On July 27, 2023, the Ontario Securities Commission (OSC) released its annual report outlining the work staff conducted in 2022/23 (to date). The report has four parts, outlining the OSC’s (i) education and outreach to registrants; (ii) regulatory oversight activities and guidance; (iii) views on the impact of upcoming initiatives; and (iv) registrant conduct activities.

For the 2023-2024 review period, the key focus of the Canadian Securities Administrators (CSA) and Canadian Investment Regulatory Organization (CIRO), will be:

  • know-your-client (KYC), know-your-product and suitability determination reviews to assess the effectiveness of the implementation of the client focused reforms (CFRs);
  • compliance reviews of high-risk firms, following the analysis of the data collected in response to the 2022 Risk Assessment Questionnaire (RAQ); and
  • compliance reviews of crypto asset trading platforms.

This article highlights only a few sections of the comprehensive report. For a fulsome read of all 63 pages, click here (we promise you won’t be bored).

New Team in the Compliance and Registrant Regulation Branch – a new team has been created to oversee specialized dealers and restricted dealers, separate and apart from dealers such as EMDs, mutual fund dealers and investment dealers.

The not so Typical Inclusions in the Report, New Desk Reviews – The OSC has launched a few new desk reviews to help staff get a better understanding of some new trends in the industry. The questions posed to the affected issuers and restricted dealers noted below were designed to gather more information about their activities and to help gauge their impact on the industry and the public.

Desk Review of Mortgage Investment Entities (MIEs) – These entities are typically mortgage pools or corporations holding mortgage investments that are sold on a private placement basis. The report states that the OSC wanted to gather more information about these relatively new real estate securities offerings. Staff wishes to gauge how these firms are dealing with recent trends such as rising interest rates and the potential for mortgage defaults that may result from rising rates. The information gathered from the responses from MIE issuers and their loan portfolio performance data will help the OSC determine the type of additional guidance that needs to be given to these industry participants. These desk reviews will be ongoing, and the findings will be posted once the reviews have been completed.

Desk Review of Crypto Asset Trading Platforms (CTPs) – In February 2023, the OSC began desk review of restricted dealer CTPs for which the OSC was the principal regulator. CTPs have been around for a while, and as part of the “Registration as the First Compliance Review” process the OSC focused on key practices, controls around custody arrangements, corporate governance structures, insurance bonding policies, and management of conflicts of interest.

A few of the common issues identified involved inappropriate third-party custodians used to hold clients’ crypto assets. Several CTPs failed to perform reconciliations on a regular basis of the crypto assets held in custody for clients to the clients’ crypto asset liabilities. There was a noted lack of effective system of controls and supervision to address custodial risks and safeguard clients’ crypto assets. The OSC also reminded the CTPs subject to the review to implement adequate business continuity plans (BCPs).

The Typical Inclusions in the Report – Key issues uncovered during the review period are covered in the regulatory oversight activities and guidance section of the report. The suggested best practices are an attempt to help industry get in line with CSA expectations.

Results of the Conflicts of Interest Sweeps – As previously reported in AUM articles, the CSA and CIRO conducted sweeps focused on the implementation of the CFR conflicts of interest requirements. The results will be published later in the year and we will report on them with our analysis once released.

Observed Trends for Smaller Firms – Firms with a small number of compliance staff had deficiencies with inadequate compliance systems, as well as not meeting their client reporting obligations.

Trading and Advising Prior to Obtaining Registration – The OSC has also noted a trend in applicants who prior to obtaining registration, are engaging in dealing, advising and/or IFM activities. The OSC reminds individuals and firms interested in becoming registered that their past activities will be reviewed as part of the determination of “fitness for registration”. It is also noted that fines might be imposed if previously due filings (such as reports of exempt trade) were missed, and that the registration process would be expected to take longer in these circumstances.

Certain Online Adviser Activities – Certain types of online advisory activity is considered to be a material conflict, where the OSC has observed that some online advisers are aligning their services with a third-party’s (i.e. referral party’s) interests rather than with the interests of its clients. Firms that engage in providing online advice are expected to:

  • develop policies and procedures for identifying, addressing and disclosing material conflicts of interest that arise at both firm and individual registrant levels;
  • develop a process for suitability determinations that ensure that investment actions proposed or taken for clients are suitable for those clients and put the clients’ interests first; and
  • implement a process and controls to monitor and supervise business arrangements, including referral arrangements.

Other Topics of Interest

IFM Related Activities – Attention was given to remind the industry that if a firm engages in activities that directs or manages the business, operations or affairs of an investment fund, that firm will be required to register as an c (IFM) – “Staff is of the view that a firm that is not registered as an IFM but attempts to direct the business, operations or affairs of an investment fund by either taking on the responsibilities of an IFM, or by entering into agreements that impose restrictions on the registered IFM from exercising its powers, is not in compliance with the Act.”

Other topics covered by the report included marketing partnerships with third parties, registered firms operating start-up funding portals, surrender applications by entities that have failed to cease registerable activity, and recordkeeping obligations of registered firms based outside Canada.

Finally, the report reminds registrants that the next RAQ will be released in 2024, and that registrants should start to prepare for the total cost reporting requirements without delay.

July 31, 2023