The Ontario Securities Commission (the OSC) recently announced that it has commenced a pre-registration review process for new registrant firms, including exempt market dealers (EMDs), in order to assess compliance with Ontario securities law at the time of registration.
Why is the OSC doing this?
The OSC wants to ensure firm applicants, such as EMDs, understand their obligations under Ontario securities law and establish an adequate compliance system. In fact, the OSC is viewing this as a firm's first compliance review (before it is even registered as an EMD).
OSC Staff Notice 33-745 states that:
What does this mean for new EMD applicants?
This means the OSC will be asking new EMD applicants a lot more questions about their business models and related policies and procedures manual (PPM) during the application process and requiring written responses and/or holding in-person interviews. That's right 'in-person" interviews!
The Ultimate Designated Person and Chief Compliance Officer of an EMD applicant better know their PPM 'inside and out' and be prepared for a sit-down with OSC staff who may ask them questions to assess their understanding of their registrant obligations under Ontario securities law.
Therefore, even though the OSC may not have previously required an EMD applicant to submit its PPM as part of the registration application process, the OSC may now request a copy or certain sections of one's PPM. Therefore, EMD applicants must not use a template PPM provided by another firm or consultant without reviewing and tailoring the template to the EMD's operations and security law obligations. In fact, if an EMD applicant is not sure about your legal obligations, you better contact an experienced securities registration lawyer and/or consultant.
1. EMD's PPM must be a 'living and breathing document', so to speak, that reflects how an EMD operates its business in a legally compliant manner.
2. If you think after you prepare your PPM that it will sit on your book shelf and collect dust, think again!
3. You need to constantly update your PPM to reflect changes in securities law and your business practices.
4. Be careful not to create what you think is the 'blue ribbon' PPM that does not reflect your intended business practices since it will be the 'roadmap' the OSC follows when investigating/reviewing what you actually did.
How can an EMD applicant prepare for its OSC pre-registration review?
Below is list of suggested practices for an OSC-pre-registration review as set out in OSC Staff Notice 33-745:
- establish an effective compliance system prior to commencing registerable activities,
- ensure that written policies and procedures adequately address all aspects of business operations, and
- be prepared to answer detailed questions (in writing or in person) regarding the firm's business plan and compliance systems including:
- -products and services that will be offered,
- business growth plans,
- details on referral arrangements, if any,
- supervisory structure within the context of the firm's growth objectives,
- marketing plans,
- material business contracts, and
- oversight for outsourced business arrangements
- be prepared to provide,
- -the firm's application or membership in OBSI, if
- details regarding planned custodial arrangements,
- copies of business plans and policies and procedures manual, and
- copies of other information such as offering documents, referral agreements, KYC documents, and disclosure documents.
Firms are encouraged to:
- compile records requested on a timely basis; and
- perform an initial self-assessment to determine compliance with Ontario securities law, or engage a compliance consultant to perform the assessment prior to registration, and rectify all deficient areas prior to applying for registration."
What should an EMD applicant not do?
Below is list of unacceptable practices for an OSC-pre-registration review as set out in OSC Staff Notice 33-745:
"Firms are encouraged to avoid the following practices:
- Conduct the following after submission of a registration
- draft the written policies and procedures manual, and
- search for possible service providers.
- Provide documents related to the registration process in stages; complete documentation relating to the registration application should be provided at the time of registration including audited financial statements."
So what else is the OSC changing for new EMD applicants? – New CCO Experience Requirement
OSC Staff Notice 33-745 states that amendments to NI 31-103 will soon require the Chief Compliance Officer (CCO) of an EMD to have 12 months of relevant securities industry experience in the 36-month period prior to applying for registration. These new requirements will apply to new firm applications only. My next blog post will discuss this new EMD CCO experience requirement.
Source: The pre-registration review process discussed above is set out in – Annual Summary Report for Dealers, Advisers and Investment Fund Managers (OSC Staff Notice 33-745).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.