Category: Regulatory Compliance
On May 18, 2021, the securities regulatory authorities in Ontario, Manitoba, New Brunswick, Nova Scotia, Quebec and Saskatchewan (the “participating securities regulators”) published the underlying data used to prepare the sixth-year review of women on boards and in executive officer positions. The data was compiled from public documents filed on SEDAR for the 610 non-venture issuers who were included in the review sample. Previously, on March 10, 2021, the participating securities regulators published CSA Multilateral Staff Notice 58-312 summarizing the underlying data (the “Notice”). The Notice revealed the following:
- 20% of board seats were held by women;
- 79% of issuers had at least one woman on their board;
- 5% of issuers had a woman CEO;
- 15% of issuers had a woman CFO;
- 65% of issuers had at least one woman in an executive officer position; and
- 54% of issuers adopted a policy relating to the representation of women on their board.
The notice indicates that the Canadian Securities Administrators will continue to monitor trends in this area and will be considering its role in the broader diversity conversation. We look forward to following these discussions and important initiatives with interest.
May 31, 2021
Answer: Registrants are often asked by their clients, as trusted advisors, to act as their trustee under family trusts, executors under their will or as powers of attorney. The potential issue with accepting any of these roles for a registrant is that they may present a material conflict of interest. For instance, if a client is deceased and the advisor takes on the role of the executor of the estate, he or she will be required to review the registrant’s work and decide if the investments are still appropriate, and potentially whether the executor should even keep the assets with the advisor or the advisor’s firm. The conflict becomes most obvious if the registrant is responsible for reviewing his or her own work.
While the CSA chose not to explicitly prohibit such relationships in the Client Focused Reforms, personal financial dealings are referenced in certain IIROC and MFDA rules. For example, in IIROC rule 3115. Personal financial dealings, there is a prohibition on acting as a power of attorney, trustee, executor or otherwise having full or partial control or authority over the financial affairs of a client except in limited circumstances, such as when the client is a related person as defined in the Income Tax Act (Canada) and control is exercised in accordance with firm policies and procedures, or in the case of certain control granted in a discretionary account. The CSA is also of the view that a registrant having full control or authority over the financial affairs of a client may create a material conflict of interest. So, if a firm is not going to avoid this conflict, it should create a specific procedure to ensure that these conflicts are identified and are addressed in the client’s best interest. For example, specific pre-approval from the CCO could be obtained, based on a justification of why such activity would be in the best interests of the client in the specific instance, and procedures to manage the potential conflict such as having the individual advisor recuse himself or herself on matters involving the appointment of an investment manager could be implemented, where possible.
We understand that simply being appointed an executor in a will does not currently amount to a disclosable OBA in Form 31-103F4, and will only become disclosable once a registrant steps into that role and is vested with the powers of the office of an executor. We believe the same logic could apply to other powers of attorney as well, depending on the type of powers granted.
May 31, 2021
Answer: While it may be considered industry standard to conduct ongoing monitoring annually, FINTRAC allows registrants to determine the frequency with which a registrant will monitor its clients’ accounts. Accordingly, every firm should have policies and procedures that reflect what they have determined to be a reasonable process for conducting ongoing monitoring. In general, the frequency of ongoing monitoring will depend on the types of services provided to the clients, the type of relationship the firm has with its clients, and the risk level of the clients.
Of course, FINTRAC rules can not be viewed in isolation, and registrant firms must also consider the requirements set out in the Client Focused Reforms Amendments to NI 31-103 and Companion Policy 31-103CP (CFR Amendments) relating to know-your-client (KYC) information which come into force at the end of the year. For managed accounts, a review should occur at least every 12 months; if the registrant is an exempt market dealer (EMD), the review should occur within 12 months before making a trade for, or recommending a trade to, the client. In any other case, reviews are expected to occur no less frequently than once every 36 months.
For any high-risk client, FINTRAC would expect monthly or quarterly monitoring, as well as the close monitoring of all of that client’s transactions.
We recommend that firms make explicit note of the fact that AML information was considered as part of the client’s information update. For more specific guidance regarding what other information should be collected from clients as part of the AML ongoing monitoring requirements, please do not hesitate to contact us.
May 31, 2021
We are pleased to have been recognized once again by Lexology as the exclusive Legal Influencer for financial services commentary in Canada for the first quarter of 2021. These awards are designed to recognize law firms that provide subscribers with relevant, high-quality legal updates and are determined based on an algorithm that takes into account reader engagement with the law firm’s publications on Lexology. This is the seventh time that AUM Law has received this award.
May 31, 2021
On May 12, AUM Law’s Chris Tooley participated as a speaker at the Portfolio Management Association of Canada (PMAC) Spring Regulatory & Compliance Webcast on FINTRAC audits and Richard Roskies spoke on the topic of OSC audits. If you are interested in a copy of our Regulatory and FINTRAC Audits presentation, please contact us.
May 31, 2021
Richard Roskies and Chris Tooley will be participating as panelists at the Compliance Officers’ Network hosted by PMAC and Borden Ladner Gervais (BLG) on various topics related to client focused reforms and AML changes. This event will take place on June 2 for members of PMAC’s compliance officers network and will have other BLG speakers.
May 31, 2021
On May 20, the CSA proposed amendments to NI 51-102 Continuous Disclosure Obligations in order to streamline and clarify continuous disclosure requirements for reporting issuers other than investment funds. The proposed amendments would include consolidating the MD&A form with the AIF form and financial statements into new annual and interim disclosure statements. The proposed amendments would eliminate some disclosure requirements found to be duplicative or redundant, such as the current MD&A requirement to disclosure summary information for the last 8 quarters, as that information can be located in previous filings. A few new requirements are proposed to be added to address perceived gaps in disclosure as well. The final amendments are expected to be effective December 15, 2023 and various transition provisions have been proposed. The CSA expects the amendments will streamline reporting and increase reporting efficiency for reporting issuers while increasing the quality of the disclosure for investors. Of particular interest, at the same time the CSA has proposed a framework for future consideration that would allow venture issuers (on a voluntary basis) to report semi-annually instead of quarterly, if they are not SEC issuers and provide alternative disclosure for interim periods where financial statements and MD&A are not being filed. The comment period on the proposals close on September 17, and we expect that market participants will want to review the extensive changes closely.
May 31, 2021
IIROC is currently seeking input into a proposed framework for its new Expert Investor Issues Panel, including with respect to the panel’s creation, structure, and operation. The panel is intended to enhance IIROC’s current robust investor outreach efforts and help it accomplish its goal of investor protection. The framework includes provisions addressing membership composition, meetings, and responsibilities. Of note, the notice includes an appendix with an interesting comparative study of similar panels of other public interest regulators. Comments will be accepted on the proposal until June 30.
May 31, 2021
The CSA has proposed certain amendments to the National Instrument which sets out definitions that apply across various other national instruments, including the definition of “Canadian financial institution”, and consequential amendments resulting from the change. The revised definition would exclude foreign banks listed in Schedule III to the Bank Act (Canada), and adds a reference to a central credit union, financial services cooperative, credit union league or federation that is incorporated or authorized to carry on business under an Act of the legislature of a jurisdiction. The change will ensure that the definition is uniform across the relevant national instruments. In addition, a change is proposed to the definition of “Handbook” only to reflect that CPAC has different publications for accounting and assurance. Comments on the proposal are due on July 21.
May 31, 2021
Certain of the securities regulatory authorities are proposing changes to Multilateral Instrument 25-102 Designated Benchmarks and Benchmark Administrators to provide for a securities regulatory regime for commodity benchmarks and administrators. MI 25-102, which was published in final form on April 29, for the first time designates and regulates benchmarks and their administrators. Under the rule, Refinitiv Benchmark Services (UK) Limited is the only designated administrator and only CDOR is designated as a benchmark. The proposed amendments would provide for the designation and regulation of commodity benchmarks, including those dually designated as designated critical benchmarks and designated commodity benchmarks, and benchmarks dually designated as designated regulated-data benchmarks and designated commodity benchmarks, as well as their administrators. For example, a “designated commodity benchmark” would be defined as a benchmark that is determined by reference to or an assessment of an underlying interest that is a commodity, but does not include a benchmark that has, as an underlying interest, a currency or a commodity that is intangible. Depending on the designation, administrators would have to comply with a number of requirements, similar to those under the existing rules but modified as needed for the commodity markets. The changes are intended to protect the Canadian commodity markets and also establish an EU equivalent regime to allow EU institutional market participants to use any Canadian designated benchmark under their equivalency provisions. The amendments are generally based on the principles for Oil Price Reporting Agencies published by IOSCO which is used in the EU regulations. There is no current intention to designate any commodity benchmarks or administrators, but the CSA members believe it is important to establish a regime because such benchmarks are subject to vulnerabilities, particularly with respect to the voluntary reporting of input data and low liquidity in physically-settled contracts.
Similar proposals have been published by the OSC to OSC Rule 25-501 (Commodity Futures Act) Designated Benchmarks and Benchmarks Administrators. Comments on both proposals are due July 28.
May 31, 2021
A number of new regulatory requirements regarding conflicts of interest, including referral arrangements, come into effect on June 30. These requirements are part of the Client Focused Reforms initiative and require new internal processes and disclosure to clients. If you have not started working on these changes, please contact your usual lawyer at AUM Law as soon as possible to discuss how we can assist you.
May 31, 2021
On May 11, 2021, the Financial Services Regulatory Authority of Ontario (“FSRA”) proposed for a second time Rule 2020-001 Financial Professionals Title Protection under the Financial Professionals Title Protection Act, 2019. As a reminder, FSRA’s title protection framework is intended to mitigate consumer confusion and help provide assurance that persons providing financial planning or financial advisory services are qualified to do so through minimum standards for title usage. The proposed rule establishes approval criteria for credentialing bodies as well as approval criteria for those credentialing bodies to issue a financial planning and/or financial advisory credential to title users. The framework includes minimum proficiency, competency and knowledge standards for persons approved to use the titles through the credentialling requirements, but will not amount to a new licensing regime nor regulate individual conduct. In the framework consultation summary report containing responses to comments made on the original August 2020 consultation, FSRA notes its intention to include SROs as credentialing bodies under the framework and confirms that the framework is not intended to introduce new conduct standards for firms registered with IIROC or the MFDA.
FSRA has also proposed guidance with respect to its supervision approach, and revised guidance on its approach to administering applications. Several amendments were made to the application guidance, including with respect to the approval criteria for a credentialling body and also to specifically require applicants to show their policies and procedures with respect to real or perceived conflicts of interest. Additional expectations are also set out with respect to the curriculum of credentialing bodies, such as a specific requirement for the financial advisor curriculum to provide an understanding of standard retail investment products and how they should be viewed with respect to other areas of financial advice. Its approach to supervision will include annual reviews of approved credentialling bodies. FSRA also expects that credentialing bodies will share information with other such entities to ensure that only qualified persons obtain and keep an approved credential (and don’t credential-hop). Further, FSRA expects that credentialling bodies will have a process in place to review the good standing of their own credential holders in the event regulatory action is taken by another credentialing body or regulatory body.
Of specific interest to current title holders, the title restrictions extend to those titles that could be reasonably confused with the title of financial planner or financial advisor. Many commentators asked for additional clarification and examples of confusing titles. An appendix to the draft supervision guidance now provides examples of both titles that FSRA considers could reasonably be confusing and those that would not likely be confused with the title of financial planner or financial advisor. We expect this list to be the subject of new comments during this consultation period.
It is also proposed that credentialing bodies provide FSRA with the information that will be posted on their websites with respect to individuals and their credentials, as well as any disciplinary action taken against such individuals, in order to allow FSRA to create a central registry of credential holders. The formation of a central registry was suggested by a number of commentators on the original proposal.
In the notice accompanying the proposed rule, FSRA has set out for the first time its overview for its intended collection and remittance of fees, for which a separate consultation will be launched in the next few months. FSRA is currently proposing a framework that would include a fixed application fee ($10,000 for approval of a credentialing body and $5,000 for each application for approval of a credential) to recover direct costs of reviewing such applications. Each credentialing body would also be subject to an annual fee in order to help FSRA recover its annual oversight costs, as well as its start-up costs to implement the title protection framework. Such costs would be recovered through a mixture of fixed annual fees of $25,000, variable fees based on each credentialing body’s number of credential holders, as well as a third amount related to recovery of start up costs over a five-year period.
It is specifically noted that FSRA will have a process to review and adjudicate complaints against persons using a financial planner or financial advisor title without an approved credential, as well as complaints against the credentialling bodies themselves. The transition period for persons utilizing the title of financial planner or financial advisor without a recognized credential has been shortened to four years for the financial planner title and two years for the financial advisor title (from the date the rule comes into force, and only if the title was already in use as of January 1, 2020). Comments on the proposed rule and related guidance are due June 21, 2021.
If you have any questions on the impact of these proposals on your business, please contact your usual lawyer at AUM Law.
May 31, 2021
On May 7 the Ontario Securities Commission (OSC) announced that it will join in on the ban on deferred sales charge (DSC) sales of mutual funds, which the rest of the Canadian Securities Administrators (CSA) announced in February 2020. The ban is expected to be effective June 1, 2022 and will be achieved through a prohibition on the payment by fund organizations of upfront sales commissions to dealers. Like The Beatles in their Yellow Submarine, the CSA will be all together now in their ban of DSCs. The CSA’s multilateral ban, not including the OSC, was discussed in our February 2020 Bulletin.
The OSC reported that it received support for a harmonized DSC ban from industry stakeholders who commented on the OSC’s Proposed Rule 81-502 Restrictions on the Use of the Deferred Sale Charge Option for Mutual Funds, published in February 2020 (the Proposed Rule). The Proposed Rule would not have banned DSCs, but rather imposed restrictions on the use of DSCs. Among other things, the restrictions would have limited redemption schedules to three years and dealers would have been prohibited from selling funds with a DSC option to clients who were either aged 60 or over or had an investment horizon shorter than the DSC schedule.
The OSC received 34 comment letters on the Proposed Rule. Approximately 70% of commenters advocated for a complete ban of DSCs and urged the OSC to harmonize the rules with the CSA. Commenters expressed concern that the Proposed Rule would create a two-tiered regulatory approach, which would create compliance issues, be costly and burdensome to implement and monitor, and cause market inefficiency. Commenters also expressed concern that even with the restrictions under the Proposed Rule, there would still be negative investor outcomes with the DSC option. The OSC also noted that mutual funds with the DSC option have been in net redemptions since 2016 and had a total net outflow of $3.34 billion in Canada during 2020. During the same time, there was a total net inflow of $23 billion into mutual funds with no-load options. The OSC also noted that with advances in industry innovation, Ontario investors have access to affordable investment options, including no-load funds and exchange-traded funds that are available to investors of all account sizes. Approximately 25% of the commenters expressed support for the Proposed Rule and provided suggestions on the proposed restrictions.
One of the arguments in favour of DSCs is that they help smaller investors access financial advice that they would not otherwise be able to receive. DSCs help pay for upfront commissions paid by fund mangers to advisers. The argument is that, with the upfront commission, the adviser can afford to deliver appropriate advice and guidance to investors over several years. This would be the case even for clients with smaller accounts, where the adviser might otherwise not be able to afford to service that client.
With the announcement on May 7, the OSC also published OSC Staff Notice 81-731 Next Steps on Deferred Sales Charges. The OSC will now bring forward final amendments to National Instrument 81-105 Mutual Fund Sales Practices that will prohibit fund organizations from paying upfront sales commissions to dealers. The prohibition on the payment by fund organizations of upfront commission to dealers will result in the discontinuation of all forms of the DSC option, including low-load options. The redemption schedules for mutual fund investments purchased under a DSC option before June 1, 2022 will be allowed to run their course until their scheduled expiry.
May 31, 2021
In February 2021, FINTRAC updated its guidance on politically exposed persons (PEP) and heads of international organizations (HIO), as well as related guidance for account-based reporting entity sectors, including “securities dealers” (i.e. dealers and advisors). This guidance comes into effect on June 1, 2021.
The fundamental obligation of a registrant to make a PEP and HIO determination remains unchanged. The new guidance adds additional specificity and clarity regarding the duration of being a PEP/HIO and who constitutes a family member or close associate of a PEP or HIO. It also sets out some exceptions to the requirement to make a PEP or HIO determination.
Prior to the new guidance taking effect in June 2021, registrants should reflect the revised guidance in their compliance manuals and review their account opening documents to ensure that the PEP and HIO questions accurately capture those who meet the definitions.
The general FINTRAC guidance regarding a PEP and an HIO can be found here and the account-based information can be found here. Please don’t hesitate to contact your usual lawyer at AUM Law.
April 30, 2021
On March 29, the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC, and together with the CSA, Regulators) jointly published Staff Notice 21-329 Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements (Staff Notice). The Staff Notice is intended to provide regulatory guidance on how securities legislation, as it currently stands, applies to platforms (Crypto Asset Trading Platforms, or CTPs) that facilitate or propose to facilitate the trading of crypto assets that are securities (Security Tokens) or instruments or contracts involving crypto assets (Crypto Contracts) in the interim period while the Regulators continue working on establishing a long-term regulatory framework for CTPs. The Regulators’ work in this area began with the publication of Consultation Paper 21-402 Proposed Framework for Crypto-Asset Trading Platforms back in March 2019 (Consultation Paper), which we reported on in a previous issue of our bulletin.
In providing their guidance, the Regulators divide the CTPs into two broad categories: The Marketplace Platforms, which operate in a manner similar to marketplaces as currently defined in securities legislation and the Dealer Platforms, which are CTPs that are not marketplaces.
Dealer Platforms: The two most common characteristics of a CTP that is a Dealer Platform are that:
- It only facilitates the primary distribution of Security Tokens; and
- Clients do not interact with one another on the CTP.
The Regulators indicate that for a Dealer Platform that only facilitates distributions or the trading of Security Tokens in reliance on prospectus exemptions and does not offer margin or leverage, registration as an exempt market dealer or, in some circumstances, restricted dealer may be required.
A Dealer Platform that trades Crypto Contracts, on the other hand, would be expected to be registered in an appropriate dealer category, and where it trades or solicits trades for retail investors that are individuals, it will generally be expected to be registered as an investment dealer and be an IIROC member.
Marketplace Platforms: Generally, a CTP would be a Marketplace Platform if it:
- Constitutes, maintains or provides a market or facility for bringing together multiple buyers and sellers and their orders for trading in Security Tokens and/or Crypto Contracts; and
- Uses established, non-discretionary methods under which such orders will be executed and processed.
Marketplace Platforms will generally be subject to the requirements applicable to alternative trading systems, such as those set out in National Instrument 21-101 Marketplace Operations.
Additionally, it is contemplated that activities on Marketplace Platforms will be subject to market integrity requirements, such as IIROC’s Universal Market Integrity Rules or similar provisions.
Where a Marketplace Platform also conducts activities similar to those performed by Dealer Platforms, it would also be subject to the appropriate dealer requirements, including dealer registration requirements, discussed above.
The Regulators acknowledge the continued evolution of fintech businesses and the emergence of a wide variety of CTP models, and note in all cases that exemptive relief may be available and terms and conditions that are tailored to their businesses may be appropriate.
The Staff Notice also contains in an appendix the Regulators’ responses to the comments received from industry stakeholders on the Consultation Paper, but does not give much indication on what the long-term regulatory framework may look like (other than, perhaps, the taxonomy of CTPs that is used in the Staff Notice) or an expected timeline.
They encourage CTPs to consult with their legal counsel and to contact staff of their local securities regulatory authority on the appropriate steps to comply with securities legislation and IIROC rules. If you have any questions on the implications of this guidance, please contact us.
April 30, 2021