Category: Regulatory Compliance

Alberta Eliminates Director Residency Requirements

On March 29, 2021, Bill 22, Red Tape Reduction Implementation Act, 2020, was proclaimed into force in Alberta. As a result, an Alberta corporation will no longer be required to have any Canadian citizens on its board of directors. In addition, director residency information will no longer be collected.

Previously, businesses incorporated under the Business Corporations Act (Alberta) were required to have a minimum of 25% of their directors be Canadian residents. The move is part of a larger Government of Alberta mandate to attract businesses by reducing costs and regulatory burden for Alberta businesses. We previously reported similar proposed changes for corporations incorporated under the Business Corporations Act (Ontario) pursuant to Bill 213. Bill 213 has received royal assent on December 8, 2020 but has not yet been proclaimed into force.

April 30, 2021

Alberta and Saskatchewan Adopt the Self-Certified Investor Prospectus Exemption

On March 31, 2021, the Alberta Securities Commission and the Financial and Consumer Affairs Authority of Saskatchewan adopted, on an interim, three-year basis, a new prospectus exemption entitled the Self-Certified Investor Prospectus Exemption, as outlined in Multilateral CSA Notice of Implementation Alberta and Saskatchewan Orders 45-538 Self-Certified Investor Prospectus Exemption. The new exemption allows individual investors in Alberta and Saskatchewan who do not qualify as an accredited investor to invest alongside accredited investors, provided that they meet other criteria to demonstrate their financial and investment knowledge. There are a number of conditions to the exemption, including an extensive prescribed risk disclosure as part of the self-certification, and limits on investments to $10,000 in the last 12 months per issuer, with an aggregate cap of $30,000 in the last 12 months for all issuers. The investment limits do not apply for ‘Listed Issuer Investments’, or those issuers listed on certain exchanges in Canada, provided the investor receives suitability advice respecting the investment from a registrant. Guidance is provided on the distribution of securities by private issuers to self-certified investors and special purpose vehicles comprised in part of self-certified investors.

April 30, 2021

CSA Multilateral Notice and Request for Comment re Proposed Order 45-539 Small Business Financing

The Alberta Securities Commission and the Financial and Consumer Affairs Authority of Saskatchewan have proposed a new prospectus exemption to assist small businesses in Alberta and Saskatchewan to raise up to $5 million from investors in those provinces, based on a simple offering document (which would be considered an offering memorandum under securities legislation).

There are many proposed conditions to the use of the exemption, which vary depending on whether or not financial statements are provided to an investor. For example, if the statements are not provided, the maximum an issuer group could raise from investors that would not qualify to invest under other specified prospectus exemptions over a 12 month period would be $1.5 million, subject to a lifetime limit of $5 million. The maximum any one investor could invest would be $2,500, or a higher limit of $10,000 if they qualify as a “minimum income investor” (which would have lower thresholds than those required of an “accredited investor”). The individual investor thresholds are slightly higher if financial statements are provided.

It is proposed that the financial statements provided under the exemption would not need to be audited (review engagement only) and could be prepared based on Canadian GAAP applicable to private enterprises (with some modifications). It is noted that corporate or other legislation might still require certain issuers to provide audited statements. The financial statements would have to continue to be provided to investors but only until such time as the proceeds from the offering are expended, and continuous distribution offerings would not be permitted. The exemption is intended to address financing challenges for small businesses that do not yet attract venture capital investors, and the exemption would not be available to issuers that are reporting issuers or investment funds. Other conditions to the exemption include requiring investors to sign a prescribed risk acknowledgement, the filing of a report of exempt distribution and the filing of the offering document on SEDAR.

Interestingly, an issuer would be given the choice of creating their own offering document with the specified information included, or to use a pre-designed form of offering document with a drop down menu that could be completed electronically in a Q&A format. Comments on the proposal are due on May 7 (May 24 with respect to the technical amendments relating to SEDAR filing requirements).

April 30, 2021

ASC Notice and Request for Comment re Blanket Order 31-536 Alberta Small Business Finder’s Exemption

The Alberta Securities Commission is continuing to explore unique exemptions to revitalize Alberta’s capital markets and assist small businesses to raise capital efficiently while balancing investor protection.

The proposed new blanket order would provide an exemption from the dealer registration requirement in Alberta for individual finders who utilize pre-existing personal contacts. It would replace the current Northwestern Exemption which has been revoked everywhere except Alberta. The targeted exemption is intended to assist early stage businesses raising modest amounts of capital without the participation of a registered dealer. There are a number of requirements for the use of the exemption, including that the issuer must have its head office in Alberta, and that the issuer can not have raised more than $5 million under all exemptions from the prospectus requirements. The registration exemption for finders would only be available if the issuer uses certain specified prospectus exemptions, such as the private issuer exemption where the purchaser is an accredited investor or not a member of the “public”, the offering memorandum exemption and the accredited investor exemption.

Finders would not be permitted to solicit prospective purchasers other than people with whom they have a “substantial pre-existing relationship”, and as a result advertising would also be prohibited. In addition, the finder would not be allowed to rely on the dealer exemption if they have previously provided certain financial services to the purchaser of securities, such as financial planning, provision of insurance products or mortgage services. Investors would be required to sign a specified risk acknowledgement form, and an information form with respect to the finder would need to be filed with the ASC within 10 days of the distribution. Comments on the new proposal are due by May 7.

April 30, 2021

Regulatory Penalties in British Columbia Not Discharged Through Bankruptcy

The Supreme Court of British Columbia has confirmed that monetary penalties and disgorgement orders from regulatory proceedings are exempt from a bankruptcy discharge. In 2015, the British Columbia Securities Commission ordered Thalbinder Singh Poonian and Shailu Poonian to pay more than $19 million in penalties and disgorgement after the commission found that the pair had engaged in market manipulation. In 2018, the Poonians sought a discharge from bankruptcy absolving them of their debts. The British Columbia Supreme Court denied their application for an absolute or suspended discharge from bankruptcy under the Bankruptcy and Insolvency Act.

The ruling sends a strong message that securities law violators may have difficulty using bankruptcy laws to release themselves of the financial consequences of their wrongdoing.

April 30, 2021

Lawsuit Against Ontario Securities Commission Can Proceed

On March 18, 2021, the Court of Appeal for Ontario ruled that a malicious prosecution lawsuit against the Ontario Securities Commission and three of its employees can proceed. One of the appellants in the case, Mr. Sam Qin, and various entities he controlled, were involved in the development and management of solar energy projects in Ontario and elsewhere. Mr. Qin attempted to raise capital for his projects using a program sponsored by the Ontario government. Neither Mr. Qin, nor any of his companies, were registered to sell securities and no prospectus was filed in connection with Mr. Qin’s efforts to raise funding. After certain proceedings, the OSC dismissed the allegations, finding that the appellants were not mainly engaged in the sale of securities and were not required to register under the Securities Act (Ontario).

In their statement of claim, the appellants argued that the allegations were false, made without reasonable and probable cause, and made for a collateral and improper purpose.

April 30, 2021

Expansion of Ontario Securities Commission’s Mandate

In January 2021, the Capital Markets Modernization Taskforce published its final report after completing its review of the status of Ontario’s capital markets. In its most recent provincial budget, the Government of Ontario indicated that it will proceed with certain of the recommendations made in the report, including to expand the Ontario Securities Commission’s mandate to include fostering capital formation and competition in the markets. The OSC’s current mandate is to provide protection to investors from unfair, improper, or fraudulent practices, to foster fair and efficient capital markets and confidence in capital markets, and to contribute to the stability of the financial system and the reduction of systemic risk.

April 30, 2021

FSRA Publishes First Quarterly Report Scorecard on Service Standards

On March 12, 2021, the Financial Services Regulatory Authority of Ontario (FSRA) published its first quarterly scorecard on its service standard performance. FSRA has 22 service standards to support core regulatory services. The standards measure operational and regulatory activities that FSRA provides to industry and consumer stakeholders, such as licence renewals, regulatory applications, complaints resolution and annual information returns. The standards set service expectations and targets for stakeholders and consumers under normal conditions and are intended to improve accountability and timeliness of service delivery. According to the results for Q3 of 2020:

  • FSRA met or exceeded service targets for 80 per cent of its standards over the reporting period.
  • Standards that fell below target were related to complaints, licence applications processing (including mortgage broker licensing) and pension applications processing.
  • The below-target performance is an outcome of FSRA adopting new service processes mid-quarter. The processes required staff to adapt to new steps and technology.
  • Where FSRA fell below target, it has identified mitigation plans. FSRA intends to continue to conduct staff training on the new processes and expects performance scores in all three areas to improve in subsequent quarters.

FSRA intends to monitor quarterly scores and adapt standards to its regulatory activities, resources and the needs of stakeholders. In the fall, as part of its 2022-2023 business planning/budgeting process, FSRA will seek comments regarding the need for additional resources to meet higher standards. The service standards will undergo a full review in early 2022.

April 30, 2021

Updates on Amendments re Syndicated Mortgages

As reported in our December 2020 bulletin, 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 form part of the 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.

On February 25, 2021, the Canadian Securities Administrators (CSA) published CSA Staff Notice 45-328 Update on Amendments relating to Syndicated Mortgages. In that notice, the CSA confirmed that the Amendments and the amendments in the local jurisdictions to the syndicated mortgage rules, took effect in all jurisdictions on March 1, 2021, except in Ontario and Quebec where the amendments are expected to take effect on July 1, 2021.

Accordingly, if a firm trading syndicated mortgages is operating only in Ontario or Quebec, they have until July 1, 2021 to comply with the Amendments. Firms operating in all other Canadian jurisdictions needed to comply with the Amendments by March 1, 2021.

Furthermore, on March 10, 2021, FSRA released final approach guidance (the “SMI Guidance”) for supervising mortgage brokerages and administrators that engage in NQSMIs. FSRA consulted on the proposed guidance in August-September 2020. The SMI Guidance will apply to: (a) mortgage brokerages dealing and/or trading in NQSMs with permitted clients on or after July 1, 2021; (b) mortgage brokerages acting on behalf of the borrower in NQSMIs with investors/lenders that are non-permitted clients; (c) mortgage brokerages that dealt and/or traded in legacy NQSMIs (conducted prior to July 1, 2021); and (d) mortgage administrators administering NQSMIs. The SMI Guidance highlights the division of regulatory oversight of NQSMIs, risk profile factors for mortgage brokerages, administrators and NQSMIs, information required for the quarterly data report for NQSMIs with permitted clients and data collection for legacy NQSMIs. Firms in Ontario dealing and/or trading in NQSMIs or mortgage administrators administering NQSMIs will want to review the final guidance in detail. Please don’t hesitate to contact your usual lawyer at AUM Law.

April 30, 2021

British Columbia Securities Commission to Contact Clients Directly

The British Columbia Securities Commission recently announced that it will be contacting clients more routinely as part of its compliance reviews (a practice adopted by the Ontario Securities Commission). Historically, the BCSC has only contacted clients in “exceptional cases,” but in a recent report it has “found that client contact can be a valuable method of assessing the firm’s compliance with BC securities law.”

February 26, 2021

Some Provincial Regulators Say Modernization Task Reforms Could Hurt Harmonization

In response to the recently released report by Ontario’s capital markets modernization taskforce containing 70 plus recommendations (summarized in our January bulletin), the Canadian Securities Administrators (CSA), excluding the Ontario Securities Commission (OSC), recently issued an open letter expressing concern about a number of the taskforce recommendations. In particular, the CSA letter raises concern that certain recommendations could negatively affect harmonization efforts across Canada, that a “harmful imbalance” could result from the recommended expansion of the OSC’s authority in certain areas, and have (again) called for the OSC to join the CSA’s passport regime.

February 26, 2021

CSA to Release Recommendations on SRO Framework

In response to the recently released report by Ontario’s capital markets modernization taskforce containing 70 plus recommendations (summarized in our January bulletin), the Canadian Securities Administrators (CSA), excluding the Ontario Securities Commission (OSC), recently issued an open letter expressing concern about a number of the taskforce recommendations. In particular, the CSA letter raises concern that certain recommendations could negatively affect harmonization efforts across Canada, that a “harmful imbalance” could result from the recommended expansion of the OSC’s authority in certain areas, and have (again) called for the OSC to join the CSA’s passport regime.

February 26, 2021

FAQ Corner: Are there other regulations for a portfolio manager to think about when determining whether the early warning reporting rules apply to the purchase of securities of a reporting issuer?

Answer: When considering an investment in a reporting issuer, we often get questions on whether the early warning reporting (EWR) requirements apply and whether a report is required under National Instrument 62-104 Take-Over Bids and Issuer Bids or National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues (NI 62-103). Typically, a purchaser must promptly issue a news release and file an early warning report in the prescribed form within two business days of a purchase exceeding the thresholds. However, NI 62-103, in certain instances, may allow a portfolio manager to rely on the alternative monthly reporting (AMR) regime to report the beneficial ownership of, or control or direction over, voting or equity securities (or convertible securities) of the reporting issuer in question within 10 days of each month-end in which a report is required to be made. A separate insider report may also be required to be filed on SEDI under applicable securities regulations with respect to such investment in the reporting issuer unless an exemption is available. In addition to the early warning and insider reports, a portfolio manager should also consider other rules, including whether consent for a purchase of securities would be required under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). For example, NI 31-103 prohibits a registered adviser from causing an investment portfolio it manages (including an investment fund) to purchase a security of an issuer in which a responsible person (as defined in NI 31-103) is a partner, officer or director unless the written consent of the client (which means the unitholders of a fund if the client is a fund) is obtained before the purchase.

There are also other conflict of interest issues to consider in these instances. For example, where the purchase in question is by an investment fund, particularly of larger positions, portfolio managers should consider whether such transaction would be prohibited by conflict of interest rules such as those found in subsection.111(2) of the Securities Act (Ontario). This provision prohibits an investment fund from making an investment in any person or company in which the fund, alone or together with one or more related investment funds, is a substantial security holder (generally, beneficial ownership of voting securities to which are attached more than 20% of the voting rights attached to all of the issuer’s voting securities). The calculation to determine whether the issuer owns 20% or more of a reporting issuer is different for the purposes of s.111 of the OSA and or the purposes of the EWR and AMR regime in NI 62-103.

These rules require careful consideration and can be complex, including with respect to determining a person’s ownership percentage of securities of a reporting issuer. If you have any questions with respect to these requirements, please do not hesitate to contact us.

February 26, 2021

Outside Activities 2.0: Potential Burden Reduction Comes to Reporting of Registrant Information

On February 4, the Canadian Securities Administrators (CSA) released a number of proposed changes to certain initial and ongoing regulatory reporting requirements for registrants. The CSA is inviting comments on these proposals by May 5. Some of the highlights of these proposed changes are:

  1. Outside Business Activities

As you know, registrants are currently required to report and update (within 10 days) all Outside Business Activities on their personal disclosure form (Form 33-109F4). The proposed changes seek to:

  • Provide much clearer definition of what an “Outside Business Activity” is. This includes dropping the term “Business” from “Outside Business Activity” to further make clear that a reportable activity includes more than just a compensated position.
  • Provide a fairly comprehensive set of evaluation criteria to assist a registrant in determining what is reportable to regulators and what is not. Some examples discussed include clarifications that activities like being a community hockey coach or being a director in a non-active holding company is typically not reportable.
  • Extend the reporting deadlines.
  1. General Deadline Extensions

In addition to extending the reporting deadline for “Outside Activities” from 10 to 30 days, other areas of disclosure have also received extended reporting deadlines. The proposed new deadlines are generally listed as follows:

Relevant Sections of Your Firm Registration Form (Form 33-109F6) Deadline Relevant Sections of Your Personal  Registration Form (Form 33-109F4) Deadline
  • General Registration Information
  • Agent and Address for Service
  • Contact Information
  • Registration History
  • Financial Condition
  • Client Relationships
  • Regulatory Action and Legal Action
15 Days (previously 10 days)
  • Name, Address, Citizenship
  • Registration Jurisdictions
  • Individual Categories
  • Address for Service
  • Proficiency
  • Location of Employment
  • Terminations
  • Regulatory Disclosure
  • Criminal Disclosure
  • Civil Disclosure
  • Financial Disclosure
  • Ownership of Securities
15 Days (previously 10 days)
  • Business History
  • Securities Registration
  • Auditor
  • Client Assets
  • Conflicts of Interest
30 Days (previously 10 days)
  • Residential Address
  • Mailing Address
  • Reportable Activities
  • Previous Employment
30 Days (previously 10 days)

The above is just a high-level summary of the proposed changes. If you have additional questions about the above, please contact your usual lawyer at AUM Law to discuss.

February 26, 2021

Interview with Richard Roskies regarding Client Focused Reforms and Know-Your-Products Provisions

Richard Roskies, Senior Counsel at AUM Law, recently sat down with Parham Nasseri from InvestorCOM to discuss the Client Focused Reforms and practical approaches for investment dealers and advisors to meet their KYP obligations.

Parham: What are your thoughts on how investment dealers have generally responded to the CFR requirements and their state of readiness?

Richard: By now, the CFRs should be on every dealer and advisors’ radar. I’d say about 60% of the clients I work with are at least knee deep into the conflict-of-interest requirements that are due in June. When it comes to the KYP, KYC and Enhanced suitability segments, I believe most people have started to think about it, but they haven’t yet weighed in with full focus. For example, these topics have not been a huge topic on the implementation committees I sit on.

That being said, depending on the size of the dealer’s product shelf, the KYP piece requires a fair amount of work and now is the time to start thinking about implementation strategy.

In terms of materials coming out of the final SRO rules-based comments, there wasn’t much to be concerned about. While the rules are close to baked, the interpretation will be ongoing through implementation guidance and FAQs. In short, this will be an ongoing iterative process for our industry.

Parham: At a high level, are there any outstanding areas for clarification or is the implementation goal quite clear?

Richard: I believe we are going to get ongoing implementation guidance and FAQs throughout this year.

The Canadian Securities Administrators (CSA) has done a lot of work in setting out what the goals, principals and expectations of the CFRs are. When it comes to KYP, it is clear that the regulators now expect documented KYP evidence for all traded products. However, when you drill down to the details of what is a reasonable way for firms to achieve these goals, I believe CSA guidance defers to industry by using the term use your “professional judgement” about ten times.

The regulators have definitely given us enough guardrails about what reasonable KYP should look like, but the last details will be determined by the ongoing interaction between regulatory Staff and industry. In short, you should absolutely start working on the CFRs, including KYP, but it will be important to follow the clarifications that come out over the course of at least this coming year.   

Parham: Given the Dealer’s new KYP obligations, can you comment on what it means to monitor for significant changes and what needs to happen when a significant change is detected?

Richard: First it is important that the CSA guidance explicitly narrowed the requirement here from general monitoring to monitoring for significant changes. We don’t get an explicit definition of “significant change”, as the guidance indicates that it will vary depending on your firm’s operations and the type of security. However, I think a generally safe litmus test is that you are looking for any event that may significantly affect market price.

To that end, for most securities, I would be thinking about creating proactive alerts for any news stories related to the issuer (including earnings calls). Where we are talking about private funds, there will still usually be certain disclosure events that you can use as triggers for reviews. These are the kinds of triggers that you would want to consider. You also would want to have policies on reviewing your shelf if a sector or broad market downturn arises as companies are likely change in those times of stress. I read into the guidance that the higher the risk profile of the security, the more often you should be “checking in”.

Parham: Can you discuss the requirement to assess products on your shelf, how frequently, is this the regulator’s way of reducing shelf sizes, how does this requirement differ for dealers that have a proprietary shelf or have proprietary products on their shelves?

Richard: I think industry’s major comment to regulators over the course of the discussion about KYP is that some of these changes may have the unintended consequence of reducing shelf size. Whether that occurs in actuality will have to be determined over the course of the next few years.

In terms of different KYP approaches, that term “professional judgement” comes back into play. The guidance is clear that you are indeed allowed to simplify the due diligence required as the product trends towards the lower risk/well understood end of the scale. In fact, we are talking to our clients and regulators have confirmed that for certain lower risk/public securities, you could even do KYP by sector (e.g. draft a KYP document for the “public banking sector in Canada”). As you trend towards higher risk, private and more complex securities, the diligence will need to become more detailed. Private proprietary products are likely much closer to the highly detailed side of the scale.

Parham: Clearly, the new KYP requirements are raising some questions in the industry. What are some practical approaches in your view for tackling this new requirement?

Richard: When it comes to what is practical and reasonable, I always come back to two rules:

  • Effort counts. When it comes to compliance, the goal cannot be absolute perfection. The goal has to be creating a strong and demonstrable “culture of compliance”. This is a key term regulatory auditors look for. Basically, as long as you are adequately protecting clients, effort counts. Where compliance departments can show that they have taken the CFRs seriously and have built up processes that reasonably resemble those of their competitor firms, then in an audit, regulators may dispute interpretation or approach but you are not going to fall below that dangerous red line. Where thoughtful effort is not shown, that is where you start to get into trouble.
  • “If it is not documented, it does not exist.” If you boil down the CFRs into one concept, it is that most of what they mandate are things that dealers and advisers have generally been doing in their heads. The CFRs ask that you better evidence your existing process. To that end, their needs to be a good paper trail for each of the tasks the CFRs are asking you to do. I get that creating a paper trail for each KYP review is onerous, and there are tech solutions that can help with that. However, the papering aspect of these CFRs cannot be understated.

Finally, tackling the CFRs from scratch are going to be hard. You need tools.

Parham: Did the comment letters (and any of the responses you’ve seen – introduce or raise any substantive items, or do you feel like what Advisor KYP is and what is required is fairly clear here?

Richard: The current round of comments for the IIROC/MFDA rules that ended January 18 was relatively sparse. I believe there were about a handful of letters and while they were thoughtful they were relatively short. As mentioned earlier, the implementation guidance/FAQs will be more informative over the coming year.

Parham: In your respective view, do the requirements raise the bar for advisors when it comes to meeting their KYP requirements?

Richard: I think that the requirements codify a lot of the best practices that Commission Staff have been recommending for a number of years. In short, most of what is in the CFRs are not “net new” from a substantive standpoint. What is new and onerous is that dealer/adviser activity will now need to be evidenced in a written and formal manner.

Parham: What are the challenges a dealer and advisors needs to consider with respect to their KYP obligation and considering a reasonable range of alternatives when making recommendations?

Richard: The first and main challenge is trying to determine what this phrase means for different firm models. While this specific phrase is drawn from the suitability requirement, there are a number of instances within the KYP requirement where you may have to look at comparator products as part of your due diligence requirements.

Understanding the “why” of this requirement will help inform when and how you should be including comparator product analysis in your KYP diligence.

The first “why” is conflicts of interest – If you are a dealer or adviser that is recommending a product (both proprietary and third party) where you are getting direct or indirect compensation for that recommendation, there is a (reasonable or otherwise) perception that you are only recommending this product because you are getting paid for it. Regulators have struggled with this issue for years. Where this conflict is identified for your firm, it is helpful to do a comparator product review so that you can show that the product you are recommending is being recommended because it is a good product, not because you are getting paid to sell it. This will give your firm additional protection as this area evolves.

The second “why” is based around some recent OSC decisions. Regulators have found that there is a client expectation that when they go to a firm, they are getting access to all the products the firm sells not just the products that an individual dealer sells. To the extent that you can show that a dealer considered all of the firm’s shelf when recommending a product to a client, you are avoiding a client expectation issue that has come up in the past.

Notwithstanding the above, I think this area will be an ongoing topic of discussion throughout the year through implementation guidance and FAQs.

February 26, 2021