Category: Regulatory Compliance

Regulators Make it Easier for MFDA Reps to Sell Liquid Alt Funds

On January 28, the Canadian Securities Administrators (CSA) issued temporary blanket relief, which is expected to be codified at a later date. This relief expands the list of courses that allow mutual fund dealing reps to sell liquid alt funds thereby increasing investor access to these products. Dealing representatives (and supervisors) in the Mutual Fund Dealers Association (MFDA) channel (and outside the MFDA channel in Québec) now have four additional courses that they can pass in order  to distribute these products – the courses are offered by the Canadian Securities Institute and the IFSE Institute.

January 29, 2021

OSC Issues “Best Practice Guidance” for Prospectus Filings

In March 2020, The Ontario Securities Commission (OSC) has put in place the option of confidentially pre-filing a prospectus, as part of the OSC’s burden reduction initiative. In recent months, the OSC has seen a significant number of confidential pre-files, which provides issuers with greater flexibility and more certainty in planning their prospectus offerings. The best practices recommended by the OSC include (i) pre-filed prospectuses should contain all financial and non-financial disclosure, (ii) a timeline should be included in the filed cover letter and (iii) all legal or accounting questions should be highlighted where OSC staff input is required.

January 29, 2021

IOSCO Issues Guidance for Dealing with Aggrieved Investors

On January 27, 2021, the International Organization of Securities Commissions (IOSCO) published a report titled “Complaint Handling and Redress System for Retail Investors” that sets forth practices aimed at assisting its members in developing and improving their complaint handling procedures and mechanisms for retail investors. The report notes that access to independent, affordable, fair, accountable, timely and efficient redress mechanisms is critical for investor protection. Effective mechanisms for addressing financial misconduct that harm financial consumers can also promote investor confidence in financial markets.

The report sets out nine practices including taking steps to raise investor awareness of various available complaint handling systems, making available as many channels as possible for retail investors to submit complaints, encouraging financial service providers to offer a wide range of resolutions to retail investor complaints and using complaint data to identify areas for new or enhanced investor education initiatives. AUM Law will monitor developments in this area and keep you informed.

January 29, 2021

FAQ Corner: Can a portfolio manager or investment fund that is subject to FATCA/CRS due diligence and reporting obligations rely on a dealer or third-party custodian to conduct these activities on its behalf?

Answer: The FATCA and CRS provisions of the Income Tax Act (Canada) (the “ITA”) and the guidance issued by the Canada Revenue Agency (CRA) in connection with those provisions addresses the application of the FATCA and CRS due diligence and reporting requirements in circumstances where there are multiple financial institutions involved in a particular financial account. Generally, where an account is maintained by two financial institutions, each of which would have FATCA and CRS due diligence and reporting requirements, the parties can enter into arrangements to allocate the FATCA and CRS obligations applicable to the account amongst them in order to alleviate duplicate reporting. So, the answer is … yes!

If units of a fund are held in client name, both the fund and the dealer involved in the distribution have FATCA and CRS obligations with respect to the account. In general, the CRA expects dealers to perform the due diligence and account classification and funds to report on the accounts, unless a fund has been advised by a dealer that the dealer will take responsibility for its own reporting. While the ITA and CRA guidance sets out some default arrangements, financial institutions can enter into written agreements to allocate the responsibilities based on their circumstances. It is advisable to retain records of such arrangements in order to demonstrate compliance with FATCA and CRS obligations.

With respect to custodians, the CRA generally expects the financial institution with the most immediate relationship with the client to be best positioned to understand the client’s tax status (i.e. conduct the due diligence), however it is appreciated that custodians may be in a better position to provide reporting. The CRA expects a suitable arrangement to include one where the investment manager performs the due diligence and communicates the account classification to the custodial institution for reporting by the custodian to the CRA.

January 29, 2021

FINTRAC Updates its Guidance on Conducting AML Risk Assessments

One of the five core requirements of a registered firm’s anti-money laundering and anti-terrorist financing (AMLTF) compliance program is to conduct a risk assessment of its business activities and relationships. The business-based risk assessment must assess the risks linked to a registered firm’s business activities and the relationship-based risk assessment must assess the risks linked to the nature and type of business of a registered firm’s clients. During an audit, FINTRAC may review these risk assessments, in part to verify if they consider certain risk factors. The risk assessments are not to be confused with the requirement to complete an independent two-year effectiveness review, which is a separate obligation that must be completed by registered firms every two years.

In January of 2021, FINTRAC published updated risk assessment guidance to include legislative amendments from June 2017 and legislative amendments that will come into force on June 1, 2021.

The key take away for registered firms is that you should review your risk assessments to ensure that the following are included among the risk factors that are considered: new developments, technologies and the activities of any affiliates. Registered firms should review the updated risk assessment guidance and reach out to their usual lawyer for assistance, as applicable. The updated risk assessment guidance can be found here. For any questions, please contact Chris Tooley or a member of our team.

January 29, 2021

CSA Publishes More FAQ Guidance on the Client-Focused Reforms

On September 28, the Canadian Securities Administrators (CSA) published guidance in the form of responses to frequently asked questions (FAQs) about how to interpret and implement the client-focused reforms (CFRs) to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). As our readers already know, the conflicts-related CFRs must be implemented by June 30, 2021 and the remaining CFRs must be implemented by December 31, 2021. If you need a refresher on the CFRs, you can download our recently updated publication In a Nutshell: Implementing the Client-Focused Reforms.

The CSA recently released additional FAQs on December 18, 2020. We have noted with interest the following topics:

  • KYC 2.0 Timing: In what can only help alleviate registrant stress, CSA Staff have made it explicitly clear that registrants do not need to both: (i) update their KYC and suitability process; and (ii) re-paper all their client accounts by December 2021. Registrants must only update their KYC and suitability process based on the CFR requirements by December 2021. Re-papering client accounts can occur after that date based on when a specific registrant is obligated to conduct a KYC update.
  • Conflicts of Interest and Disclosure: The CFRs require registrant firms to compile an inventory of all their material conflicts and how they will mitigate those conflicts. Subsequently, the registrant firm must then disclose those conflicts in their relationship disclosure. CSA Staff have now clarified that where a registrant firm addresses a conflict by avoiding the conflict altogether, they do not need to include this conflict in their relationship disclosure. This clarification gives registrant firms some control over their required disclosure to clients and makes their choice of approach to conflict mitigation all that more important.
  • Registrant Employee Oversight: For registrant firms that seek to provide a multi-discipline offering to their clients (e.g. a family office that provides services such as financial planning, securities advisory and insurance), CSA Staff have clarified that registrants have a broader due diligence obligation that just securities law oversight. CSA Staff have indicated that if a registrant employee holds themselves out as appropriately registered with another regulator, registrant firms have an ongoing obligation to ensure that this license is appropriate and that the registrant employee is in good standing with that regulator. This expectation may broaden existing due diligence procedures for registrant firms.

Implementing the CFRs will require changes to your policies, procedures, internal controls, record-keeping protocols, client-facing documentation and compliance training. Giving our clients practical advice on compliance with NI 31-103 is one of our core services. We can help you develop a project plan, work with you to systematically review and make any needed changes, and train your employees so that you are ready as the CFRs are phased in. In fact, our very own Richard Roskies is part of the Portfolio Management Association of Canada (PMAC) CFRs implementation committee. If you have any questions about the Guidance, please do not hesitate to contact us.

January 29, 2021

Ontario’s Capital Markets Modernization Taskforce Releases Final Report

In our July 2020 Bulletin we reported on the Consultation Report of Ontario’s Capital Markets Modernization Taskforce. On January 22, the Taskforce released its Final Report after engaging with over 110 stakeholders and receiving over 130 stakeholder comment letters in response to the Consultation Report.

Background: The Taskforce was appointed by Ontario’s former Finance Minister to review the capital markets regulatory framework and make recommendations to modernize Ontario’s capital markets regulation. One of the Taskforce’s main objectives was to amplify growth and competitiveness in Ontario’s capital markets.

As we did in our July 2020 Bulletin when we last reported on the Consultation Report, in this month’s bulletin we have highlighted the proposals that we think will be of particular interest to readers who are following this initiative.

Improving Regulatory Structure: The Final Report sets out a number of recommendations which the Taskforce believes will lead to a more modern and efficient securities regulator including:

  • Replacing the Securities Act (Ontario) and Commodity Futures Act (Ontario) with the Capital Markets Act (CMA). The recommendation is to see the implementation of the CMA by the end of 2021. As for this timing … we’re betting on the Over.
  • Expanding the mandate of the OSC to include fostering capital formation and competition in the markets in order to encourage economic growth and help facilitate capital raising.
  • Enhancing collaboration between the Ontario Securities Commission (OSC) and Financial Services Regulatory Authority of Ontario (FSRA) to achieve efficiencies including examining the potential of back-office efficiency opportunities.
  • Introducing a single self-regulating organization (SRO) that covers all advisory firms, including investment dealers, mutual fund dealers, portfolio managers, exempt market dealers (EMDs) and scholarship plan dealers. In the short term the new SRO would regulate both investment and mutual fund dealers. In the long term this SRO would replace IIROC and MFDA and would also regulate exempt market dealers, portfolio managers and scholarship plan dealers and ultimately the OSC would delegate more registration responsibilities to the new SRO.
  • Speed up the SEDAR+ project to create a more modern, centralized and user-friendly electronic filing/document retrieval system with the first phase to be complete in 2021. We’d love to see this happen in 2021 but again, don’t see this as being likely considering the heavy regulatory agenda this year.

Improving Regulations and Enhancing Investors Protection: Based on the Taskforce’s findings, capital markets participants are in favour of reducing regulatory burden and streamlining regulatory requirements. The Final Report recommends streamlining regulatory requirements and enhancing investor protection including:

  • Lowering to 30 days the current four-month hold period for securities issued by a qualified reporting issuer using the accredited investor exemption and eliminating the hold requirement altogether after two years.
  • Providing the Director of Corporate Finance at the OSC with power to impose terms and conditions on issuers similar to the power the Director of Compliance and Registrant Regulation has regarding registrants.
  • Expanding civil liability for offering memorandum misrepresentation to extend to parties other than the issuer such as its board of directors, promoters, influential persons and experts.
  • Allowing the OSC to adapt prospectus liability to address regulatory gaps resulting from new and evolving financing structures.
  • For consistency with other jurisdictions, decreasing the ownership threshold for early-warning reporting disclosure from 10 to 5 per cent for non-passive investors.
  • Designating a dispute resolution services organization that would have the power to issue binding decisions.

The Rise of Private Markets, Exempt Market Activities and Ensuring a Level Playing Field: The Taskforce included recommendations that aim to increase capital raising opportunities for small intermediaries and increase the variety and quality of independent products available to retail investors, such as:

  • A dealer registration safe harbour for issuers that wish to distribute their own securities without an intermediary. We agree that this would be incredibly helpful to market participants.
  • A finder category of registration which would impose fewer obligations compared to those imposed on EMDs or investment dealers (such as lower capital requirements) and eliminate the need for a finder to have an ultimate designated person or chief compliance office in certain instances. We also think this is a good idea, provided there’s clarity regarding when one crosses into being a registrable finder.
  • The OSC and TMX to re-allow EMDs to act as “selling group members” in the distribution of securities made under a prospectus offering. This door was closed to EMDs a few years ago due to various policy concerns, so will be interesting to monitor this proposal.
  • Additional accredited investor categories to include individuals that have passed relevant proficiency requirements.
  • Improving access to the shelf system for independent product through guidance to address product shelf issues and the makeup of New Product Committees, title clarification for proprietary product to ensure a level playing field for all products gaining action to a distribution channel and that conflicts are addressed in the best interest of clients.

Fostering Innovation: The Taskforce made recommendations to help support stakeholders request for a more nimble and flexible regulator in order to foster innovation in the Ontario capital markets including:

  • Foster an Ontario Regulatory Sandbox to benefit entrepreneurs and in the longer-term, consider developing a Canadian Super Sandbox where the OSC and FSRA should design an approach that would offer rapid exemptive relief or use other available regulatory tools to permit companies with innovative business models operating across the financial services sector in Ontario to test new financial services and products.
  • Encourage access to retail investors in less liquid private equity and debt markets by introducing an appropriate retail investment fund structure (e.g. Interval Funds in the U.S.)

Other Recommendations: The summary above highlights only a handful of the Taskforce’s 70 plus recommendations. The Final Report also included other proposals such as:

  • A fully electronic or digital delivery in relation to documents mandated under securities law requirements within six months.
  • Name change of the Ontario Securities Commission to the Ontario Capital Markets Authority.
  • Reducing the minimum consultation period for rule-making from 90 days to 60 days.
  • Providing the OSC with additional tools for continuous disclosure and exemption compliance.
  • Modernizing Ontario’s short selling regulatory regime to include protections allowed for in other jurisdictions (e.g., U.S. and U.K.)
  • Introducing an exemption from the disclosure of conflicts of interest in connection with private
    placements to institutional investors. An issue that’s been kicking around for years.

What’s Next? The next steps for the Final Report are now up to recently appointed Minister of Finance. The Minister may choose to act on some, none or all of the recommendations. As we have previously mentioned, we think that initiatives that can be implemented by Ontario authorities on their own could start moving forward if no legislative or rule changes are required. Other proposals (such as SRO reform) will require coordinated, cooperative and determined actions by multiple parties across the country and therefore likely to take much more time to achieve, if they are achievable at all.

AUM Law will continue to monitor the status of the recommendations and update you on significant developments. If you are interested in discussing any of the recommendations, please do not hesitate to contact Sandy Psarras, Chris von Boetticher or another member of our team.

January 29, 2021

AUM Law Participates in CAASA Webinar

As a proud member of the Canadian Association of Alternative Strategies and Assets (CAASA), AUM Law is pleased to contribute to CAASA’s ongoing educational programming. On November 23, our very own Jason Streicher contributed his expertise to CAASA’s webinar Client Focused Reform – A Closer look at KYP. The webinar shared discussions of changes to KYP coming from the Canadian regulators, with new rules taking effect in 2021.

December 11, 2020

CSA Publishes Guidance on Automatic Securities Disposition Plans

On December 10, the Canadian Securities Administrators published guidance (including “recommended best practices”) for issuers and insiders on the establishment, use and disclosure of automatic securities disposition plans. These plans enable insiders to make preplanned sales of securities of an issuer through a dealer or an arms-length administrator, according to a predetermined schedule and set of instructions.

CSA Staff Notice 55-317 Automatic Securities Disposition Plans, can be found on CSA members’ websites.

December 11, 2020

OSC Publishes Report on Exempt Market Activity

On December 10, the OSC published a report on recent capital raising activity in the exempt market by corporate (i.e., non investment-fund issuers). As noted in CSA press release, the report revealed that while there has been notable year-over-year growth in the number of individual investors with capital invested in Ontario’s exempt market, the number of issuers raising capital has remained relatively stable. The report can be found on the OSC website here.

December 11, 2020

MFDA and IIROC Publish Proposed CFR Rules

The Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC) have both published a set of proposed changes to self-regulatory rules designed to conform to the provisions of the Canadian Securities Administrators’ (CSA) effort to enhance investor protection.

As we have reported previously, on October 3, 2019, the CSA published, in final form, the client-focused reforms (CFRs) which require the industry to put their clients’ interests before their own. The CFRs include a number of changes to investor protection rules, including conflicts of interest, suitability, KYC/KYP and disclosure obligations.  IIROC has now published its own proposed rule amendments for public comment intended to make its requirements uniform in all material respects with the CFRs. In a notice published on November 19, IIROC stated that the objectives of the rule changes is to better align the interests of industry firms and reps with their clients, to improve client outcomes and to enhance clients’ understanding of the terms of their relationship with the industry. IIROC has published two sets of proposals: measures that are out for public comment until January 18, 2021, as well as a set of so-called housekeeping amendments which are required to conform with the CSA’s amendments but don’t add further material requirements on industry participants. The more substantive amendments subject to public comments include enhancements to IIROC’s suitability rules and changes to its account appropriateness requirement to ensure that client’s interests come first, along with measures setting out CFR exemptions from the core regulatory obligations of account appropriateness, KYC, suitability determination, product due diligence and KYP for certain account types, client types or service arrangements, as well as other changes of a consequential nature.

Similar to the approach taken by IIROC, on November 19, the MFDA published two sets of amendments. One set addresses housekeeping changes that are relatively minor and the other is a more significant set of proposals that must go out for public comment before they can be approved. The public comment proposals include changes to the MFDA’s rules on suitability, KYC/KYP and account supervision, as well as covering the guidance set out in various MFDA staff notices. The MFDA proposals are out for comment until January 18, 2021. The MFDA has indicated that it is seeking comments on the drafting of its own amendments to ensure that they are clear and properly applied to the business model of fund dealers. As with the CSA’s reforms, the proposed changes will, among other things, require that fund dealers resolve all conflicts of interest in the best interests of clients and provide conflicts disclosure to clients.

The CFRs are to be fully implemented by the end of 2021, with the conflicts of interest provisions taking effect as of June 30, 2021. It is expected that IIROC and MFDA rule changes will be implemented along the same timeline.

December 11, 2020

Activist Short Selling

On December 3, the Canadian Securities Administrators (CSA) published Consultation Paper 25-403 Activist Short Selling “to facilitate discussion” about this activity in Canada. As described by the CSA, activist short selling involves an individual or entity that takes a short position in a security and then publicly shares information that is expected to negatively impact a company’s stock price. If the value of the security declines, the short seller realizes a profit. The consultation paper summarizes stakeholder concerns about activist short selling, outlines the Canadian and international regulatory frameworks for this activity and sets out CSA Staff’s findings regarding the nature and extent of this activity in Canada. Included in the CSA’s findings is that across all 116 Canadian short seller campaigns it looked at between 2010 and September 2020, approximately 40 per cent involved allegations of some type of fraud at the issuer, the most common being a stock promotion scheme. The comments period ends on March 3, 2021.

December 11, 2020

OSC Publishes Final Amendments Regarding Syndicated Mortgages

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 are a part of the proposed 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. The final version of the Amendments contain no substantive changes from the earlier version released on August 6 other than coming into effect on July 1, 2021, a few months later than the originally scheduled effective date of March 1, 2021. A firm that intends to engage in trades of NQSMIs to persons other than permitted clients on or after July 1, 2021 will be required to 1) either meet the prospectus requirements (or rely on an available exemption) and 2) either be registered as an exempt market dealer (EMD) or engage the services of a third-party EMD (or rely on an available exemption).

December 11, 2020

FAIR Funding

In some welcome news for investor advocates, the OSC recently announced that it will provide $3.75 million to FAIR Canada (FAIR), a national charitable organization dedicated to advancing the interests of individual investors. This funding will be provided to FAIR in annual instalments of $750,000 over five years to fund its day-to-day operating expenses.

December 11, 2020