passed upon the financial standing, fitness or conduct of the firm, (b) resulted in the registration of the firm being improperly marketed, or (c) suggested the firm or an individual employed by the firm is holding out as being registered through the use of misleading titles.
- Outside business activities: OBAs are a regulatory concern for a number of reasons, including when the OBA (a) creates a material conflict of interest for the representative that must be addressed in the best interest of the client, (b) places the representative in a position of influence over clients, especially vulnerable clients, (c) creates the risk for client confusion, or (d) limits the ability of the representative to properly service clients. As such, firms must supervise their representatives’ OBAs as part of their compliance system and respond to material conflicts of interest which include OBAs. Firms are also required to report their representatives’ OBAs on each individual’s registration application, and report changes on the NRD within ten days.
- Complaint handling processes: Staff identified a number of issues, including a failure to clearly set out a client’s right to immediately access OBSI if they are not satisfied with the firm’s response. In some cases, clients were instead directed to the firm’s internal ombudsperson. Staff found this to be problematic as it may mislead clients to believe that they are required to contact an internal ombudsperson first before escalating their complaints to OBSI, or that the internal ombudsperson is an alternative to OBSI. The Report reminds firms that both the UDP and CCO have responsibility for establishing an effective compliance system, which includes maintaining a complaint handling process that is consistent with the firm’s obligations to deal fairly, honestly and in good faith with their clients.
- Net asset value adjustments: Section 12.14 of NI 31-103 requires an IFM to deliver no later than the 90th day after the end of its financial year and no later than the 30th day after the end of its first, second and third interim period, a completed Form 31- 103F4 Net Asset Value Adjustments (Form 31-103F4), if any net asset value (NAV) adjustment has been made in respect of an investment fund managed by the IFM during the financial year, including any interim period. A NAV adjustment is necessary when there has been a material error and the NAV per unit does not accurately reflect the actual NAV per unit at the time of computation. The Report notes instances where the error was identified by sub-advisers, auditors, or third-party fund administrators. Staff’s review found that most of the errors were identified and rectified in a timely manner, however, there were instances where inadequate controls resulted in the error remaining undetected for an extended period of time (e.g., greater than one month).
- Wholesaling securities requiring registration: Market participants who engage in wholesaling activities should (a) not communicate with end-purchasers when relying on section 8.5 of NI 31-103, including through written communications and marketing and registered firms should have procedures to prevent their employees from doing so, (b) seek registration as a dealer if they are not able to rely on section 8.5 of NI 31-103, and (c) have procedures to prevent their registered individuals from engaging in wholesaling outside of the registered firm.
- Ownership changes: The Report notes firms are not filing the notice of proposed ownership changes in, or asset acquisitions of, registered firms required under sections 11.9 or 11.10 of NI 31-103. Also noted were instances where, in addition to the registered firm missing the notice under sections 11.9 or 11.10 of NI 31-103, the firm did not make the required filings under NI 33-109, in particular the filing of Form 33-109F5 to reflect the change in share ownership or the acquisition of its assets. A registered firm has 30 days to file any changes to information previously reported in Part 3 of Form 33-109F6, which includes Item 3.12 Ownership Chart. A registered individual or permitted individual must also update information previously provided under Item 17 Ownership of Securities and Derivatives Firms of Form 33-109F4 within 10 days of such change. Failure to provide notice of ownership changes or asset acquisitions may also result in the issuance of a warning letter or further regulatory action.
- Incomplete Form 33-109 submissions: Registrants need to provide blacklines showing the amended sections of the form when making an update to information previously provided under Form 33-109F6. Furthermore, an update to information about a registered firm previously filed using Form 33-109F6 requires that the title of an authorized signing officer or partner be specified in the certification section in Form 33-109F5.
- Exemptive relief applications: The Reports reminds market participants engaging in at-will financings facilities/equity lines that both the issuer and the purchaser generally require registration relief. In addition, market participants are reminded that other requirements of Ontario securities law, including prospectus exemptions, early warning and insider reporting requirements, the prohibition on trading in securities of a reporting issuer while in possession of material undisclosed information and the prohibition on market manipulation, may also apply to market participants involved in equity line arrangements.
4. Additional Items of Note
- Voluntary Surrender Process: The OSC expects a registered firm to file an application to surrender its registration (a voluntary surrender application) when it ceases (or intends to cease) conducting registerable activities. To initiate the voluntary surrender process, registered firms must submit an application letter and an officer’s/director’s certificate. There is no prescribed format for the application letter or officer’s/director’s certificate. The application letter and certificate must be filed through the OSC’s Electronic Filing Portal.
- Registration of Client Relationship Managers: Last year, the Canadian Securities Administrators (CSA) updated its expectations for the assessment of Relevant Investment Management Experience (RIME) for advising representatives (ARs) wishing to act as client relationship managers (CRMs). Associate advising representatives (AARs) that act as CRMs typically will not have accumulated sufficient securities-selection RIME to become ARs. However, an AAR or other individual who can demonstrate that they have all of the other proficiencies required for registration as an AR, in addition to significant experience relevant to CRM activity, can be registered as an AR who will specialize in CRM activity (a CRM AR). In any case, terms and conditions will be applied to the registration of CRM ARs to restrict their registerable activities to things that do not involve the selection of securities.
5. Policy Initiatives
As usual, the Report summarizes certain policy initiatives affecting registrants and provides links to the relevant publications. This year, the Report covers:
- Burden reduction;
- Crypto-asset trading platforms;
- Client focused reforms; and
- Exemption from underwriting conflicts disclosure requirements.
If you would like to discuss the issues highlighted in this article or any aspect of the Report and its relevance to your business, please do not hesitate to contact us.
August 31, 2021
On August 3, 2021, the Canadian Securities Administrators (CSA) published CSA Position Paper 25-404 – New Self-Regulatory Organization Framework (Position Paper), announcing its plans to create a new single Self-Regulatory Organization (New SRO). The Position Paper is a product of the SRO Framework Review Project that began in December 2019 with the formation of a CSA working group (Working Group) to study the current SRO regulatory framework.
The CSA stated that it has decided to pursue the establishment of the New SRO, after evaluating a number of other options.
The establishment will be carried out in two phases. In Phase 1, a CSA integrated working committee (IWC) will determine the appropriate corporate structure for the New SRO and define and oversee the execution of the implementation strategy, focusing on i) the integration of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) into the New SRO, ii) the harmonization of the rules, policies and related processes of the current SROs and iii) making changes to the governance of the New SRO by strengthening the CSA’s oversight framework. Following completion of Phase 1, the project will enter Phase 2 where the CSA will consider incorporating other registration categories such as portfolio managers, exempt market dealers and scholarship plan dealers into the New SRO.
Some of the specific plans for the New SRO include:
- Creation of formal investor advocacy mechanisms, as well as a separate investor office charged with investor education and outreach, within the New SRO;
- Reviewing the proficiency requirements applying to investment dealers and mutual fund dealers;
- Reducing industry cost by:
- Allowing introducing / carrying broker arrangements to allow mutual fund dealers to access certain products more easily, such as ETFs;
- Reviewing the current SRO fee models for dual platform dealers;
- Enabling dual platform dealers to include its mutual fund dealer and investment dealer businesses within one legal entity and integrate similar compliance and back office functions to realize economies of scale;
- Harmonizing applicable policies and rules into a consolidated rule book to reduce operating costs; and
- Reviewing the rules on directed commissions (although no specific proposal was made as yet, other than that the CSA will form a working group comprising appropriate CSA stakeholders).
The Position Paper also referred to the consolidation of the two current investor protection funds into a single protection fund which will be independent from the New SRO.
The Working Group will consider comments no later than October 4, 2021. The IWC will make a public communiqué that includes an implementation timeline once it has determined the appropriate corporate structure for the New SRO as part of its work in Phase 1.
August 31, 2021
Answer: Canadian securities laws require that a registered firm manage material conflicts of interest in the best interests of its clients. The Canadian Securities Administrators have provided guidance that paid referral arrangements are an inherent conflict of interest which, in their experience, are almost always material. While much of the guidance then focuses on out-bound referral arrangements (a registered firm referring a client to a third-party in exchange for a referral fee), we believe the guidance can equally apply to an in-bound referral arrangement (a third-party, such as a wealth planner, referring a client to a registered PM). In order to manage this conflict of interest, in addition to compliant client disclosure, the registered firm should have procedures in place to verify that the proposed referral arrangement will serve its clients’ best interests. These procedures can include a due diligence review of the referrer’s reputation and level of service, and confirmation that the referrer: (i) is qualified to render its services and is not subject to any civil actions or regulatory or professional disciplinary matters, and (ii) does not hold itself out as providing services that it is not registered to provide. The registered firm must also of course determine that its services are suitable for the client. Importantly, the CSA have also provided that If a client pays more for the same, or substantially similar, products or services as a result of a referral arrangement, they will not consider the inherent conflict of interest to have been addressed in the best interest of the client.
June 30, 2021
The Financial and Consumer Services Commission released proposed Local Rule 81-510 Self-Dealing on June 24 for a 60-day comment period. The stated purpose of the rule is to provide additional guidance regarding the meaning of certain terms used in Part 10 of the Securities Act (New Brunswick) which relates to self-dealing by mutual funds as well as insider trading. Part 10 of the Act already prohibits mutual funds formed in New Brunswick (or are reporting issuers in the Province) from taking certain actions without exemptive relief, such as the conflict of interest provisions which prohibit a mutual fund from, among other things, making an investment in any person in whom the mutual fund, alone or together with one or more related mutual funds, is a substantial security holder. Many of the new proposed definitions will be familiar to market participants as they relate to prohibited transactions for certain mutual funds, including the meaning of “significant interest” and “substantial security holder”, as they are very similar to those already in use by other provinces, including Ontario. The intention of the proposed rule is for New Brunswick’s approach to the provisions to be more consistent with that taken in many other Canadian jurisdictions, thereby reducing any confusion in the market.
June 30, 2021
As a follow-up to our article, All Together Now – OSC Joins DSC Ban, in the May 2021 AUM Law Bulletin, we can report that on June 23 the Canadian Securities Administrators (CSA) issued CSA Notice 31-360 Blanket Orders/Class Orders in respect of Transitional Relief Related to the Deferred Sales Charge Option in respect of Client Focused Reforms Enhanced Conflicts of Interest and Client First Suitability Provisions of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (the Notice).
The Notice states that each of the CSA jurisdictions have decided to grant relief by way of blanket orders (the Blanket Orders) to address the issue of overlapping periods between the implementation of the enhanced conflicts of interest and “client first” suitability requirements in the Client Focused Reforms (CFRs) and the implementation of the ban on deferred sales charges (DSCs). The enhanced conflicts of interest provisions of the CFRs come into effect on June 30, 2021 and the client first suitability provisions of the CFRs come into effect on December 31, 2021 whereas the DSC ban only comes into effect on June 1, 2022.
In respect of a trade in a security of an investment fund that results in the payment of an upfront sales commission and that is subject to a DSC, the Blanket Orders will provide registrants with an exemption from the enhanced conflicts requirements from June 30, 2021 to June 1, 2022 and with an exemption from the client first suitability requirement from December 31, 2021 to June 1, 2022. Without the Blanket Orders, a firm selling investment funds with DSCs until the ban on June 1, 2022 could be in contravention of the CFR requirements regarding conflicts of interest and suitability.
If you have any questions about the Notice or Blanket Orders, please contact your usual lawyer at AUM Law.
June 30, 2021