Key takeaways from OSC’s Summary Report for Dealers, Advisers and Investment Fund Managers

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On August 10, 2021, the Compliance and Registrant Regulation (CRR) division of the Ontario Securities Commission (OSC) published its annual Summary Report for Dealers, Advisers and Investment Fund Managers- OSC Staff Notice 33-752 (the “Report”). The Report provides an overview of the OSC’s regulatory oversight activities in the 2020-2021 fiscal year and outlines important information for registrants.

1. Registrant outreach programs and resources

Several programs and resources of interest were provided to registrants in the 2020-2021 fiscal year, including updates to the voluntary surrender process and registration of client relationship managers.

1.1. Voluntary surrender process

Registered firms seeking to voluntary surrender their registration when they cease or intend to cease registerable activities are advised that the CRR will look for satisfactory evidence that all financial obligations of the firm to its clients have been discharged, all regulatory requirements for the surrender of registration have been or will be fulfilled, and the surrender of the registration is not prejudicial to the public interest. To initiate a voluntary surrender process, registered firms must submit an application letter and an officer’s or director’s certificate. Although there is no prescribed format, the Report provides an indicative list of the contents of these two application documents.

1.2. Registration of client relationship managers

The Canadian Securities Administrators (CSA) has updated its expectations for the assessment of Relevant Investment Management Experience (RIME) for advising representatives (ARs) seeking 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 demonstrates that they have all the other proficiencies required for registration as an AR, in addition to significant CRM experience, can be registered as an AR specialising in CRM activity (a CRM AR). CRM ARs may not use titles that could imply to a reasonable person that they have the same status as unrestricted ARs. See Guidance on Client Relationship Management Specialists and Related FAQs.

2. Compliance initiatives

The Report provides an overview of the compliance initiatives, including findings and outcomes from compliance reviews conducted during the 2020-2021 fiscal year and highlights best practices.

2.1. COVID-19 survey

In July 2020, the CRR issued a survey to registrants domiciled in Ontario to better understand the impact of the COVID-19 pandemic on their operations, from January 1, 2020 to June 30, 2020. The survey demonstrated that registrants adapted well during the pandemic yet raised two considerations:

(a) Remote work and “business location” registration

The increased prevalence of registered individuals working remotely has raised questions about whether such individuals are required to identify their personal residence as a “business location” in accordance with NI 33-109 - Registration Information Requirements (“NI 33-109”). The CRR takes a practical approach on this issue, considering many firms have established work-from-home arrangements with their registered individuals. For a personal residence to be reported as a “business location”, registered firms should consider if there is a regular and ongoing working from home arrangement, and also consider if:

  • More than one registered individual conducts registerable activities on behalf of the firm at the residence;
  • The residence is held out to the public (signage, business cards, etc.) by the individual or firm;
  • The individual physically meets with clients at the residence; or
  • The individual maintains books and records at the residence that are not duplicated at the firm’s head office.

Registered firms that allow staff to work remotely must have compliance systems in place that adequately address the work from home arrangements.

(b) Business continuity planning

In light of interruptions due to the pandemic, the CRR reiterated the importance of business continuity plans (BCPs). NI 31-103 - Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”) requires registered firms to have policies and procedures that establish a system of controls to ensure compliance with securities legislation and manage the risks associated with their business. Senior management should be involved in creating and approving BCPs to develop procedures that mitigate and sufficiently respond to business interruptions that may hamper business continuity.

2.2. 2020 Risk assessment questionnaire (RAQ)

In June 2020, a RAQ was issued to over 1,000 firms. The RAQ obtains information about registrants and supports the CRR’s risk-based approach to select firms for compliance reviews or targeted reviews. A firm may be risk-ranked as high based on a variety of factors, including, the broad nature of the firm’s business activities, the amount of client assets under management, the size of the firm, and the number or type of clients serviced by the firm.

2.3. Compliance reviews

The CRR conducted reviews of 100 firms across all categories of registration, of these: 64 of the firms reviewed had limited activity in Canada and many were also regulated by foreign regulators and were subject to limited reviews; and 36 firms were subject to normal course, on-site compliance reviews conducted virtually.

a) Representatives servicing clients without required registration (PM / EMD)

Certain representatives of portfolio managers (PMs) and exempt market dealers (EMDs) conducting registerable activities in Ontario were doing so without being registered as either ARs, AARs or dealing representatives and most of these registered firms operated outside Canada. In some cases, the registered individuals were responsible for collecting and updating know-your-client (KYC) information and discussing investment or account performance with Ontario clients, among other activities. Firms outside Canada with individuals trading in, or advising on securities on behalf of the firm and servicing clients in Ontario, must be registered as either an AR, AAR or dealing representative, and failure to comply with registration requirements may raise questions about the adequacy of the firm’s compliance system and continued fitness for registration. PMs and EMDs are also advised to seek legal advice and take immediate steps to register their representatives as ARs, AARs or dealing representatives as appropriate.

b) Policies and procedures not tailored to the firm’s operations (Investment Fund Managers (IFM) / PM / EMD)

The CRR observed that registrants that operate in multiple countries did not incorporate Ontario specific requirements into their compliance programs. The CRR recommends that registered firms:

  • Address Ontario specific requirements in their written policies and procedures;
  • Address their compliance with Ontario securities legislation in the annual compliance report to the board of directors (or equivalent);
  • Allow exceptions for voluntary communication with regulatory authorities in Ontario in confidentiality provision language of key employment agreements; and
  • Provide training on Ontario regulatory requirements to staff involved in Ontario operations.

2.4. Marketing review

The CRR reviewed the marketing practices of registrants to assess compliance with marketing practices and to verify the existence of an internal compliance infrastructure to support references about environmental, social or governance (ESG) claims in their marketing material. The CRR reviewed the IFMs marketing material and internal policies and procedures related to responsible investing and did not identify any substantive concerns specific to this area of the marketing review.

a) Inadequate disclosure when using benchmarks

Registered firms sometimes present benchmarks in marketing materials to compare the performance of their investment strategies, without adequate accompanying disclosure for a client to draw correct conclusions from the comparisons. Firms are advised to provide disclosure accompanying the presentation of a benchmark, including the full name, and information about the relevance and purpose of the benchmarks and any other information necessary to make the comparison fair and meaningful.

b) Misleading marketing material

It was observed that some firms included claims that could be considered misleading in their marketing material. 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.

c) Prohibited representations

The CRR also noticed situations where firms made prohibited representations in their marketing material, including statements that implied endorsement from the OSC, inaccurately marketing or omitting their category of registration or the CSA jurisdiction the firm is registered in, or misleading use of titles by firms and their employees.

2.5. Outside business activities

The OSC conducted focused compliance reviews of seven firms across various dealer and adviser registration categories to assess supervision of their representatives’ outside business activities (OBAs). The OSC reviewed the firms’ supervision of any restricted client terms and conditions (RCTCs) due to an OBA that creates a position of influence over a potential client. The OSC did not find significant deficiencies in the reviewed firms’ OBA supervision and found no evidence of non-compliance with any RCTCs. This review has informed proposed amendments to NI 33-109 and NI 31-103 as part of the regulatory burden reduction initiative. See Section 3.1 (a) of this summary for highlights of the proposed amendments.

2.6. Complaint handling processes (PM / EMD / Scholarship Plan Dealers (SPDs))

In 2020, the CRR Branch and the self regulatory organizations (SROs) jointly reviewed the websites of registered firms with an internal ombudsperson to assess whether their complaint escalation processes and timelines for accessing the services of the Ombudsman for Banking Services and Investments (OBSI) were presented in a manner consistent with NI 31-103 and SRO rules. Some registered firms failed to clearly explain a clients’ right to immediately access OBSI if unsatisfied with the firm’s response. Several clients also believe that contacting an internal ombudsperson is a prerequisite to escalating complaints to OBSI, or that the internal ombudsperson is an alternative to OBSI. Registered firms were advised to improve their complaint handling process, to ensure that all complaints are documented and responded to within five business days and to disclose the relationship between the internal ombudsperson and the firm, while also explaining that clients may submit a complaint to OBSI without first using the internal ombudsperson.

2.7. Net asset value adjustments (IFM)

Section 12.14 of NI 31-103 requires an IFM to submit a completed Form 31- 103F4 - Net Asset Value Adjustments (“Form 31-103F4”) within a required timeframe 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. The OSC reviewed 85 Form 31-104F4s received between April 1, 2020 and January 31, 2021, and spotted several errors leading to NAV adjustments. IFMs are advised to maintain and apply written policies to ensure that the fund’s investments are properly valued and the NAV is accurately calculated, while also assessing the control failure that resulted in the incorrect NAV and enhance controls where necessary.

2.8. Registration & commission filings

The CRR highlighted some issues relating to filings and registrations as summarized below:

a) Wholesale securities being considered registrable activity

The CRR cautioned against abuse of Section 8.5 of NI 31-103 which provides an exemption from registration where a trade is made through a registered dealer. Market participants who wholesale should not communicate with end-purchasers when relying on Section 8.5 of NI 31-103 and should have procedures to prevent their employees from doing so. Market participants are also advised to seek registration as a dealer if they are unable to rely on the Section 8.5 exemption.

b) Ownership changes

Some firms did not file 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. Failure to provide notice of ownership changes or asset acquisitions may result in the issuance of a warning letter or further regulatory action. Some firms 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. Currently, a registered firm has 30 days to file any changes to information previously reported in Part 3 of Form 33-109F6, which includes an 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.

c) Incomplete Form 33-109F5 submissions

A Form 33-109F5 filing to update information about a registered firm previously filed using Form 33-109F6 requires registered firms to provide a blackline of the amended section of the Form 33-109F6 to avoid processing delays. The title of an authorized signing officer or partner should be specified in the certification section in Form 33-109F5 to avoid follow-up questions and delays.

3. Initiatives impacting registrants

The Report provides an overview of initiatives affecting registrants during the 2020-2021 fiscal year, some of which are highlighted below.

3.1. Burden reduction

The Burden Reduction Task Force (the “Taskforce”), was established to enhance registrants competitiveness, save time and money for registrants and other market participants and protect investors. The Taskforce produced a report on Reducing Regulatory Burden in Ontario’s Capital Markets, published on November 19, 2019 (the “Regulatory Burden Report”). CRR staff committed to completing 30 initiatives (identified as R-1 to R-30 in the Regulatory Burden Report) to address the nine identified concerns involving registrants. Some highlights of initiatives which recorded significant progress or completion during the 2020-2021 fiscal year are set out below:

a) NI 33-109 modernization project

The CSA is recording progress on the modernization project, which is designed to provide registered firms and individuals with greater clarity on the registration process. The CSA is proposing changes to how OBAs are reported and managed, while also seeking to minimize duplicate filings. Further clarifying amendments are expected to reduce the number of errors on forms.

b) Proposed OSC Rule 32-506 (under the Commodity Futures Act) exemptions for international dealers, advisers and sub-advisers

On December 1, 2020, the OSC published for comment the Proposed OSC Rule 32-506 (Under the Commodity Futures Act) Exemptions for International Dealers, Advisers and Sub-Advisers and related Proposed Amendment to OSC Rule 91-502 Trades in Recognized Options (Under the Securities Act) (collectively, the Proposal). The Proposal is intended to codify relief routinely granted by the OSC under both the Commodity Futures Act (CFA) and OSC Rule 91-502 to enhance institutional investor access to international options and futures markets and to eliminate the need for international firms to file applications for exemptive relief. In response to the positive comments received, the OSC granted Ontario Instrument 32-507 (Commodity Futures Act) Exemptions for International Dealers, Advisers and Sub-Advisers (Interim Class Order) and Ontario Instrument 91-505 Exemptions from the Options Proficiency Requirement for International Dealers, Advisers and Sub-Advisers (Interim Class Order), which came into force on April 15, 2021.

c) Template form for notices under Section 11.9 or 11.10 of NI 31-103

CSA staff developed a standard template of a Section 11.9 and 11.10 notice under NI 31-103 to help filers prepare notifications of acquisitions involving registered firms. In February 2021, this template form was made available with the intention to assist filers to submit accurate information, thereby reducing the follow-up required.

3.2. Crypto-asset trading platforms

On March 29, 2021, the CSA and the Investment Industry Regulatory Organization of Canada (IIROC) issued Joint CSA/IIROC Staff Notice 21-329 Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements (CSA/IIROC SN 21-329) that sets out how securities legislation applies to crypto-asset trading platforms (CTPs) that facilitate the trading of crypto assets that are securities (security tokens), or instruments or contracts involving crypto assets (crypto contracts).

On March 29, 2021, the Commission also notified CTPs that currently offer trading in derivatives or securities to persons or companies located in Ontario to bring their operations into compliance with Ontario securities law or face potential regulatory action. For CTP operators that have determined that their business is subject to securities legislation, CSA/IIROC SN 21-329 provides guidance on how existing regulatory requirements could apply to CTPs that carry out activities similar to a marketplace or are in the business of trading Security Tokens and/or Crypto Contracts. In addition, this guidance provides an overview of risks associated with CTPs and investor protection considerations.

3.3. Client focused reforms

The CSA published the Client Focused Reforms (CFRs) on October 3, 2019, making significant amendments to the registrant conduct obligations under NI 31-103. Two fundamental changes made include that material conflicts of interest are to be addressed in the best interest of the client and registrants should put the client’s interest first when making investment suitability determinations. As of June 30, 2021, registrants are required to have implemented the CFRs relating to conflicts of interest, and must have a process for identifying material conflicts of interest that arise at firm and individual registrant levels. As of December 31, 2021, registrants are required to have implemented the KYC, know your product (KYP) and suitability and relationship disclosure information reforms. Responses to frequently received questions have been published on the CFRs FAQ webpage to assist registrants.

3.4. Exemption from underwriting conflicts disclosure requirements

On February 18, 2021, the Commission issued a class order entitled Ontario Instrument 33-507 Exemption from Underwriting Conflicts Disclosure Requirements (the “Class Order”) which provides that a person or company is exempt from the underwriting conflicts of interest disclosure requirements in NI 33-105 under certain conditions. This exemption will apply if the distribution of securities is made under an exemption from the prospectus requirement, the distribution is of a security that is an “eligible foreign security” as defined in NI 33-105 and each purchaser in Ontario that purchases a security through such person or company is a “permitted client” as defined in NI 31-103. The Class Order is effective for a period of no longer than 18 months unless extended. OSC staff are presently considering an amendment to NI 33-105 to deal with this issue on a permanent basis. The Class Order addresses concerns by institutional investors that the underwriting conflicts disclosure requirements in National Instrument 33-105 Underwriting Conflicts may create barriers that prevent institutional investors in Ontario from participating in global offerings on a timely basis.

This summary provides an overview of the Report and is not legal advice. Readers are cautioned against making any decisions based on this material alone. Specific legal advice should be obtained.

We wish to thank Mariam Momodu, articling student in Toronto, for her assistance with this summary.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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