Category: Mortgage and Real Estate Investment Vehicles
May 31, 2023 | Mortgage and Real Estate Investment Vehicles, Regulatory Compliance
The Financial Services Regulatory Authority of Ontario (FSRA) has released proposed guidance that speaks to its expectations for mortgage administrators when complying with their financial reporting requirements. Mortgage administrators are already required to have a licensed public accountant independently review their financial statements and operations on an annual basis, and to file the financial statements and findings with FSRA. The proposed guidance explains a variety of concepts in connection with this obligation, including the appropriate form and content of the auditor reports and permitted licensed public accountants. The guidance would also note that FSRA expects the auditors to be familiar with the applicable requirements for mortgage administrators under the law in relation to their reports. The consultation closes on June 16, 2023.
May 31, 2023
Apr 28, 2023 | Mortgage and Real Estate Investment Vehicles, Regulatory Compliance
On March 28, 2023, the Financial Services Regulatory Authority of Ontario (FSRA) released updated draft interpretation guidance (the Draft Guidance) that addresses requirements and expectations for FSRA-licensed mortgage brokers, agents, brokerages and administrators to deter deceptive and fraudulent practices in the mortgage brokering sector. The Draft Guidance takes into consideration feedback received from the December 2021 public consultation and outlines FSRA’s interpretation of various provisions of the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA) and related regulations, and includes a non-exhaustive list of key steps for detecting and preventing mortgage fraud.
Fraud includes both situations where misleading or false information is provided to qualify a borrower for a mortgage, as well as when a person falsifies information to benefit financially from a mortgage transaction. FSRA expects brokerages and administrators to have policies and procedures that address the MBLAA prohibitions against providing false or deceptive information, the steps licensees must take to detect and prevent mortgage fraud and the duty to conduct identity verification.
The Draft Guidance notes that although FSRA does not regulate anti-money laundering (AML), conducting adequate identity verification is important for brokerages and administrators to defend against being used to facilitate money laundering. As we highlighted in our February bulletin, the federal Department of Finance has proposed amendments that once implemented will extend the application of the AML compliance regime to MBLAA licensees.
The Draft Guidance outlines FSRA’s expectation for licensees to take steps to ensure the accuracy of documents in a mortgage or investment transaction as well as the role of the principal broker in detecting and preventing mortgage fraud. The Draft Guidance also includes examples of red flags for fraud. The Draft Guidance notes that the failure to address or obtain the satisfactory resolution of red flags may be a reason to doubt the effectiveness of a licensee’s governance and the suitability to hold a licence under the MBLAA. We recommend that licensees review the Draft Guidance as it addresses practices that apply to your day-to-day business.
April 28, 2023
Mar 31, 2023 | Corporate Finance, Investment Funds, Mortgage and Real Estate Investment Vehicles, Regulatory Compliance
On March 8, 2023, staff of the Canadian Securities Administrators (other than Ontario), published revised Multilateral CSA Staff Notice 45-309 (the Notice), first published in 2012, which provides guidance for preparing and filing an offering memorandum (an OM) under National Instrument 45-106 – Prospectus Exemptions (NI 45-106). The Notice is relevant to issuers that rely on the offering memorandum prospectus exemption (the OM Exemption) and summarizes common deficiencies that have been observed in OMs prepared in accordance with Form 45-106F2. The Notice also discusses potential consequences of non-compliance with the terms of the OM Exemption.
The Notice was published in conjunction with the effective date of the amendments to NI 45-106 applicable to issuers relying on the OM Exemption that are “collective investment vehicles” and “real estate issuers” (the Amendments). We wrote about the Amendments in our January bulletin.
The CSA remind issuers that an OM must comply with the requirements of the OM Exemption when it is prepared, when it is delivered to prospective purchasers and when the issuer accepts an agreement to purchase the security from the purchaser. This means that the OM must be in the correct form, not contain any misrepresentations and provide sufficient information to enable a prospective purchaser to make an informed investment decision.
Staff have observed issuers making distributions under the OM Exemption using an OM that no longer meets the requirements, which is not permitted. This can occur if an issuer fails to update the OM to reflect a material change or to include more recent financial statements. If distributions under the OM Exemption are ongoing, the OM is required to be amended to include annual audited financial statements for the issuer’s most recently completed financial year no later than 120 days after the issuer’s financial year-end. For ongoing distributions to Ontario residents, the OM must be amended to include financial statements for the issuer’s most recently completed six-month interim period no later than 60 days after the end of that period, unless the issuer qualifies for the exemption set out in the Amendments.
The CSA also remind issuers that disseminating material forward-looking information (such as expected returns) to prospective purchasers during the course of a distribution without disclosing such information in the OM is prohibited.
Other common issues with OMs discussed in the Notice include the following:
- Failing to file an OM on time;
- Failing to provide balanced disclosure;
- Inadequately disclosing available funds and use of available funds;
- Omitting key terms of material agreements;
- Omitting compensation disclosure;
- Omitting key elements of financial statements;
- Omitting required interim reports;
- Failing to obtain required audits; and
- Improperly certifying the OM.
Issuers relying on the OM Exemption should ensure that their OM complies with the requirements of NI 45-106. Now that the Amendments are in effect, any update to an OM will require a “form check” to ensure the OM complies with the Amendments. An updated OM must be filed with the regulators no later than 10 days after the first distribution under that OM. If you have any questions or would like our assistance with reviewing your OM, please contact us.
March 31, 2023
Feb 28, 2023 | Corporate Finance, Corporate Law, Mortgage and Real Estate Investment Vehicles
Significant changes to National Instrument 45-106 Prospectus Exemptions that impact the use of the offering memorandum prospectus exemption are expected to take effect shortly on March 8, 2023. These changes impact issuers using this specific prospectus exemption to issue securities, that engage in “real estate activities” as well as issuers that are “collective investment vehicles”. Significant new disclosures about these issuers that must be included in the prescribed offering memorandum in order to take advantage of this exemption.
For real estate issuers, required disclosure includes detailed descriptions of each property, real estate development projects and information about future cash calls required by investors. In certain circumstances it will also be necessary to provide to investors (and file with the relevant securities regulatory authorities) an independent appraisal of an interest in real property. Collective investment vehicles (including mortgage investment entities) will also need to provide new information, including portfolio performance information.
For more detail on the requirements, please see our January bulletin article here. Issuers may also be interested in webinars being offered with respect to these amendments, such as the webinar hosted by staff of the Alberta Securities Commission on March 6, 2023. For more information and to register, please visit the ASC website.
February 28, 2023
Feb 28, 2023 | Anti-Money Laundering, Counter-Terrorist Financing, Mortgage and Real Estate Investment Vehicles, News, Regulatory Compliance
Registered dealers and advisers are well versed in the AML requirements contained in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. The federal Department of Finance has recently released proposed amendments to regulations under the Act that would impact certain non-financial institution entities, including mortgage brokers, mortgage lenders and mortgage administrators.
The proposed amendments are a result of a number of studies and recommendations relating to the increased risk of money laundering in the real estate sector. A number of AML obligations, such as developing a compliance program, gathering prescribed KYC information (including beneficial ownership), keeping records, suspicious transaction reporting and monthly AML reports, would then apply. Penalties similar to those imposed on other sectors would also apply, which would range based on the harm done and the entity’s history of compliance. For example, the range of penalty for a very serious violation would be from $1-$500,000 per violation for an entity.
If adopted, the amendments would come into force 8 months after their publication in the Canada Gazette, Part II. FINTRAC would be expected to release additional guidance specific to the mortgage industry to assist with interpretation of the new requirements. The draft regulations are open for comment until March 20, 2023.
February 28, 2023
Jan 31, 2023 | Investment Funds, Mortgage and Real Estate Investment Vehicles, Regulatory Compliance
On December 8, 2022, the Canadian Securities Administrators (CSA) published amendments (the Amendments) to National Instrument 45-106 Prospectus Exemptions relating to the offering memorandum (OM) prospectus exemption (the OM Exemption). The Amendments will impose significant new and additional disclosure requirements on issuers that are engaged in “real estate activities” (Real Estate Issuers) and issuers that are “collective investment vehicles” (CIVs). The Amendments are intended to clarify the disclosure framework for Real Estate Issuers and CIVs, with the objective of providing better information for investors. We wrote about the proposed amendments (the Proposals) when they were introduced in September 2020.
The Amendments are expected to take effect on March 8, 2023.
1. New Requirements for Real Estate Issuers
The Amendments define “real estate activities”, subject to certain exceptions, as activities, the primary purpose of which is to generate for security holders income or gain from the lease, sale or other disposition of real property. The definition includes property development and real estate activities conducted by subsidiaries of the issuer. Activities relating to mineral, oil and gas projects are excluded from the definition, as are in Québec activities relating to the forms of investments subject to the Regulation Respecting Real Estate Prospectus and Registration Exemptions (Québec).
Independent Appraisal: The Amendments require Real Estate Issuers relying on the OM Exemption to provide to the purchaser, and file with the relevant securities regulatory authorities, an independent appraisal of an interest in real property if one or both of the following apply:
- the issuer proposes to acquire an interest in real property from a related party and a reasonable person would believe that the likelihood of the issuer completing the acquisition is high;
- a value for an interest in real property is disclosed in the OM (other than in the financial statements).
Unlike the Proposals, the appraisal requirement no longer applies to a completed acquisition of an interest in real property from a related party. Similarly, the appraisal requirement will not apply only if the issuer intends to spend a material amount of the proceeds from the offering on an interest in real property.
New Disclosure Schedule: Subject to the de minimis exemption noted below, OMs for Real Estate Issuers relying on the OM exemption will have to include the disclosure required by new Schedule 1 to Form 45-106F2 – Additional Disclosure Requirements for an Issuer Engaged in Real Estate Activities. The schedule applies to each interest in real property held or proposed to be acquired by the issuer (provided a reasonable person would believe that the likelihood of the issuer completing the acquisition is high) and includes the following:
- a detailed description of each property including disclosure of material encumbrances, current and proposed use and occupancy levels;
- detailed disclosure about real estate development projects, such as costs, objectives, timelines and any required approvals;
- the purchase and sale history of real property involving a related party;
- penalties, sanctions, criminal or quasi-criminal proceedings, and/or bankruptcy or insolvency proceedings for parties such as the developer; and
- information about any future cash calls required by investors.
De Minimis Exemption: Most of the disclosure requirements in Schedule 1 will not apply to an interest in real property, or to more than one interest in real property taken together, that when considered in relation to all interests in real property held by the issuer, is not significant enough to influence a decision by a reasonable investor to buy, hold or sell a security of the issuer.
2. New Requirements for Collective Investment Vehicles
The amendments define “collective investment vehicle” as an issuer whose primary purpose is to invest money provided by its security holders in a portfolio of securities other than securities of subsidiaries of the issuer. Issuers that hold portfolios of mortgages, other loans, or receivables would be considered CIVs. The definition also includes investment funds, to the extent they are permitted to use the OM Exemption.
New Disclosure Schedule: New Schedule 2 to Form 45-106F2 – Additional Disclosure Requirements for an Issuer That is a Collective Investment Vehicle will require such issuers to disclose in the OM, among other things:
- the issuer’s investment objectives, strategy and investment criteria;
- detailed description of the portfolio;
- portfolio performance information;
- disclosure of penalty, sanction, criminal or quasi-criminal proceedings, and/or bankruptcy or insolvency proceedings for persons involved in the selection and management of the investments; and
- conflicts of interest.
January 31, 2023
Jan 31, 2023 | COVID-19, Mortgage and Real Estate Investment Vehicles, Regulatory Compliance
On December 7, 2022, the Ontario Securities Commission (OSC) published OSC Staff Notice 45-718 – Ontario’s Exempt Market, a report on capital raised through prospectus exemptions in the province between 2019 and 2021 (the Report). The scope of the Report is limited to non-investment fund issuers (e.g., corporate issuers) and focuses on highlighting key annual trends in exempt market financing activity in Ontario for both investors and issuers. The Report highlights that despite volatility and disruptions in the markets caused by the COVID-19 pandemic, capital raising activity in Ontario’s exempt market has continued to grow since 2019. In fact, in 2021, the use of prospectus exemptions to raise capital almost doubled its pre-pandemic value, hitting a record high of $175 billion.
Key findings in the Report include the following:
- Ontario’s exempt market continues to be primarily composed of institutional investors, accounting for approximately 98% of the capital raised.
- A majority of the capital raised through the exempt market was through institutional investment in foreign and U.S.-based issuers, with much of it being in debt-related offerings.
- In 2021, there were more foreign-based issuers that raised capital from Ontario investors than Canadian issuers.
- Individual investors predominately invested in Ontario and other Canadian issuers, with the majority of investments being made in equity securities.
- Real estate and mortgage-related investments continue to attract an increasing share of individual investor capital, growing from approximately 37% in 2019 to 43% in 2021.
- The most used prospectus exemption continues to be the Accredited Investor Exemption for both individual and institutional investors. However, there has also been an increase in the use of the Offering Memorandum Exemption (OM Exemption) and the Family, Friends and Business Associates Exemption (FFBA Exemption). The OM Exemption continues to be predominately used by real estate and mortgage issuers, while the FFBA Exemption was most used by non-financial issuers, especially mining issuers.
It will be interesting to see if the OM Exemption continues to be as popular following the amendments impacting issuers engaged in real estate activities and collective investment vehicles, which we describe further in the article above.
If you have any questions regarding accessing the exempt market to raise capital or the specifics of any prospectus exemption, please contact us. For more information, please see BLG’s summary on the report notes in “BLG’s Resource Corner” below.
January 31, 2023
Nov 30, 2022 | Investment Funds, Mortgage and Real Estate Investment Vehicles, News, Regulatory Compliance
Our colleagues at BLG have provided the following insights we thought might interest our readers:
For more information, please visit the BLG website.
November 30, 2022
Oct 31, 2022 | Cyber-security and Data Privacy, Investment Funds, Mortgage and Real Estate Investment Vehicles, News, Regulatory Compliance
Our colleagues at BLG have provided the following insights we thought might interest our readers:
We hope you received your invitation to attend (either in person or virtually), BLG’s Investment Management Group annual fall educational seminar and reception. Amongst BLG speakers, two AUM Law speakers will be participating. Bill Donegan will be presenting on implications of the SRO consolidation that can be expected next year and Jason Streicher will be participating on a registrant regulation panel. We hope to see you at BLG’s House for some “Late Night Talking”!
For more information, please visit the BLG website or contact us for details on the seminar.
October 31, 2022
Mar 31, 2022 | Corporate Finance, Mortgage and Real Estate Investment Vehicles, Regulatory Compliance
On February 11, 2022, the Financial Services Regulatory Authority of Ontario (FSRA) announced that it is consulting on guidance that outlines new educational requirements and new licence categories for mortgage agents and mortgage brokers transacting in private mortgages (the Guidance).
The Guidance sets out new proposed licence classes that would be effective April 1, 2023, being mortgage agent level 1, mortgage agent level 2, and mortgage broker. Mortgage agents with a level 1 licence would be permitted to deal and trade in mortgages provided by financial institutions (as defined by the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA)) and lenders approved by the Canada Mortgage and Housing Corporation (CMHC). Mortgage agents with a level 2 licence would be permitted to deal and trade in mortgages provided by financial institutions (as defined in the MBLAA), lenders approved by the CMHC, and all other lenders, such as mortgage investment corporations, syndicates, private individuals, brokers, and brokerages. Mortgage brokers would be permitted to deal and trade in mortgages provided by financial institutions, lenders approved by the CMHC and all other lenders. Mortgage brokers would also be permitted to supervise mortgage agents and could be appointed as the principal broker for a brokerage.
While a mortgage agent level 1 would not need any particular outlined experience, an applicant would have to complete the Mortgage Agent Level 1 Course and apply for a mortgage agent level 1 licence within two years of successfully completing the course. A mortgage agent level 2 would need to have at least 12 months experience over the last 24 months as a mortgage agent level 1 and complete the Mortgage Agent Level 2 Course and the Private Mortgages Course. A mortgage broker would need to have at least 24 months experience over the last 36 months as a mortgage agent level 2 and complete the Mortgage Agent Level 1 Course, Private Mortgages Course and the Broker Course.
There are a number of proposed transition periods for persons licensed under the current requirements which start April 1, 2023, and end March 31, 2024. Certain existing licensees with more than 5 years experience who wish to obtain the mortgage agent level 2 or mortgage broker license may be permitted to take a challenge exam in lieu of the Private Mortgages Course.
The Guidance also includes details on licensing fees, new continuing education requirements that are effective April 1, 2023, labour mobility between provinces, applications for education and experience equivalency, supervision approach and principles, and compliance and enforcement provisions.
Along with the Guidance, draft proposed amendments to the MBLAA reflecting the changes proposed in the Guidance have also been published.
If you have any questions regarding these proposed changes, please contact a member of our team.
March 31, 2022
Sep 30, 2021 | Corporate Finance, Mortgage and Real Estate Investment Vehicles, Regulatory Compliance
On August 18, the Financial Services Regulatory Authority of Ontario (FSRA) released a consultation paper on its draft interpretation relating to a license exemption for mortgage transactions between sophisticated entities. The draft provides FSRA’s interpretation of an exemption from licensing under the Mortgage Brokerages, Lenders and Administrators Act, 2006 that applies to non-individual permitted clients that deal or trade in mortgages with or lend exclusively to other non-individual permitted clients. The exemption is available on the premise that the risk of consumer harm is limited as such transactions do not involve individual consumers and non-individual permitted clients are presumed to have sufficient experience and knowledge, as well as the financial resources, to manage the risks of mortgage-related investment transactions. The interpretation guidance confirms that FSRA will generally look to the definition of a “permitted client” under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations for this purpose, and that a non-individual should also refer to that definition as to whether they satisfy the intent of what would qualify as a non-individual permitted client (which FSRA indicates is not exhaustive). The draft interpretation guidance also provides examples of the type of transactions that would fit within the ambit of the exemption.
September 30, 2021
Aug 31, 2021 | Investment Funds, Mortgage and Real Estate Investment Vehicles, Regulatory Compliance
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
Jun 30, 2021 | Corporate Finance, FAQs, Mortgage and Real Estate Investment Vehicles, Regulatory Compliance
Answer: As of July 1, 2021, the OSC will have regulatory oversight over the distribution of NQSMIs to persons that are not permitted clients. Firms distributing NQSMIs to investors that are not permitted clients will need to rely on another available prospectus exemption and will need to be registered as an exempt market dealer (EMD) or engage the services of a third-party EMD (or rely on an available exemption). FSRA will retain regulatory oversight over the distribution of NQSMIs to permitted clients (although there is no prohibition on EMDs distributing NQSMIs to permitted clients under the OSC’s regime).
FSRA requires the filing of a quarterly report containing certain data about each NQSMI with permitted clients. Firms that distribute NQSMIs in reliance on the “accredited investor” prospectus exemption or the “offering memorandum” prospectus exemption will need to file a report of exempt distribution with the OSC (and any other applicable securities regulators) within 10 days of the distribution. Issuers relying on the “offering memorandum” prospectus exemption will need to comply with certain supplemental disclosure obligations and will also need to prepare audited financial statements. Although there are no prescribed disclosure requirements for issuers relying on the “accredited investor” prospectus exemption, be aware that presentations and marketing materials could fall within the broad definition of “offering memorandum” which exposes the issuer to potential liability for misrepresentation and triggers the need to include a summary of applicable damages and rescission rights and to file a copy of the materials with the OSC within 10 days of the distribution.
EMDs distributing NQSMIs must comply with know-your-client, know-your-product and suitability obligations as well as conflicts of interest and client relationship disclosure. While the OSC does not require prescribed forms, the OSC expects registrants to perform a meaningful suitability assessment and to appropriately document that assessment. If you have any questions about the changes to the treatment of NQSMIs, please contact your usual lawyer at AUM Law.
June 30, 2021
Apr 30, 2021 | Mortgage and Real Estate Investment Vehicles, Regulatory Compliance
On March 12, 2021, the Financial Services Regulatory Authority of Ontario (FSRA) published its first quarterly scorecard on its service standard performance. FSRA has 22 service standards to support core regulatory services. The standards measure operational and regulatory activities that FSRA provides to industry and consumer stakeholders, such as licence renewals, regulatory applications, complaints resolution and annual information returns. The standards set service expectations and targets for stakeholders and consumers under normal conditions and are intended to improve accountability and timeliness of service delivery. According to the results for Q3 of 2020:
- FSRA met or exceeded service targets for 80 per cent of its standards over the reporting period.
- Standards that fell below target were related to complaints, licence applications processing (including mortgage broker licensing) and pension applications processing.
- The below-target performance is an outcome of FSRA adopting new service processes mid-quarter. The processes required staff to adapt to new steps and technology.
- Where FSRA fell below target, it has identified mitigation plans. FSRA intends to continue to conduct staff training on the new processes and expects performance scores in all three areas to improve in subsequent quarters.
FSRA intends to monitor quarterly scores and adapt standards to its regulatory activities, resources and the needs of stakeholders. In the fall, as part of its 2022-2023 business planning/budgeting process, FSRA will seek comments regarding the need for additional resources to meet higher standards. The service standards will undergo a full review in early 2022.
April 30, 2021
Apr 30, 2021 | Corporate Finance, Investment Funds, Mortgage and Real Estate Investment Vehicles, News, Regulatory Compliance
As reported in our December 2020 bulletin, on December 7, the Ontario Securities Commission (OSC) released the final amendments to OSC Rule 45-501 Ontario Prospectus and Registration Exemptions (Amendments). The Amendments form part of the changes across Canada which, in Ontario, will have as one of their effects the transfer from the Financial Services Regulatory Authority of Ontario (FSRA) to the OSC of regulatory oversight over the distribution of non-qualified syndicated mortgages (NQSMIs) to persons that are not permitted clients.
On February 25, 2021, the Canadian Securities Administrators (CSA) published CSA Staff Notice 45-328 Update on Amendments relating to Syndicated Mortgages. In that notice, the CSA confirmed that the Amendments and the amendments in the local jurisdictions to the syndicated mortgage rules, took effect in all jurisdictions on March 1, 2021, except in Ontario and Quebec where the amendments are expected to take effect on July 1, 2021.
Accordingly, if a firm trading syndicated mortgages is operating only in Ontario or Quebec, they have until July 1, 2021 to comply with the Amendments. Firms operating in all other Canadian jurisdictions needed to comply with the Amendments by March 1, 2021.
Furthermore, on March 10, 2021, FSRA released final approach guidance (the “SMI Guidance”) for supervising mortgage brokerages and administrators that engage in NQSMIs. FSRA consulted on the proposed guidance in August-September 2020. The SMI Guidance will apply to: (a) mortgage brokerages dealing and/or trading in NQSMs with permitted clients on or after July 1, 2021; (b) mortgage brokerages acting on behalf of the borrower in NQSMIs with investors/lenders that are non-permitted clients; (c) mortgage brokerages that dealt and/or traded in legacy NQSMIs (conducted prior to July 1, 2021); and (d) mortgage administrators administering NQSMIs. The SMI Guidance highlights the division of regulatory oversight of NQSMIs, risk profile factors for mortgage brokerages, administrators and NQSMIs, information required for the quarterly data report for NQSMIs with permitted clients and data collection for legacy NQSMIs. Firms in Ontario dealing and/or trading in NQSMIs or mortgage administrators administering NQSMIs will want to review the final guidance in detail. Please don’t hesitate to contact your usual lawyer at AUM Law.
April 30, 2021
