On August 10, 2021, staff of the Compliance and Registrant Regulation (CRR) Branch at the Ontario Securities Commission (OSC) published OSC Staff Notice 33-752 Summary Report for Dealers, Advisers and Investment Fund Managers (Report). The Report provides an overview of the CRR’s work for the 2020-2021 fiscal year and is a must-read for all registrants. The OSC encourages registrants to use the Report to learn more about recent and proposed regulatory initiatives, the OSC’s expectations for registrants and how staff interpret initial and ongoing requirements for registration and compliance.
1. Focus Areas for 2021-2022 Compliance Reviews
The OSC identified the following as focus areas:
- Firms identified as high-risk through the Risk Assessment Questionnaire (RAQ) process;
- Client Focused Reforms review, which will commence after the key implementation dates of June 30, 2021 and December 31, 2021;
- Firms offering online advice or online dealer platforms; and
- “Registration as the First Compliance Review” for crypto-asset trading platforms.
AUM Law’s focused and general compliance risk assessments can save you time and money by enabling you to proactively identify and address issues before they flare up into problems or you are audited by the OSC. Please contact us to learn more about these services.
2. Compliance Initiatives
- COVID-19 Survey: In July 2020, the OSC issued a COVID-19 Survey to gather information from registrants to better understand the initial impacts of the COVID-19 pandemic on registrants’ operations. Overall, the information gathered from the survey demonstrated that registrants adapted well.
- Remote Work and Business Location Registration Considerations: Questions on whether individuals working remotely are required to identify their personal residence as a “business location” in accordance with NI 33-109 have popped up. The Report notes that the OSC continues to take a flexible and practical approach on this issue considering many firms have established work-from-home (WFH) arrangements with their registered individuals. However, registered firms that allow staff to work remotely must have compliance systems in place, including appropriate policies and procedures related to supervision, that adequately address the WFH arrangements.
- Business Continuity Planning: The operational challenges arising out of the COVID-19 pandemic demonstrated the importance of business continuity plans (BCPs). It is important that senior management is involved in the creation and approval of the firm’s BCP. Senior management’s ongoing communication and participation regarding the firm’s BCP will demonstrate a positive and strong tone at the top.
- 2020 Risk Assessment Questionnaire: In June 2020, the OSC issued the 2020 RAQ to over 1,000 firms. The RAQ is the OSC’s primary tool to obtain information about a registrant’s business operations, which supports the OSC’s risk-based approach to select firms for compliance reviews or targeted reviews. Registrants can expect to receive the next version in April 2022.
3. Compliance Deficiencies
What follows are highlighted topics we think will be of particular interest to our readers.
- Representatives servicing clients without required registration: The Report notes instances of representatives of registered firms conducting registerable activities in Ontario without being registered as either ARs, AARs or dealing representatives. If a firm is not in compliance with the registration requirements in Ontario, this may raise concerns regarding the adequacy of the firm’s compliance system and may reflect poorly on the firm’s continued fitness for registration. This may also raise concerns that the firm is not adequately supervising its representatives.
- Policies and procedures not tailored to the firm’s operations: For instance, (a) written policies and procedures did not address Ontario regulatory requirements, such as CRM2 guidelines for client account reporting and minimum timelines for retention of books and records, (b) the annual compliance report to the Board of Directors (or equivalent) did not address the firm’s compliance with Ontario securities regulatory standards or was signed by someone other than the firm’s CCO, and (c) confidentiality provision language in employment agreements, such as non-disclosure agreements and whistleblower policies, did not permit exceptions for voluntary communication with Ontario regulatory authorities.
- Inadequate disclosure when using benchmarks: Staff noted instances of registered firms presenting benchmarks in marketing materials to compare to the performance of their investment strategies, without adequate accompanying disclosure for a client to draw correct conclusions from the comparisons.
- Misleading marketing material: Several firms included claims in marketing material that were misleading. Registrants must ensure that all claims included in marketing material can be substantiated, are factually correct and are up to date to ensure that existing and prospective clients are not misled.
- Prohibited representations: The Report identifies instances where firms made prohibited representations in their marketing material that (a) implied the OSC had passed upon the financial standing, fitness or conduct of the firm, (b) resulted in the registration of the firm being improperly marketed, or (c) suggested the firm or an individual employed by the firm is holding out as being registered through the use of misleading titles.
- Outside business activities: OBAs are a regulatory concern for a number of reasons, including when the OBA (a) creates a material conflict of interest for the representative that must be addressed in the best interest of the client, (b) places the representative in a position of influence over clients, especially vulnerable clients, (c) creates the risk for client confusion, or (d) limits the ability of the representative to properly service clients. As such, firms must supervise their representatives’ OBAs as part of their compliance system and respond to material conflicts of interest which include OBAs. Firms are also required to report their representatives’ OBAs on each individual’s registration application, and report changes on the NRD within ten days.
- Complaint handling processes: Staff identified a number of issues, including a failure to clearly set out a client’s right to immediately access OBSI if they are not satisfied with the firm’s response. In some cases, clients were instead directed to the firm’s internal ombudsperson. Staff found this to be problematic as it may mislead clients to believe that they are required to contact an internal ombudsperson first before escalating their complaints to OBSI, or that the internal ombudsperson is an alternative to OBSI. The Report reminds firms that both the UDP and CCO have responsibility for establishing an effective compliance system, which includes maintaining a complaint handling process that is consistent with the firm’s obligations to deal fairly, honestly and in good faith with their clients.
- Net asset value adjustments: Section 12.14 of NI 31-103 requires an IFM to deliver no later than the 90th day after the end of its financial year and no later than the 30th day after the end of its first, second and third interim period, a completed Form 31- 103F4 Net Asset Value Adjustments (Form 31-103F4), if any net asset value (NAV) adjustment has been made in respect of an investment fund managed by the IFM during the financial year, including any interim period. A NAV adjustment is necessary when there has been a material error and the NAV per unit does not accurately reflect the actual NAV per unit at the time of computation. The Report notes instances where the error was identified by sub-advisers, auditors, or third-party fund administrators. Staff’s review found that most of the errors were identified and rectified in a timely manner, however, there were instances where inadequate controls resulted in the error remaining undetected for an extended period of time (e.g., greater than one month).
- Wholesaling securities requiring registration: Market participants who engage in wholesaling activities should (a) not communicate with end-purchasers when relying on section 8.5 of NI 31-103, including through written communications and marketing and registered firms should have procedures to prevent their employees from doing so, (b) seek registration as a dealer if they are not able to rely on section 8.5 of NI 31-103, and (c) have procedures to prevent their registered individuals from engaging in wholesaling outside of the registered firm.
- Ownership changes: The Report notes firms are not filing the notice of proposed ownership changes in, or asset acquisitions of, registered firms required under sections 11.9 or 11.10 of NI 31-103. Also noted were instances where, in addition to the registered firm missing the notice under sections 11.9 or 11.10 of NI 31-103, the firm did not make the required filings under NI 33-109, in particular the filing of Form 33-109F5 to reflect the change in share ownership or the acquisition of its assets. A registered firm has 30 days to file any changes to information previously reported in Part 3 of Form 33-109F6, which includes Item 3.12 Ownership Chart. A registered individual or permitted individual must also update information previously provided under Item 17 Ownership of Securities and Derivatives Firms of Form 33-109F4 within 10 days of such change. Failure to provide notice of ownership changes or asset acquisitions may also result in the issuance of a warning letter or further regulatory action.
- Incomplete Form 33-109 submissions: Registrants need to provide blacklines showing the amended sections of the form when making an update to information previously provided under Form 33-109F6. Furthermore, an update to information about a registered firm previously filed using Form 33-109F6 requires that the title of an authorized signing officer or partner be specified in the certification section in Form 33-109F5.
- Exemptive relief applications: The Reports reminds market participants engaging in at-will financings facilities/equity lines that both the issuer and the purchaser generally require registration relief. In addition, market participants are reminded that other requirements of Ontario securities law, including prospectus exemptions, early warning and insider reporting requirements, the prohibition on trading in securities of a reporting issuer while in possession of material undisclosed information and the prohibition on market manipulation, may also apply to market participants involved in equity line arrangements.
4. Additional Items of Note
- Voluntary Surrender Process: The OSC expects a registered firm to file an application to surrender its registration (a voluntary surrender application) when it ceases (or intends to cease) conducting registerable activities. To initiate the voluntary surrender process, registered firms must submit an application letter and an officer’s/director’s certificate. There is no prescribed format for the application letter or officer’s/director’s certificate. The application letter and certificate must be filed through the OSC’s Electronic Filing Portal.
- Registration of Client Relationship Managers: Last year, the Canadian Securities Administrators (CSA) updated its expectations for the assessment of Relevant Investment Management Experience (RIME) for advising representatives (ARs) wishing to act as client relationship managers (CRMs). Associate advising representatives (AARs) that act as CRMs typically will not have accumulated sufficient securities-selection RIME to become ARs. However, an AAR or other individual who can demonstrate that they have all of the other proficiencies required for registration as an AR, in addition to significant experience relevant to CRM activity, can be registered as an AR who will specialize in CRM activity (a CRM AR). In any case, terms and conditions will be applied to the registration of CRM ARs to restrict their registerable activities to things that do not involve the selection of securities.
5. Policy Initiatives
As usual, the Report summarizes certain policy initiatives affecting registrants and provides links to the relevant publications. This year, the Report covers:
- Burden reduction;
- Crypto-asset trading platforms;
- Client focused reforms; and
- Exemption from underwriting conflicts disclosure requirements.
If you would like to discuss the issues highlighted in this article or any aspect of the Report and its relevance to your business, please do not hesitate to contact us.
August 31, 2021