Category: Regulatory Compliance
On May 28, the International Organization of Securities Commissions (IOSCO) published for comment revised Principles on Outsourcing (Revised Principles). Previously, IOSCO had issued outsourcing principles for market intermediaries (2005) and markets (2009). The proposed Revised Principles consolidate and build on this earlier work, expand the scope of coverage (e.g. to include credit rating agencies, market participants acting on a proprietary basis and financial market infrastructures), and update the content to reflect technological and market developments. We think that market participants may find the proposed, Revised Principles a helpful source of guidance on evolving standards for outsourcing in the securities industry.
The seven Revised Principles and related implementation guidance cover:
- Due diligence in selecting and monitoring service providers;
- Contracts with service providers;
- Information security, business resilience, continuity and disaster recovery;
- Confidentiality issues;
- Concentration of outsourcing arrangements;
- Access to data, premises, personnel and associated rights of inspection; and
- Termination of outsourcing arrangements.
The consultation deadline is October 1. If you have any questions about the proposed, Revised Principles, please do not hesitate to contact us.
June 30, 2020
On May 30, the Canadian Securities Administrators (CSA) announced that most member regulators including the Ontario Securities Commission (Participating Jurisdictions) had issued temporary blanket relief (Temporary Relief) from certain financial statement and information delivery requirements for periodic filings normally required to be made between June 2, 2020 and September 30, 2020. The blanket relief extends the deadlines for 60 days. It applies to registrants and, in Ontario, unregistered capital markets participants (such as unregistered investment fund managers and unregistered, exempt international firms) that rely upon certain registration exemptions. The conditions of the Temporary Relief are substantially the same as the temporary relief granted on March 23 (Prior Relief), as we described in our March 2020 article on this topic. Firms cannot rely on the Temporary Relief to extend any deadline previously extended under the Prior Relief.
Separately, the Manitoba Securities Commission and Québec Autorité des Marchés Financiers (AMF) issued temporary blanket relief from certain financial statement and information delivery requirements for registrants whose principal regulator is one of the participating jurisdictions.
Please contact us if you have any questions about the Temporary Relief, other requirements and temporary exemptions, and/or other operational changes adopted by CSA members regarding COVID-19 that may affect your business. We can help you assess your options and, if necessary, engage with regulators on your behalf.
June 30, 2020
On June 25, the International Organization of Securities Commissions (IOSCO) published a draft report and proposed guidance (Report) regarding asset managers and market intermediaries’ use of artificial intelligence (AI), including machine learning (ML). It’s a useful reference document to help you stay informed on evolving firm practices, as well as regulatory concerns and approaches, in this area.
The Report is based on IOSCO’s survey of and discussions about AI and ML with asset managers and market intermediaries. It analyzes how firms are using the relevant technologies, outlines the potential benefits and risks, and describes how firms are addressing those risks. The report also includes appendices describing how various regulators (including Canadian securities regulators) are addressing AI and ML risks and summarizes guidance in this area published by international organizations such as the Financial Stability Board.
IOSCO is seeking feedback on six proposed regulatory measures (Measures). Three of the measures are framed as proposed requirements that IOSCO believe regulators should adopt:
- Test and monitor algorithms: Regulators should require firms to test and monitor the algorithms to validate the results of any AI and ML technique on a continuous basis. Testing should be conducted in an environment that is segregated from the live environment before deployment to ensure that AI and ML behave as expected in stressed and unstressed market conditions and operate in a way that complies with regulatory obligations.
- Competence: Regulators should require firms to have adequate skills, expertise and experience to develop, test, deploy, monitor and oversee the controls over the AI and ML that the firm uses. Compliance and risk management functions should be able to understand and challenge the algorithms that are produced and conduct due diligence on any third-party provider, including on the level of knowledge, expertise, and experience present.
- Oversight of third parties: Regulators should require firms to understand their reliance upon, and manage their relationship with, third party providers, including monitoring their performance and conducting oversight. This includes having clear service-level agreements and contracts that clarify the scope of any outsourced functions and the third party’s responsibilities and that specify clear performance indicators and “sanctions” for poor performance.
The other proposed Measures are framed in softer language, which may indicate a lack of consensus among IOSCO members regarding the universal necessity for such requirements:
- Senior management responsible for AI/ML and its controls: Regulators should consider requiring firms to have designated senior management responsible for overseeing the development, testing, deployment and monitoring of, and controls for, AI and ML. This includes having a documented internal governance framework and having appropriately senior individuals with relevant skills and knowledge sign off on the technology’s initial deployment and any substantial updates.
- Disclosure and regulatory reporting: Regulators should consider what level of disclosure they should require firms to provide about their use of AI and ML. Among other things, regulators should consider:
- Requiring firms to disclose meaningful information to customers and clients around their use of AI and ML that impact client outcomes; and
- What information the regulators may require from firms using AI and ML to ensure they can have appropriate oversight of those firms.
- Data quality controls: Regulators should consider requiring firms to have appropriate data quality controls so that data on whose performance the AI and ML depends is of sufficient quality to prevent bias and sufficiently broad to ensure a well-founded application of AI and ML.
Although the Measures won’t be binding on IOSCO member regulators, we expect that the Ontario Securities Commission (OSC) and other Canadian securities regulators likely will take the final version of the Measures into account when they interpret existing rules and consider regulatory reforms.
The comment deadline is October 26, 2020. If you have questions about the Report or are interested in discussing how evolving regulatory expectations in this area might affect your business, please contact us.
June 30, 2020
A. Priorities for the Coming Year
On June 25, the Ontario Securities Commission (OSC) published its annual Statement of Priorities (SOP). As we mentioned in our April bulletin, COVID-19 and the related market uncertainty caused the OSC to forego its usual substantive consultation on priorities. Instead, the OSC used last year’s SOP, its plans flowing from its burden reduction initiative and its routine engagements with stakeholders to develop its 2020-21 priorities. Consequently, there are very few surprises in this year’s final SOP. We’ve summarized below key initiatives that we believe will be of interest to our readers.
Client-focused Reforms: The OSC will work with other members of the Canadian Securities Administrators (CSA) and the self-regulatory organizations (SROs) to help registrants operationalize the amendments.
Seniors Strategy: The OSC will continue to implement its Seniors Strategy, including continuing with its consultation on proposed changes to the regulatory framework to address financial exploitation and cognitive decline among older and vulnerable investors. (See our March 2020 article on this consultation.)
Leverage in the Asset Management Industry: Working with other members of the International Organization of Securities Commissions (IOSCO), the OSC plans to design and implement enhanced data collection to monitor vulnerabilities associated with the asset management industry’s use of leverage.
OTC Derivatives: The OSC plans to:
- Publish (with Ministry pre-approval) amendments to the business conduct rule for over-the-counter (OTC) derivatives, limiting the rule’s scope and outlining jurisdictions that will be granted equivalency;
- Work with the CSA on the next version of the proposed OTC derivatives dealer registration rule;
- Conduct compliance reviews of the OTC derivatives rules on trade reporting, clearing, segregation and portability; and
- Develop and implement a framework to analyze OTC derivatives data for systemic risk and market conduct purposes.
Continue Policy Work on Embedded Commissions: The OSC will continue working within the CSA and on its own regarding rule reforms affecting mutual fund deferred sales charges (DSCs) and order execution-only embedded commissions.
Retrospective Reviews of Rulemaking: As part of its efforts to enhance its economically-focused rulemaking, the OSC plans to conduct restrospective reviews of past regulatory changes to see if the intended objectives were achieved.
Re-Consider the SRO Framework: As discussed elsewhere in this bulletin, the CSA has launched a consultation on the SRO framework. The OSC also plans to work on clarifying and streamlining the SROs’ recognition orders and memoranda of understanding.
Office of Economic Growth and Innovation (OEGI): The OSC plans to have the OEGI fully operational and delivering on its mandate by fiscal year-end 2021. This includes having the OEGI conduct outreach with market participants to identify further, potential burden reduction opportunities.
CSA National Systems: The OSC will support the CSA in its implementation of revised national systems (i.e. SEDAR, SEDI and NRD) under the name SEDAR+. It also will work with CSA members to amend the operational and fee rules governing CSA systems.
Modernize the OSC’s Technology Platform: The OSC will continue redeveloping its website, implementing its information security program, and adding more tools and technology to enable to staff to work more effectively and efficiently from home.
B. 2019-2020 Report Card
The OSC also published its 2019-2020 OSC Statement of Priorities Report Card (Report Card). Chief Compliance Officers (CCOs) may find it useful to skim the Report Card because it consolidates into a single document status reports on the OSC’s regulatory and operational initiatives from the past fiscal year. It also highlights some “in progress” initiatives that the OSC expects to deliver in the coming year. Notably, the Report Card indicates that the OSC expects proposed reforms to the regulatory framework governing registrants’ other business activities (OBAs) to be published for comment in the fall of 2020.
C. Be Prepared for the OSC to Shift Its Stated Priorities
Market participants should always be prepared for the OSC to adjust its priorities in light of significant emerging issues. This year more than ever, however, market participants should be prepared for surprises. The OSC has also indicated that it expects to adjust and re-align its priorities throughout the coming year to accommodate changes resulting from the impact of COVID-19 as well as the outcomes of the Ontario Government’s Capital Markets Modernization Task Force.
Please contact us if you would like to discuss how the OSC’s priorities and goals for the coming year might affect your business.
June 30, 2020
On June 10, the Canadian Securities Administrators (CSA) announced steps, effective immediately, to make it easier for advising representatives (ARs) of portfolio managers (PMs) to register as client relationship management (CRM) specialists. Until now, CSA members required all applicants for registration as ARs to have stock-picking expertise and expected applicants for registration as associate advising representatives (AARs) to accumulate such expertise to become eligible to register as ARs.
Now, when a PM sponsors an individual for registration as an AR or AAR, the PM can identify the individual as a CRM specialist whose advice to clients will not include stock-picking. If the individual’s application for registration is accepted, it will include terms and conditions prohibiting them from providing stock-picking advice and requiring them to tell clients about the limits of the advice they can give. A PM will be expected to have at least one individual registered as a “full AR”. The CSA has also developed standard terms and conditions for CRM specialists so that regulatory expectations are clear and consistent.
Although this change in regulatory practice addresses the relevant investment management experience (RIME) requirement for registration, applicants in these registration categories will still have to meet the applicable education requirements. For example, to be an AR-CRM, the individual will have to be a Chartered Financial Analyst (CFA) or hold the Canadian Investment Management (CIM) designation).
The approach described above to registering individuals as AR-CRMs or AAR-CRMs reflects a change in regulatory practice. The CSA has not created a new registration category for CRMs at this time.
AUM Law has extensive experience helping firms and individuals navigate the registration process. We can help you assess the pros, cons and probability of succeeding with an application for individual registration in various categories and then prepare your application and engage with regulators on your behalf. Please contact us to discuss your options.
June 30, 2020
On June 25, the Canadian Securities Administrators (CSA) published a consultation paper (Consultation Paper) seeking feedback on whether the current framework for self-regulatory organizations (SROs) should be reformed. As our readers know, the existing system requires investment dealers to be members of the Investment Industry Regulatory Organization of Canada (IIROC) and requires most mutual fund dealers (except those in Québec) to be members of the Mutual Fund Dealers Association of Canada (MFDA). CSA members directly regulate and oversee exempt market dealers (EMDs), investment fund managers (IFMs), portfolio managers (PMs), and scholarship plan dealers (SPDs).
The Consultation Paper is the latest in a series of publications considering whether the existing SRO system should be reformed. In February, we discussed the MFDA’s proposal that the CSA take over direct oversight of markets while giving up direct oversight of EMDs, SPDs and certain PMs to a new self-regulatory organization (NewCo) that would take on direct responsibility for the registration, business conduct, prudential oversight, policymaking and enforcement functions of the registrants mentioned above, plus those currently overseen by IIROC and the MFDA. More recently, IIROC proposed that IIROC and MFDA be brought together as divisions of a consolidated SRO.
At this stage, the CSA is not recommending any particular regulatory model or reforms. Instead, the Consultation Paper describes the existing SRO framework, summarizes the results of the CSA’s recent consultations with stakeholders, and seeks feedback on the issues raised by those consultations. According to the Consultation Paper, many stakeholders commended the SROs’ specialized expertise and the benefits of their national scope. However, they also raised some concerns about the existing system, including the following:
- Product-based regulation: Some stakeholders think that there is an unlevel playing field and potential for regulatory arbitrage because similar products and services are subject to different rules, or differing interpretations of similar rules, depending on which organization’s rules apply.
- Duplicative operating costs: There also are concerns that the lack of common oversight standards and differing interpretations of similar rules have led to duplicative operating costs for dealers who operate under both the IIROC and MFDA platforms.
- Structural inflexibility: Some stakeholders think that the existing framework makes it harder for dealers to accommodate evolving investor preferences (e.g. to access a wider range of products from a single registrant), creates succession planning challenges for mutual fund dealers and their representatives (because of the limited product shelf they can offer their clients), and/or limits investment dealers’ ability to grow their businesses due to difficulties in attracting mutual fund dealing representatives because of the additional proficiency requirements.
- Investor confusion: Investors and their advocates stated that layers of regulation have contributed to investor confusion because investors can’t access a broad range of products from one representative and/or are unsure whom to turn to if an issue arises.
- Public confidence in SRO system: Some stakeholders see this project as an opportunity to enhance the SROs’ governance structures to focus on their public interest mandates and strengthen complaint resolution mechanisms.
Although the Consultation is likely to be of particular interest to IIROC and MFDA members, this initiative has the potential to reshape in fundamental ways the regulatory environment for all registrants, including firms and individuals currently subject to direct regulation and oversight by the CSA. The deadline to submit comments is October 23. If you would like to discuss the Consultation and its potential impact on your business, please contact your usual lawyer at AUM Law.
June 30, 2020
On May 20, the Canadian Securities Administrators (CSA) issued substantially harmonized blanket orders giving investment funds and other issuers temporary relief from certain regulatory and filing obligations. The conditions of relief are similar to the blanket orders issued in late March, except that the relief applies only to issuers with filing deadlines as noted below:
- Investment fund issuers: The OSC’s blanket order for investment funds (Funds Blanket Order) provides a 60-day extension for certain filing, delivery and prospectus renewal requirements normally required to be made between June 2 and September 30, 2020. If an investment fund wishes to rely on the Funds Blanket Order, it must, as soon as reasonably practicable and in advance the relevant delivery, filing or renewal deadline: (a) notify its regulator by email that it is relying upon the Funds Blanket Order and each requirement for which it is relying upon that order; and (b) post a statement on its public website or public website of its investment fund manager indicating that it is relying upon the Funds Blanket Order and listing each requirement for which it is relying on upon that order.
- Non-investment fund issuers have a 45-day extension for certain filing, delivery and base shelf prospectus renewal obligations normally due or required to be made between June 2 and August 31, 2020.
- Issuers can’t further extend pre-June 2 deadlines: An issuer cannot rely on the blanket relief to further extend a deadline occurring before on or before June 1.
On May 29, the CSA issued substantially harmonized blanket orders giving registrants and certain unregistered capital markets participants relief from certain financial statement and information delivery deadlines. The blanket orders provide a 60-day extension for periodic filings normally required to be made between June 2, 2020 and September 30, 2020 by registrants and, in Ontario, unregistered capital markets participants that rely upon certain registration exemptions such as unregistered investment fund managers (IFMs) and unregistered exempt international firms. The extension applies automatically, without any terms and conditions. Registrants and unregistered capital markets participants that have already used the prior relief to extend their deadline for any financial statement or information delivery requirements occurring on or before June 1, 2020, cannot use this relief to further extend that deadline.
Please contact us if you have any questions about the blanket orders described above. We can help you assess your options and, if necessary, engage with regulators on your behalf.
May 29, 2020
Last November, we wrote about the Ontario Securities Commission (OSC) report Reducing Regulatory Burden in Ontario’s Capital Markets. On May 27, the OSC published a progress report (Report) on these initiatives. Of the 107 initiatives described in the original report, 27% have been completed, 36% are on track, and 37% of them are delayed (nine of them due to COVID-19). We think the following updates will be of particular interest to our readers:
Registrant Regulation: The good news is that 23 of the 30 registrant-related initiatives are complete (14) or in progress and on-track (9). All the initiatives relating to compliance reviews are complete. Delayed initiatives include:
- Developing a rule to exempt international dealers, advisers and sub-advisers from registration under the Commodity Futures Act (Ontario) (CFA); and
- Evaluating options to reduce duplication in certain regulatory processes for firms that are members of the Investment Industry Regulatory Organization of Canada (IIROC).
Investment Funds: Unlike the registrant regulation-related initiatives, a majority (16) of the 24 investment funds-related initiatives have been delayed, while five have been completed and four are in progress and on-track. The delayed items include changes to the investment funds prospectus regime and some of the continuous disclosure initiatives. Most of the completed items relate to discrete projects such as:
- Finalizing an exemptive relief precedent to allow an investment fund to have more than one custodian;
- Codifying relief to allow any body corporate that is an investment fund manager (IFM) to act as a trustee of any pooled fund organized as a mutual fund trust in Ontario that it manages; and
- Adopting an internal process at the OSC to ensure the use of sunset clauses in exemptive relief decisions only where appropriate.
Derivatives Participants: Of the eighteen initiatives concerning derivatives participants, only two are complete, while eight are in progress and on-track, and eight are delayed. Among other things, the OSC expects to:
- Complete its review of how proficiency requirements apply to registered advising representatives (ARs) advising in recognized options and determine whether to provide clarification (Fall 2020); and
- Complete its review of the existing registration regime to determine whether regulatory gaps can be addressed by measures less burdensome than an over-the-counter (OTC) derivatives registration rule (Spring 2020).
AUM Law will continue monitoring the progress of the OSC’s burden reduction initiatives and keep you informed.
May 29, 2020
During the Spring Regulatory and Compliance Webinar organized by the Portfolio Management Association of Canada (PMAC) on May 27, a member of the Compliance and Registrant Regulation Branch (Branch) at the Ontario Securities Commission (OSC) updated attendees on the Branch’s programs and what registrants can expect in the coming months. We think that our readers will be interested in the following:
- Compliance audits re-booted:The Branch is re-starting regulatory compliance audits this week. They will be conducted remotely, and firms can expect to have more time (e.g. 45 days as opposed to 30 days) to respond to deficiencies.
- Privacy and cyber security risks arising from the shift to remote work during the pandemic will be an area of regulatory focus in compliance audits. (See our March 2020 and April 2020 bulletin articles, which discussed these risks.) Among other things, if firms haven’t already done so, they should consider arranging for secure document removal from employees’ homes and destruction of files as appropriate.
- Working capital: Registered firms should stay on top of their working capital. If there are potential issues resulting from COVID-19, firms should engage proactively with their regulators.
- Are you registered everywhere you need to be? Branch staff have observed an uptick in registrable activity by registrants in jurisdictions where the firms and relevant individuals are not registered. OSC staff will report such activity to the local regulator.
- Some CCO reports need improvement: Branch staff have observed that some chief compliance officers (CCOs) are not complying with the requirement in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Requirements to provide the registrant’s board of directors with an annual compliance report (CCO Report) or are preparing only a cursory report. Branch staff expect all firms, even one-person firms, to produce comprehensive CCO Reports every year describing how their firms are meeting their securities law obligations.
- Registration of client relationship managers: We expect the OSC to announce very soon a protocol for registering client relationship managers as Associate Advising Representatives subject to certain terms and conditions.
Post-COVID work arrangements: Although the topic did not come up during the PMAC conference, it is our understanding that, to date, registered firms have not been expected to register any remote work locations (such as home offices) that have been set up in response to the authorities’ COVID 19-related restrictions or recommendations for workplaces. As COVID-19 goes on for an extended period, as well as Post-COVID-19, if any of a firm’s individuals make working from home, or another location that isn’t already approved as a branch office, more permanent, the firm should consider whether it needs to register new branch offices.
As the OSC moves toward a “business almost as usual” state, AUM Law stands ready to help registered firms meet their existing obligations and address emerging risks and evolving regulatory expectations. For example, we can conduct focused compliance risk assessments in areas of interest to the regulators and help draft (or improve) your CCO Report. We are also helping firms and individuals with registration applications, and we can help you, too. Please do not hesitate to contact us.
Correction: The paragraph on Post-COVID work arrangements reflects our understanding of expectations for registered firms on this topic. However, in an earlier version of this article (published on May 29), we incorrectly attributed those views to the OSC representative who spoke at the webinar.
June 9, 2020
On May 12, the Financial Services Regulatory Authority of Ontario (FSRA) issued guidance (Guidance) for mortgage administrators (Administrators) and mortgage brokers (Brokers) regarding their disclosure and other obligations in respect of mortgage-based investments during significant market disruptions, such as the COVID-19 pandemic.
The first notice, Mortgage Administrators – Responses to Market Disruptions (Administrator Notice), sets out FSRA’s interpretation of Administrators’ obligations under Mortgage Brokerages, Lenders and Administrators Act 2006 (MBLAA) to protect investors/lenders in mortgages/mortgage investments during significant market disruptions. For example:
- Notify investors/lenders:The Administrator must promptly notify investors/lenders of a borrower defaulting under the mortgage or any significant change to circumstances affecting a mortgage. If an investor/lender is a mortgage investment corporation (MIC) or other mortgage investment entity (MIE), the Administrator must notify that entity. The Administrator Notice includes examples of events that trigger this disclosure requirement, such as potential forbearance, a material delay in the development of a project being funded by the mortgage, or a change in the ability of investors or lenders to redeem prior to the mortgage investment’s maturity. The Administrator Notice also describes good practices that an Administrator should follow to keep current on the financial status of the mortgages and underlying properties in the portfolio and to communicate effectively with investors/lenders.
- Adhere to administration agreements:During the COVID-19 pandemic, more borrowers are requesting modifications to their mortgage terms. Administrators should review their administration agreements to confirm the scope of any discretion that they have to modify mortgage terms and they must adhere to those terms. They also should carefully document any exercise of such discretion. If the agreement does not authorize them to modify mortgage terms, an administrator faced with a request from the borrower to modify terms must review the requirements under the MBLAA and related regulations regarding the notice to be provided to the investors / lenders and obtain approval for the modifications.
The second notice, Mortgage Brokerage Disclosure and Suitability Assessments for Non-Qualified Syndicated Mortgage Investments (SMIs) – Responses to Market Disruptions (Broker Notice), discusses Brokers’ obligations to:
- Disclose material risks arising from the current market disruption to investors in non-qualified syndicated mortgage investments (NQSMIs); and
- Consider the current market disruption when assessing the suitability of an NQSMI to an investor.
The Broker Notice includes a non-exhaustive list of risks associated with a market disruption that FSRA considers material. These are similar to the “significant changes in circumstances” outlined in the Administrator Notice. The Broker Notice also emphasizes that Brokers must consider whether any property appraisals prepared for syndicated mortgage investments (SMIs) before the market disruption reflect the property’s market or current value and make investors/lenders aware of the risks of relying on any appraisal that either predates the market disruption or does not consider the market disruption’s impact on the property valuation. Also, if the appraisal contains any limitation statements, the Broker must bring those statements to the attention of the investor/lender. The Broker Guidance also states that Brokers must take into account the potential impacts of a market disruption on an SMI, its probable future performance, and the investor/lender’s unique circumstances when they assess the suitability of an SMI for an investor-lender.
Although not directly applicable to exempt market dealers (EMDs), the Guidance also may be useful to firms conducting suitability assessments with respect to MIE securities. Likewise, firms that operate MIEs might want to consider the Guidance when assessing whether to update the descriptions in their offering documents regardig risk factors, descriptions of the MIE’s mortgage portfolio, and/or changes to redemption rights.
AUM Law can help you assess the impact of the Guidance on your business, advise you on your disclosure obligations and help you prepare the required disclosures, as well as update your policies and procedures to incorporate these publications. Please do not hesitate to contact us for assistance.
May 29, 2020
In March, the Ontario Securities Commission (OSC) announced that due to COVID-19, it was postponing the 2020 Risk Assessment Questionnaire (RAQ) cycle until further notice. On May 28, chief compliance officers (CCOs) of registrants were notified that they will receive the RAQ on June 11, with responses due on August 6. The 2020 RAQ will ask for information for the periods ending December 31, 2018 and December 31, 2019.
In our January 2020 bulletin, we highlighted a number of changes that the OSC is introducing for the 2020 RAQ, including pre-population of the questionnaire with some of the answers from firms’ 2018 RAQ responses and data security enhancements.
But wait, there’s more: Because the 2020 RAQ will not cover the period when registrants were dealing with COVID-19, the OSC also will send out a short survey (Survey) on July 9, 2020 to gather information from January 1 to June 30, 2020 regarding COVID-19’s impact on each registered firm. The Survey will be sent to firms domiciled in Ontario, as well as to some firms where the OSC is not the principal regulator because the OSC is collecting the information for those other regulators. The deadline for completion also will be August 6, 2020.
We encourage firms to re-start their planning for this exercise now, if they haven’t already done so, and to schedule time with key individuals including the ultimate designated person (UDP) to review and sign off on the completed questionnaire. AUM Law has had extensive experience helping firms prepare their RAQs. If you would like us to help you complete this year’s RAQ and the Survey, please contact us for a fixed-fee quote.
May 29, 2020
On May 11, the Investment Industry Regulatory Organization of Canada (IIROC) published its 2019 Enforcement Report (Report). Although the Report will be of greatest interest to IIROC members, we think that other registered firms will find certain parts of the Report relevant. We have summarized below some of the Report’s enforcement case studies, which highlight some areas of continuing concern for regulators.
- Unauthorized Discretionary Trading: A father and son team at BMO Nesbitt Burns executed at least 7,000 discretionary trades in approximately 100 client accounts, even though the father did not have IIROC’s approval to manage discretionary accounts and BMO had not authorized any of the accounts for discretionary trading. The duo also took steps to prevent the Compliance Department from spotting the unauthorized activity. The settlement provided for, among other things, fines ($40,000 and $30,000, respectively), prohibition of approval (30 months and 16 months, respectively), close supervision (12 months and 6 months, respectively), and costs of $2,500 each.
- Facilitated Suspicious Trading: Two advisors at Hampton Securities facilitated suspicious trading by a group of related accounts and insiders of two TSXV-listed issuers. The advisors received unsolicited orders either from an insider or family member of the issuers, with frequent deposits of large quantities of securities certificates of the two issuers followed by asubsequent sale. The related clients engaged in frequent same-day trading (including trading on opposite sides of the market), which sometimes resulted in no economic benefit. According to IIROC, numerous red flags generated by the trading should have caused the advisors to question the trading or request explanations from their clients about the trades’ legitimacy. As a result, they breached their gatekeeper responsibilities. The settlement provided for, among other things, fines ($50,000 and $20,000, respectively) and costs of $7,500 each.
- Non-Disclosure to Firm of Profit-Sharing and Loan Arrangement with Client: A representative (R) arranged with one of the firm’s clients to loan him $3 million so that he could participate in a bought deal involving his firm. The loan provided for profit-sharing on the transaction. When R’s supervisor questioned him about the source of $3 million, he stated that the funds were a loan collateralized against his condo and didn’t disclose the lender’s identity or the profit-sharing arrangement. In the disciplinary hearing, the panel found that the profit-sharing and loan arrangement created an actual or potential conflict of interest between the client and R and between the client and the firm, that R’s statements to his supervisor were false and misleading, and that failing “to provide true and complete disclosure prevents a firm from being able to fulfil its obligations to respond to existing or potential conflicts of interest.” The Ontario Securities Commission (OSC) dismissed R’s appeal of IIROC’s decision and the sanctions (including a fine of $30,000, disgorgement of approximately $25,000, costs of $24,500, and suspension of approval for two years).
- Is It or Isn’t It an OBA? A representative (T) provided funds to acquire an interest in a trust, which acquired the sole interest in a limited partnership (LP), which then used the funds to acquire interests in oil and gas wells. Revenue from the well was eventually distributed up through this structure to T and other investors. The hearing panel also found that he had misled Enforcement Staff regarding his interest, and a family member’s interest, in the vehicle. During the initial disciplinary hearing, the panel concluded that T did not engage in an unauthorized outside business activity (OBA) because it viewed his involvement as a passive investment. On appeal, however, the British Columbia Securities Commission (BCSC) disagreed with the IIROC hearing panel’s interpretation of the law and held that it wasn’t necessary to find that T managed the OBA in order to find a breach of IIROC’s rules. When the matter was referred back to the IIROC hearing panel, it concluded that the activity was not disclosed to or approved by T’s firm. He was fined $75,000, required to disgorge over $100,000 and pay costs of $80,000. He also had his approval suspended for twelve months and made subject to close supervision for six months upon his re-instatement.
Enforcement case studies like these can serve as a training tool to help compliance and supervisory staff spot red flags and raise awareness among all employees of how the law is interpreted. AUM Law can provide compliance training (including virtual sessions) tailored to your business operations and compliance risk areas. Please contact us find out how we can help.
May 29, 2020
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) prohibits an associate advising representative (AAR) from advising on securities unless that advice has been pre-approved by an advising representative (AR) designated by the firm to review that AAR’s advice.
There is no requirement for an AAR and the AR reviewing that AAR’s advice to work “side by side” in the same office. However, there are potentially greater compliance risks associated with having them work from separate locations, such as in the current environment where many people are working remotely from home. For example, the AR and AAR might be working somewhat different hours as they juggle professional and family responsibilities, and clients concerned about market volatility might be calling them at all hours for reassurance. These factors can make it more challenging for the AR to pre-clear the AAR’s advice to the client. Maintaining organized client files including documentation of the AR’s pre-approval of the AAR’s advice can also be more difficult when people are accessing files remotely.
Nevertheless, it is critical for the firm to have and maintain adequate controls and supervision to ensure compliance with the pre-clearance rule described above. The firm also should document how it has considered and addressed the risks that arise from the AAR and AR working from separate locations, as well as documenting on an ongoing basis the AR’s review and pre-approval of any advice to be provided by the AAR.
The COVID-19 pandemic continues to present regulatory challenges for firms as they operate in this “new normal”. AUM Law is helping clients assess whether their existing policies, procedures and controls address the emerging risks and we can help you too. Please do not hesitate to contact us.
May 29, 2020
In January, we published an FAQ discussing the risks that advising representatives face if they accept an appointment as an executor of a client’s estate. We noted that securities regulators have concerns about the potential conflicts of interest arising in such arrangements. These kinds of concerns are reflected in the recent announcement by the Ontario Securities Commission (OSC) that it is taking enforcement action against a mutual fund dealing representative (M) who agreed to act as his elderly and terminally ill client’s attorney for personal care and property and as executor of her estate, even though he is alleged to have known that he was also a beneficiary under her will.
According to the statement of allegations, M did not comply with his employer’s specific prohibition on accepting powers of attorney from clients such as the client in this case or its requirement to disclose to the firm any actual or potential conflict of interest. The OSC is alleging, among other things, that M failed to deal honestly, fairly and in good faith with the client contrary to subsection 2.1(2) of OSC Rule 31-505 Conditions of Registration and that his conduct was contrary to the rules of the Mutual Fund Dealers Association (MFDA), his employer’s policies and procedures, and the public interest.
AUM Law can assess and, if necessary, help you enhance your firm’s policies, procedures and practices regarding potential conflicts of interest like this. We can also conduct training with your employees to sensitize them to the legal, regulatory and reputational risks associated with accepting such appointments. Please do not hesitate to contact us.