Category: Regulatory Compliance
The Ontario Securities Commission (OSC) has released its most recent draft statement of priorities (SoP) in OSC Notice 11-797 – Request for Comments Regarding Statement of Priorities for Financial Year to End March 31, 2024.
The draft SoP is open for comment until December 22, 2022, and describes the OSC’s key priority initiatives, broken down into one of the following four strategic goals for the year:
- Building Trust and Fairness in Ontario’s Capital Markets;
- Strengthening Investor Safeguards;
- Adapting Regulation to Align with Innovation and Evolving Markets; and
- Enabling the Organization to Deliver Effective Regulation.
A key priority under the first goal relates to advancing work on environmental, social, and governance (ESG) disclosures for reporting issuers. In addition to engaging in further targeted consultations to inform their work, including with Indigenous organizations, staff will complete their focused review of ESG disclosures by investment funds, and publish a summary of findings and any guidance updates by the end of 2023. With respect to the Total Cost Reporting (TCR) proposals that were released in April 2022, the draft SoP notes that the Canadian Securities Administrators and the Canadian Council of Insurance Regulators are moving forward with final TCR amendments. Another key priority under this goal relates to the OSC’s ongoing review of diversity on boards and in executive positions. In the first quarter of fiscal 2023-2024, the OSC intends to publish for comment proposed changes to the disclosure requirements on diversity, board renewal and the director nomination process.
Also under the first strategic goal, the OSC will continue to enhance the domestic derivatives oversight framework. Actions next year will include finalizing and implementing the derivatives dealer business conduct rule by the third quarter of the OSC’s fiscal year. With respect to the new consolidated SRO (New SRO), the OSC intends to initiate the work required to assess incorporating other registration categories into the New SRO, including Portfolio Managers, Exempt Market Dealers and Scholarship Plan Dealers.
As noted above, the second strategic goal set out in the draft SoP is to strengthen investor safeguards. One key priority under this goal relates to the Ombudsman for Banking Services and Investments (OBSI). As indicated earlier this year by press release, the CSA is developing a proposal that will provide OBSI with binding decision making authority. The draft SoP notes that actions in 2023-2024 will also include determining next steps in response to the independent evaluation of OBSI’s investment mandate together with the CSA, other members of the Joint Regulators Committee and OBSI. A stated expected outcome of these proposals will be that investors do not experience undue pressure to accept offers to settle claims for less than they are entitled to receive. As an aside, we note that OBSI stated in response to its external review recommendations that it intends to consult on its loss calculation methodology for exempt market product cases in 2023.
The third stated goal involves aligning regulation with innovation and our evolving markets. The first key priority continues to refer to the crypto asset sector. Actions next year will involve continued application of regulatory obligations to crypto firms while completing the registration or approval process, including obtaining pre-registration undertakings from firms pending completion of the registration or approval process. Actions also include implementing and refining the program for ongoing oversight of crypto asset trading platforms. A stated action may also specifically impact investment funds, as the regulators intend to develop a regulatory framework with appropriate safeguards for how investment funds invest in crypto assets.
In connection with the existing CSA work on streamlining disclosure requirements for both investment fund and corporate finance reporting issuers, one planned action for the next fiscal year is to review the requirements in National Instrument 81-106 Investment Fund Continuous Disclosure and other disclosure requirements to publish rule amendments in December 2023, focusing on Management Reports of Fund Performance and non-IFRS content in issuers’ financial statements. Regarding the delivery options for continuous disclosure materials, final amendments are expected to be published to allow for an access-based instead of delivery model for investment fund issuers continuous disclosure filings by December 2023. The legacy CSA filing systems are also expected to be replaced over time by SEDAR+, beginning with Phase 1 in mid-2023.
Under the final strategic goal of enabling the organization to deliver effective regulation, the OSC continues to review strategies to attract and retain talent, execute on its inclusion and diversity strategy, and integrate data and processes to support effective decision making and risk monitoring. The latter key priority includes rolling out the OSC’s external portal, to streamline participants’ interaction with OSC staff.
Readers may be interested in understanding that this is the first SoP published by the OSC under its new structure (separate tribunal, separate roles for the Chair and the CEO of the OSC).
November 30, 2022
Earlier this month, the Canadian Securities Administrators (CSA) released CSA Consultation Paper 21-403 Access to Real-Time Market Data, focusing on the costs of various types of access. As defined in the Consultation Paper, ‘real-time market data’ is order and trade information that is distributed immediately after an order has been entered, amended, or cancelled or a trade has been executed”. Issues have been raised about the cost of accessing data, particularly in Canada where there are multiple marketplaces, comprised of exchanges and alternative trading systems, competing for the same securities to trade. The Consultation Paper is of interest to anyone responsible for investment, order routing and execution decisions and sets out in a comprehensive manner the current regulatory regime, including the regulation of direct feeds and consolidated data, summarizes concerns that have been raised to date, and sets out potential initial and longer-term options under consideration by the CSA.
In its review, staff of the CSA considered:
- Changes in core marketplace revenues to identify changes and trends;
- Fees that impact the costs incurred by market participants that access and use real-time market data;
- The need to access Level 2 consolidated real-time market data [depth-of-book, i.e. information on all visible orders in the marketplace and all trades] versus Level 1 consolidated real-time market data from listing markets only [top-of-book information for each security, generally the last sale, the best bid and offer and the aggregated volume available for purchase or sale at those prices]; and
- The fees charged in Canada compared to those charged in the U.S. and other global markets.
The research indicated that fees differ across marketplaces for access and use of real-time market data and may include additional fees such as distribution fees if the data is redistributed, user display fees (or non-display fees), and charges associated with how participants connect to the data (e.g. co-location fees). The CSA’s research indicated that providing access to Level 2 data could as much as double the cost to consume data from all marketplaces when compared to only the listing markets.
Of note, the Consultation Paper stated that everyone interviewed by staff as part of their research indicated that the use of real-time market data should be tailored to a participant’s needs, and that not all participants needed access to the same data. However, most market participants were also of the view that they must acquire real-time market data from all marketplaces in order to comply with both their best execution obligations and the order protection rule.
The potential initial options focus on fair access to real-time market data for both direct marketplace and consolidated feeds. One suggestion is to impose standardized terminology to describe various products and how those products are accessed and enhance the transparency of any fee changes proposed by marketplaces by requiring them to publish proposed changes for public comment.
Longer-term options would instead propose an overhaul of the regulations applicable to accessing consolidated real-time market data. For example, consideration is being given to leveraging the current information processor model and imposing a cap on fees charged by marketplaces for marketplace order and trade data that is consumed through the consolidated products distributed by an enhanced information processor. The CSA is also contemplating introducing a new model for data consolidation through the use of a new administrative information processor that would be responsible for setting and managing the components of the model (including products, fees and revenue sharing).
A number of CSA considerations and areas for feedback are set out in the Consultation Paper, ranging from the need to enhance the transparency of any fee proposals related to real-time market data, any unintended consequences that could spring from the suggestions made, to how to incentivize market participants to provide consolidated real-time market data to all clients at reasonable prices.
Comments on the Consultation Paper are due by February 10, 2023. Any further regulatory proposals that result from the consultation will be published for further comment.
November 30, 2022
The Ontario Securities Commission (OSC) recently announced that new OSC Rule 13-502 Fees and OSC Rule 13-503 (Commodity Futures Act) Fees and their respective companion policies will come into effect on April 2, 2023. As noted in our January 2022 bulletin article, the OSC had been consulting on changes to the fee calculations for certain market participants to reflect the growth in Ontario’s over-the-counter (OTC) derivatives market activities. The revised rules will introduce a new fee for entities that enter into OTC derivatives transactions but will moderately reduce participation fees for certain reporting issuers and registrants.
The amendments will also eliminate certain activity and late fees, and permanently eliminate late fees on certain registration form updates, including outside activities. With respect to fees for exempt trade reports, the fees payable will be reduced to $350.
No changes have been made to the original proposals regarding the simplification of the annual capital markets participation fee, where it will no longer be necessary to estimate revenues that are later adjusted. The fee will be based instead on actual financial information from the most recently audited financial statements. In addition, the current rush that registrants face to file the fee forms by the deadline of December 1 will be alleviated by a requirement to file between September 1 and November 1.
November 30, 2022
On November 25, the Financial Services Regulatory Authority of Ontario (FSRA) proposed amendments to the existing Unfair or Deceptive Acts or Practices (UDAP) Rule. The amendments would eliminate deferred sales charges (DSC) on new segregated fund contracts effective June 1, 2023. DSCs are payable by clients when they withdraw money from a segregated fund contract before the end of the time period specified in the contract. New requirements would also be introduced with respect to existing DSCs, including customer disclosure and limits on the use of existing DSC options. Comments are the two sets of proposed amendments are due February 23, 2023.
September 28, 2022
The CSA recently published notices that recognize the New Self-Regulatory Organization of Canada (New SRO) and approve the Canadian Investor Protection Fund (CIPF) both as of January 1, 2023. As set out in our May 2022 bulletin, the CSA released CSA Staff Notice and Request for Comment 25-304 Application for Recognition of New Self-Regulatory Organization and CSA Staff Notice and Request for Comment 25-305 Application for Approval of the New Investor Protection Fund seeking comment on a number of operational aspects relating to the New SRO and investor protection fund. The press release announcing the notices also indicated that the Autorité des marches financiers intends to publish a transition plan for mutual fund dealers registered in the Province of Québec before the end of the year.
The New SRO will be temporarily known as the “New Self-Regulatory Organization of Canada” until a new name is determined at a later date, and as noted above the combined contingency fund will be known as the “Canadian Investor Protection Fund”. The interim rules for the New SRO provide for the continued jurisdiction over persons subject to the current IIROC and MFDA rules and contain numerous transitional provisions. With respect to the registration of firms and individuals, the powers of the New SRO remain the same as the current powers of IIROC unless changed by the regulators. In response to public comments on the May consultations, a number of clarifications were made, including that there would be no changes to the current delegation of registration authority to IIROC (which applies to investment dealers only).
Firms and individuals currently regulated by IIROC or the MFDA may wish to consult the FAQs relating to the Interim Rules and the Integration Cost Recovery Fee Model Guideline, now found on the New SRO website.
November 30, 2022
A few impending filing deadlines that we thought would be helpful to note from past bulletins for your reference:
- December 1 (yes, December 1) is the deadline for registrants in Ontario and foreign firms that rely on certain exemptions from the registration requirements to file their fee calculation forms (Form 13-502F4 Capital Markets Participation Fee Calculation under OSC Rule 13-502 Fees and Form 13-503F1 (Commodity Futures Act) Participation Fee Calculation under OSC Rule 13-503 (Commodity Futures Act) Fees).
- January 30, 2023, is the deadline for filing exempt trade reports for issuers that are investment funds and that relied on specific prospectus exemptions under National Instrument 45-106 Prospectus Exemptions, namely the accredited investor exemption, the minimum investment of $150,000 (for non-individuals), and the exemption for additional investment in investment funds. Based on past experience, the processes of completing the forms and submitting the fees across the country can be time consuming and should be started as soon as possible to avoid a “filing crunch” in late January. Contact us and we can help you!
- June 6, 2023, is when an individual registrant’s Form 33-109F4 must be filed to update their “other activities”, as required by amendments to National Instrument 33-109 Registration Information. While this seems eons away, as the whole form should be reviewed, updated and filed within the deadline, and if older forms were used, the new forms may require new information to be inputted, we continue to recommend that clients speak with us sooner rather than later to work through the forms in a systematic fashion to avoid filing delays.
Finally, we wanted to note in case you have not yet had an opportunity to visit the page, the Ontario Securities Commission has set up a number of helpful materials that can be used to assist with a registrant’s obligations regarding older and vulnerable investors. Resources include educational material, and some starter template forms. We would be pleased to discuss your strategies for addressing the needs of these investors in greater detail.
November 30, 2022
Our colleagues at BLG have provided the following insights we thought might interest our readers:
For more information, please visit the BLG website.
November 30, 2022
AUM Law’s Chris Tooley will be participating as a speaker for the second year in a row at the Anti-Money Laundering and Anti-Terrorist Financing Training Session hosted by PMAC. Chris will be covering core concepts around money laundering and terrorist financing, client identification, what information you must collect from clients, record keeping, and suspicious transactions. To register for the event, please click here, or contact our communications team here for more details.
November 30, 2022
On October 17, 2022, the Ontario Securities Commission (OSC) published its 2021-2022 Annual Report – Responding to Change; Preparing for the Future (the Report), along with its financial statements for the year ended March 31, 2022, and the accompanying MD&A. The Report highlights another busy year for the OSC.
The OSC processed 43,815 individual registration applications, an increase of 14% from last year. As well, it approved a record number of exemptive relief requests including 265 requests from investment and registrant firms. In the context of protecting investors and market integrity, the OSC noted that it discontinued deferred sales charges for mutual funds, published new rules expanding investor protection for seniors, and brought the Client Focused Reforms for the investment industry into force.
With respect to responding to emerging trends, the OSC approved 83 ESG funds representing 24% of all new funds created in the year. As well, it registered four new crypto asset trading platforms to operate in Ontario with another 20 applications under review.
The OSC also noted that it prepared for the implementation of a new governance structure, establishing an independent Capital Markets Tribunal and separating the Chair and CEO roles. In the Message from the Chair and CEO, Grant Vingoe wrote that the OSC is co-leading the Canadian Securities Administrators’ (CSA) work to create a new self-regulatory organization that combines the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA), which is expected to launch by year-end.
The Report also includes an update on the OSC’s Statement of Priorities. The Statement of Priorities sets out the OSC’s strategic goals, priorities and specific initiatives for the year. The OSC noted that its 2021-2022 goals are to: (i) promote confidence in Ontario’s capital markets; (ii) reduce regulatory burden; (iii) facilitate financial innovation; and (iv) strengthen its organizational foundation. For each goal, the OSC outlined a number of priorities, summarizing why they are important, and their success measures.
For the first goal of promoting confidence in Ontario’s capital markets, the OSC’s first priority was to support the implementation of the Client Focused Reforms. The Report stated that the Client Focused Reforms establish a higher level of protection for investors and a higher standard of care for the investment industry. Success measures include: (i) investors benefiting from registrants addressing material conflicts of interest in the best interests of investors; (ii) registrants having considered specific factors when deciding whether an investment product is suitable and whether recommendation put the client’s interest first; and (iii) investors receiving greater clarity about the products and services they can expect from their registrants.
Other priorities under this first goal of promoting confidence in Ontario’s capital markets included: (i) implementing mutual fund embedded commissions rules and the discontinuance of the mutual fund deferred sales charge payment option; (ii) improving the retail investor experience and protection; (iii) strengthening investor redress through the Ombudsmen for Banking Services and Investments through policy and oversight activities (read more about that in our in brief article below); (iv) bringing timely and impactful enforcement actions; (v) publishing a position paper regarding the framework for self-regulatory organizations; (vi) continuing to expand systemic risk oversight; (vii) strengthening oversight of crypto asset trading platforms and other dealers; (viii) advancing work on the Capital Markets Modernization Taskforce policy recommendations identified in the Ontario Government’s 2021 Budget; (ix) improving climate-related financial disclosures; (x) integrating new mandates and fostering capital formation and competition; (xi) amending registration information requirements; (xii) developing total cost reporting disclosure for investors; (xiii) developing fee rule amendments; and (xiv) harmonizing the interpretation of primary business financial statement requirements in IPOs.
With respect to the second goal of reducing regulatory burden, the OSC reported that it is continuing to develop a continuous improvement framework with a systematic focus on reducing undue regulatory burden. With respect to the proposed Amendments to National Instrument 51-102 Continuous Disclosure Obligations and Other Amendments and Changes Relating to Annual and Interim Filings of Non-Investment Fund Reporting Issuers, the OSC stated that it plans to publish final amendments in early 2023.
In connection with the goal of facilitating financial innovation, the OSC reports that its Innovation Office launched OSC TestLab in November 2021, a dedicated environment to test innovative solutions and new approaches to regulation aimed at reducing burden, promoting economic growth, and fostering capital formation in Ontario’s capital markets. Applications for the first TestLab cohort were accepted from November 2021 to January 2022, with the successful applicants announced in April 2022.
With respect to the fourth goal of strengthening the OSC’s organizational foundation, the OSC reported that the development of SEDAR+ is an ongoing and important CSA project and remains a top priority for the OSC. The OSC continues to actively participate with the CSA in the development of SEDAR+. Phase one of SEDAR+ is focused on issuer filings and will replace the cease trade order database, the disciplined list, SEDAR, and local exempt distribution reporting systems.
The OSC also reported on its 2021-2022 service standard results. Of note is that with respect to Advising Representative, Associate Advising Representative, and CCO applications, the goal of providing decisions on routine applications within 20 working days of receiving complete and adequate applications in acceptable form was met 71% of the time in Q1, 65% in Q2, 68% in Q3 and 86% in Q4. The OSC’s target is to meet the service standard 80% of the time.
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.
October 31, 2022
Registrants should be mindful of an uptick in regulatory scrutiny relating to conflicts of interest, as we first noted in our June 2022 bulletin here. As a reminder, the Client Focused Reforms (CFRs) pursuant to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations came into force in two stages. The conflicts of interest requirements came into force on June 30, 2021, and the remainder of the CFR requirements, including the know-your-client (KYC), know-your-product (KYP), suitability and relationship disclosure information reforms, came into force on December 31, 2021. Current regulatory “sweeps” have been aimed at assessing how firms have operationalized the first stage of the CFRs – the new, more stringent, conflict of interest rules (referred to below as the CFR Sweep).
As part of the CFR Sweep, regulators are looking for a number of key items, including:
- Ensuring a process is in place to identify material conflicts of interest that arise at both the firm and individual registrant levels;
- The identification of actual material conflicts of interests;
- Whether there are adequate controls in place to mitigate risks associated with any material conflicts of interest;
- How any identified material conflicts of interest between a client and the registrant firm had been addressed in the best interest of the client;
- Whether adequate disclosure had been provided to clients regarding the material conflicts of interest; and
- Whether the firm’s written policies and procedures adequately address conflicts of interest, including whether they contain criteria to determine the materiality of the conflicts of interest and if the policies and procedures outline training for employees on identifying material conflicts of interest.
Common material conflicts of interest include investments in related or connected issuers (such as a firm’s proprietary products), and conflicts which arise from internal compensation arrangements, which may raise questions as to whether a registered individual is placing their interest ahead of their client’s interest. Registrants should also note that adequate disclosure of material conflicts of interest to a client is expected to include a description of (i) the nature and extent of the conflict of interest; (ii) the potential impact on and risk that the conflict of interest could pose to the client; and (iii) how the conflict of interest has been, or will be, addressed. Furthermore, although the focus of the current CFR Sweep is on the conflicts of interest rules, it is prudent for registrants to have a demonstrable compliance framework to address the second stage of the CFRs, as it is likely a CFR sweep focused on these obligations will be forthcoming.
Finally, as a reminder, it is important for registrants to note that they should keep their policies and procedures manuals up to date to account for ongoing regulatory developments and amendments, as an outdated policies and procedures manual generally will be cited as a deficiency upon any regulatory review.
If you require updates to your compliance program or policies and procedures manuals or have any questions regarding the CFRs or are generally interested in learning more about these requirements, please contact us.
October 31, 2022
On October 13, 2022, the Financial Services Regulatory Authority of Ontario (FSRA) launched a public consultation on its proposed 2023-2024 statement of priorities and recommended financial plan (the Statement of Priorities). FSRA’s proposed priorities continue to focus on fostering principles-based regulation, while delivering on outcomes that ensure consumer protection, support innovation, and effectively address emerging risks and supervision in the sectors it regulates. The Statement of Priorities will form the core of FSRA’s Annual Business Plan which will be submitted to the Minister of Finance for approval.
FSRA’s overall strategic priorities include:
- Strengthening the consumer focus;
- Modernizing systems and processes;
- Enabling innovation; and
- Enhancing FSRA’s talent management framework and strategy.
With respect to its focus on consumers, FSRA’s key deliverables include delivering and promoting research, data insights and analysis into trends, processes and issues that impact consumers in FSRA’s regulated sectors with the goal of achieving enhanced protection of consumer rights and interests with an emphasis on vulnerable consumers. Enabling innovation will involve deliverables such as using the data and knowledge gained from FSRA’s pilot Test and Learn Environments (TLE) to refine FSRA’s future usage, building the Innovation Office into a center of expertise and developing stronger ties with peer regulators and key stakeholders.
Priorities for the mortgage broker sector include promoting high standards of governance and business conduct and enhancing professional competence of licensed individuals. Key deliverables for this sector include: (i) consulting on best practices to improve the effectiveness of the principal broker’s role; (ii) developing a supervisory engagement model for mortgage brokerages and administrators; (iii) continuing to update the broker and agent licensing education courses; (iv) executing the multi-year plan to enhance continuous education requirements; and (v) consulting on best practices to ensure the suitability of mortgage recommendations for consumers.
Other priorities include ensuring the effectiveness of the title protection framework for financial planners and financial advisors. Key deliverables include assessing credentialing bodies to ensure that they meet FSRA’s minimum standards and have the necessary policies and procedures in place to protect consumers, as well as conducting a review of the framework to evaluate its effectiveness.
The Statement of Priorities includes a draft financial plan and FSRA’s cost projections for achieving its mandate and stated priorities. The public consultation is open for stakeholder feedback until November 11, 2022.
October 31, 2022
On October 19, 2022, the OSC published Staff Notice 81-733 Summary Report for Investment Fund and Structured Product Issuers (the Report). The Report provides an overview of the key activities and initiatives of the OSC’s Investment Funds and Structured Products Branch (IFSP) during the 2021-2022 fiscal year. The Report’s overview of the market composition of investment funds and structured products in Canada highlighted the rising numbers of ESG investment funds and a comparative decline in the creation of new crypto asset funds in Canada through fiscal 2021-2022. The Report is organized into the following four broad areas and some of the highlights are summarized below.
IFSP completed a total of 359 prospectus reviews during the 2021-2022 fiscal year (slightly less than the 364 reviews completed in the 2020/2021 fiscal year). Some of the novel prospectus filings that were receipted during the fiscal period included crypto asset funds, an income for life fund, an interval fund, and two carbon credit future funds.
The Report included a reminder of the CSA’s staff notice released in January of this year that provides guidance for investment funds on their disclosure practices as they relate to ESG considerations (the ESG Notice), particularly funds whose investment objectives reference ESG factors and other funds that use ESG strategies (ESG Related Funds). Staff have been reviewing, and will continue to review, the prospectus and related documentation of ESG Related Funds in accordance with the ESG Notice. The Report highlights the most common issues raised in comments for ESG Related Funds and notes that as part of these reviews staff are reviewing the sales communications relating to the ESG Related Funds in question.
Exemptive Relief Applications
IFSP completed 142 exemptive relief applications during the fiscal period. In addition to the relief applications granted in connection with the prospectus products noted above, noteworthy relief included an exemption granted to a group of investment funds and a registered adviser to permit domestic and cross-border inter-fund trading. In addition, the CSA granted relief to a Schedule I bank to facilitate the distribution of Canadian Depositary Receipts.
Continuous Disclosure Reviews
Some of the major reviews completed by IFSP during the fiscal period include:
- A review on liquidity risk management for IFMs that experienced significant redemptions during the first half of 2020. The purpose of the review was to assess how the fund managers dealt with the significant redemption events and to obtain information on their liquidity risk management policies. IFSP found that all managers subject to the review were able to manage their funds’ significant redemptions as part of the normal course of operations without breaching any borrowing restrictions under National Instrument 81-102 Investment Funds or requiring exemptive relief. Investment fund managers (IFMs) are reminded to review CSA Staff Notice 81-333 Guidance on Effective Liquidity Risk Management for Investment Funds for recommended practices in this area.
- An issue-oriented review on crypto asset ETFs in light of a period of market volatility in May 2021 in order to understand how IFMs managed their subscription and redemption activity, where they sourced crypto assets, and how they continued to accurately value their funds. IFSP found that the majority of the crypto asset ETFs traded very close to their NAV during the period of volatility.
- A targeted continuous disclosure review of the disclosure documents and sales communications of a number of ESG Related Funds to assess the quality of the fund’s ESG disclosure. Based on the findings of the review, CSA published the ESG Notice mentioned above which includes findings from this review.
- Several ad hoc reviews of marketing materials in light of complaints received related to sales communications that dealt with insufficient disclosure and exaggerated and misleading claims in internet advertising and social media platforms. Staff reiterated that all information, including disclaimers, should be easily comprehensible to the retail investor on their first viewing of an advertisement and direct IFMs to a prior staff notice that provides additional guidance when the sales communication is presented with alternative media. The Report also reminds IFMs that they should be reviewing the use of personal social media with their employees who use their accounts to market investment funds and that IFMs should have adequate policies and procedures related to the use and monitoring of social media (an area in which AUM Law can assist).
- A review of the cybersecurity risk disclosure for a sample of funds, focusing on whether there was some type of cybersecurity risk disclosure in the publicly filed fund documents. The Report notes that given the threat of cybersecurity attacks, all IFMs should review the risks disclosed in their funds’ disclosure documents and perform a thorough risk assessment to determine whether cybersecurity risk is a material risk to its funds which merits disclosure in the prospectus. IFMs who do not include cybersecurity risk may be selected for a more in-depth review to explain why the disclosure was excluded.
The Report summarizes the major policy initiatives that were completed or are in progress during the period including the prohibition of deferred sales charges, the blanket order to codify permitted means to comply with the trailer ban for order execution only dealers and the amendments to reduce the regulatory burden for investment fund issuers (much of which dealt with relief from certain conflict of interest requirements).
If you have any questions or wish to discuss any aspects of the Report with us, please contact your usual AUM lawyer.
October 31, 2022
On October 14, 2022, the Compliance and Registrant Regulation (CRR) Branch of the Ontario Securities Commission (OSC) published its annual summary report in OSC Staff Notice 33-754 Summary Report for Dealers, Advisers and Investment Fund Managers (the Report). The report is akin to an industry report card on how registered firms have been handling recent regulatory changes and enhancements. Many firms appear to be in the same boat when it comes to the positive progress made in implementing the required changes. However, the deficiencies observed by staff means that industry still has work to do to meet staff’s expectations.
The CSA, IIROC and the MFDA have all been conducting targeted sweeps. The findings and remedial efforts that result from these sweeps will be used by the CSA and self-regulatory organizations (SROs) to improve the guidance provided to industry to accommodate their expectations and shape the focus of compliance sweeps going forward. This article will focus on the types of firms targeted, main deficiencies found, and recent industry initiatives.
In terms of firms chosen for a review over the period covered by the Report, a profile of high risk and high impact type firms was developed from the results of previous annual compliance reviews. These firms, believed to pose a greater risk for non-compliance due to their size and/or business activity, were targeted throughout 2021 and 2022.
The high risk firms that were targeted included smaller firms, registered as either a singular registrant or a combination of an investment fund manager (IFM), portfolio manager (PM), or exempt market dealer (EMD), with at least $25 million of assets under management. These firms tended to have limited staff and resources in relation to their assets, reducing the likelihood that they would have an effective compliance program in place that would allow them to meet their regulatory requirements.
The other high risk firms targeted were PMs that offered discretionary investment management services online, typically through an interactive portal where investor profiles are derived, and model portfolios offered to clients. The concerns with this business activity related to how these firms market their business to clients as well as the firms’ ability to meet the know-your–client (KYC), know-your-product (KYP), and suitability obligations for each investor.
The high impact firms chosen for review were those that had large amounts of client assets under management, on average $900 billion, and a large client base which would have adverse effects on the capital markets in the event the firm failed to carry out its obligations.
The deficiency trends observed relating to high risk and high impact firms to date included:
- inadequate policies and procedures;
- trade confirmations and investment performance reports missing required information;
- insufficient cyber security controls;
- incorrect working capital calculations;
- client statement deficiencies (i.e.: missing firm name); and
- the use of data and information (e.g., hypotheticals) that were not representative of products in the client’s actual portfolio.
Sweeps of these types of firms are still ongoing, and the OSC plans to publish its findings and observations of these targeted sweeps in next year’s summary report.
CFR and NI 33-109 amendments: The CSA and the SROs are committed to the Client Focused Reforms (CFRs) changes that came in force in two phases in 2021. To this end, the Report provided highlights of the progress firms have made in the implementation of all aspects of the CFRs, and the gaps that were commonly observed. A key CFR enhancement relates to the handling of material conflicts of interest. Firms are expected to have in place internal processes that identify material conflicts of interest, both between a client and the firm and a client and individual registrants. Notably, material conflicts that result from compensation arrangements or incentive practices are expected to be addressed in the client’s best interest.
From all the compliance sweeps conducted, the Report cites areas for improvement relating to addressing material conflicts of interest requirements. Notably, firms have not:
- developed a process whereby existing material conflicts of interest, or those that are reasonably foreseeable, can be identified between the firm and the client and those acting on behalf of the client;
- avoided material conflicts or used internal controls to mitigate conflicts in the best interest of the client;
- provided clients with required disclosure that is “prominent and specific” regarding material conflicts in a timely manner;
- kept adequate records of identified conflicts and the controls in place to address these conflicts in the best interest of the client; and
- updated or provided conflicts related training to their staff.
NI 33-109 Registration Information (NI 33-109) amendments: The CSA’s goal with the NI 33-109 amendments was to create an efficient registration and oversight process for firms. The Report outlined some of the key components of the amendments, one of which extends the deadlines to report changes in registration information via the NRD. The other key component of the amendments is to establish an internal reporting framework that allows for the capture and reporting of outside activities and business titles and professional designations to regulators within the prescribed timelines.
The Report notes that instances of non-disclosure of material information relating to insolvency events (i.e., bankruptcies (Form 33-109F4- Item 16)), are not being disclosed. Instances of non-disclosure of information relating to dismissals for cause or other identified misconduct by individuals while registered (Form 33-109F4 – Item 12 and Schedule I) with former sponsoring firms were not disclosed and were causing delays in registration approvals. The amendments to NI 33-109 encourage full disclosure to be able to determine suitability of each registrant. Staff expect registered firms to make reasonable efforts to ensure that the information included in Notices of Termination (Form 33-109F1 Notice of End of Individual Registration or Permitted Individual Status (Notice of Cessation)) filed through NRD are truthful and complete.
As a result of recent industry trends, the need for virtual business locations has given rise to more registered individuals working from their homes. In an email blast sent September 7, 2022, the CSA indicated it was providing firms with the flexibility to create virtual business locations (Form 33-109F4- Item 9) on the NRD for registered persons working from home.
Looking ahead: Finally, the Report noted that staff’s compliance review activity for 2022-2023 would prioritize the following:
- The next phase of the CFR requirements – i.e. assessing the effectiveness of the implementation of the CFRs. This is a multi-year priority, and will start with a review of conflicts of interest requirements (already well underway) and later transition to a review of KYC, KYP and suitability requirements;
- Continued compliance reviews of high-risk firms, following the analysis of the data collected in response to the 2022 Risk Assessment Questionnaire; and
- Compliance reviews of crypto asset trading platforms.
Please don’t hesitate to reach out to our team if you require any assistance with the matters covered by the Report, and we encourage all registrants to review the Report carefully.
October 31, 2022
On September 25, 2022, the Ontario Securities Commission (OSC) announced that it had adopted an exemption from the prospectus requirements on a pilot basis. The exemption in effect broadens the accredited investor exemption to persons who have relevant proficiency that indicates a high degree of understanding of investing and the markets but who may not meet the financial thresholds or other criteria to qualify as an accredited investor. In the interim prior to any formal expansion of the existing exemption, the OSC released Ontario Instrument 45-507 Self-Certified Investor Prospectus Exemption (Interim Class Order), where a prospectus exemption is being made available for distributions of securities in Ontario of non-investment fund issuers to “Self-Certified Investors” (as defined in the order) or to their permitted designates (such as their RRSP), subject to numerous conditions. The issuer must have its head office in Ontario, and the aggregate acquisition cost of all securities purchased by a Self-Certified Investor (and permitted designate) under the exemption in a calendar year may not exceed $30,000. A person can qualify as a Self-Certified Investor in numerous ways, but includes a person who:
- Holds a Chartered Financial Analyst Charter from CFA Institute;
- Holds a Chartered Investment Manager designation from the Canadian Securities Institute;
- Holds a Chartered Professional Accountant designation from CPA Canada;
- Is a lawyer admitted to practice law in a jurisdiction of Canada where at least 33% of their practice involved providing advice respecting financings involving public or private distributions of securities or M&A;
- Has passed certain courses including the Exempt Market Products Exam or the Canadian Investment Funds Course Exam administered by the IFSE Institute;
- Holds a Certified Financial Planner designation from FP Canada; or
- Has management, policy-making, engineering, product or other relevant operational experience at a business that operates in the same industry or sector as the issuer and who, as a result of this experience, is able to adequately assess and understand the risk of investment in the issuer.
Issuers who rely on this exemption will need to file a private placement report and a confirmation of qualifying criteria provided by the investor within 10 days of a distribution. The investor must also complete and sign a risk acknowledgment form that describes twelve general risks of the private placement, including with respect to resale restrictions and potential lack of available information and financial statements.
The order is in effect until the earlier of (i) April 25, 2024 (unless extended); and (ii) the effective date of any amendment to National Instrument 45-106 Prospectus Exemptions that addresses substantially the same subject matter of the order.
October 31, 2022
Earlier this month, the Investment Industry Regulatory Organization of Canada (IIROC) released a request for Expressions of Interest for potential future vendors who wish to provide educational services in connection with IIROC’s proficiency regime. IIROC has already released draft competency standards with respect to all of its registration categories (see our article on the latest round of proposals here) which, once finalized, are expected to launch in 2026. The request for Expressions of Interest includes references to opportunities for course development, exams, administration and program delivery in English and French. The deadline for submissions has been set at December 16th, with the short listing of vendors that will move to an RFP stage occurring March 31, 2023. Vendors are currently expected to be selected in the spring of 2024.
October 31, 2022