Category: Regulatory Compliance

OSC Publishes its 2021 Annual Report – What you Need to Know

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

IIROC Releases Draft Competency Profiles for Directors, Executives, UDPs, CCOs and CFOs

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

Québec Consults on the Complaint Handling Process

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

CPAB Consults on its Disclosure of Audit Firm Reviews

The Canadian Public Accountability Board (CPAB) is seeking comments on potential changes to the type of information it discloses about the results of its assessments of accountants that audit Canadian reporting issuers. Currently, the rules governing CPAB restrict the sharing of inspection findings for individual firms to limited circumstances or with the consent of all impacted parties. The current Protocol for Audit Firm Communication of CPAB Inspection Findings with Audit Committees (Protocol) is voluntary in nature.

CPAB is considering certain disclosure principles, against which any changes are to be evaluated. The principles include improvements in audit quality, timeliness of CPAB reporting and remediation of audit deficiencies, public accountability and cost vs benefit considerations. The consultation seeks input with respect to communication of findings to an issuer’s audit committee, how much information should be included in CPAB’s public reports and whether CPAB should publicly report on its enforcement actions.

With respect to communication with audit committees, the current Protocol allows audit firms to choose to share the results of individual file inspections with the audit committee, although not all audit firms participate in the Protocol. The consultation asks whether the rules should be amended to mandate the sharing of the results of individual audit file inspections with the audit committee, and if such a requirement should apply to all reporting issuers. For public disclosure, CPAB currently publishes two reports a year, which provide a summary of inspection themes and recurring issues, but does not publish its findings individually by firm, and is seeking input on whether and how to do so. Lastly, CPAB seeks comment on whether it should make its enforcement actions public – to date, they have not done so – and with respect to the nature and breadth of such disclosure. CPAB has created a short survey as a potential alternative to comment letters, which are due by the end of September.

September 30, 2021

A Trusted Contact Person and a POA

On July 15, 2021, the Canadian Securities Administrators released Notice of Amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) which contains the final amendments (the Amendments) to NI 31-103 that are intended to improve protection of older and vulnerable clients. One of the ways in which the Amendments aim to do this is by requiring registrants to take reasonable steps to obtain and keep updated the name and contact information of a trusted contact person (TCP) from their clients. For more information on these obligations, please refer to our August bulletin here.

Although not a legal obligation up until now, it has always been considered advisable that a registrant attempt to obtain the TCP information from their clients so that there are individuals other than the clients who can be reached for information or for limited instructions in case the registrant detects or suspects irregularities regarding their affairs, such as diminishing mental capacity or financial exploitation. This would be the case even where the client has a designated attorney under a valid power of attorney (POA). A TCP can serve as a check and balance against the attorney where the attorney happens to be the individual who is exploiting the client.

The Amendments explicitly recognize this notion of the different roles played by the TCP and the attorney by newly defining the term trusted contact person as “an individual identified by a client to a registrant whom the registrant may contact in accordance with the client’s written consent”. The Amendments also add a discussion in the Companion Policy to NI 31-103 suggesting that an attorney under a POA could be an individual who is close to and may exploit a vulnerable client and a statement that a TCP does not replace or assume the role of a client-designated attorney under a POA.

In short, despite some overlaps in the respective roles of a TCP and an attorney, the two are distinct categories, and upon the expected coming into effect of the Amendments on December 31, 2021, registrants will be obligated to take reasonable steps to obtain the TCP information at account opening and keep such information updated as part of their KYC information update process, regardless of whether the client has an attorney or not.

September 30, 2021

Canadian Securities Regulators Announce Launch of Refreshed Website

On September 13, 2021, the Canadian Securities Administrators (CSA) announced the launch of its newly refreshed website as part of its continued efforts to streamline and enhance the information and resources available to market participants. The website is intended to be easier to navigate, be mobile friendly and includes an expanded search feature. In addition, the site has been optimized to meet web accessibility guidelines and lays the groundwork needed for the transition of a number of CSA databases to SEDAR+.

The refreshed website contains a helpful Resources section under which one can easily find useful information including rules and policies, frequently asked questions regarding the client focused reforms as well as the CSA Guide to Monthly Suppression of Terrorism and Canadian Sanctions Reporting.

September 30, 2021

NRD Filing Reminders

We would like to remind our clients of a few items to consider with respect to their NRD filing obligations, so that filings are made (and approved) as quickly as possible.

When filing a new individual registration on Form 33-109F4 – Registration of Individuals and Review of Permitted Individuals (F4), it is important to disclose in Item 1.2 – Use of Other Names whether or not you use a “nickname” or short form name (e.g., “Jay” for “Jason”). In our experience, this question is often raised by regulatory staff when they come across a name other than the legal name in the application package and could lead to delays.

Another housekeeping item to remember when completing an F4 relates to disclosure of past employment history. While Item 11 of the F4 requires that disclosure of previous employment and other activities during the last 10 years be included in Schedule H, the Schedule itself indicates that if you were employed or had business activities in the securities or derivatives industry, those jobs and activities must also be disclosed, even if they are outside the 10-year window.

If you have any questions about navigating the registration process in a practical manner, please contact us.

September 30, 2021

Minor Amendments to the STCS Guide

Please note that there have been some small amendments to the CSA Guide to Suppression of Terrorism and Canadian Sanctions Reporting (STCS) applicable to registered firms, exempt dealers and exempt advisers. The STCS has been amended to reflect the fact that as of June 30, 2021, the Justice for the Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law) no longer requires a monthly “nil” report to be filed with a registered firm’s principal regulator. Now, a report is only required to be filed under that Act where a registered firm determines that it is in fact in possession of property of a designated person. A “nil” report is still required to be filed under the Criminal Code (Canada) on a monthly basis, by the 14th day of each month to the firm’s principal regulator. The CSA’s revised guidance can be found here.

September 30, 2021

FSRA’s Proposed Guidance on Exemption from Mortgage Brokerage License Requirements

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

PMAC Fall Regulatory and Compliance Webcast – October 21

AUM Law is a proud sponsor of the Fall Regulatory and Compliance Webcast organized by the Portfolio Management Association of Canada (PMAC) on October 21. Click here to register for the event. AUM Law’s very own Richard Roskies will participate as a speaker to discuss the top compliance challenges and priorities for the next 6-12 months. We hope to (virtually) see you there and don’t forget to drop into our online booth for a chat.

FSRA Proposes Approach Guidance for Publication of Enforcement Proceedings

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

CSA Proposes a New Prospectus Exemption for Canadian-listed Issuers

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

CSA Proposes Amendments to Guidance for Financial Statements in Long Form Prospectuses

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