10 Canadian Developments That Will Set The Stage For Securities Registrants In 2024 - Commodities/Derivatives/Stock Exchanges

From the launch of SEDAR+, results from the initial Client Focused Reform sweeps, the announcement of total cost reporting, and the advent of Canada's first business conduct rule governing derivatives, it has been a busy year for Canadian securities regulators. This article canvasses some of the year's most notable developments from the regulators and provides some guidance to help registered firms navigate the regulatory landscape in 2024.

In this article we will discuss:

Client focused reforms sweeps
Total cost reporting
OSC Staff Notice 33-755 – Summary Report for Dealers, Advisers and Investment Fund Managers
OSC Staff Notice 81-734 – Summary Report for Investment Fund and Structured Product Issuers
Launch of SEDAR+
Canadian Investment Regulatory Organization
Derivatives business conduct rule
Ombudsman for Banking Services and Investments
Title protection frameworks
Review on the use of chargebacks

1. Client focused reforms sweeps

This year, the Canadian Securities Administrators (CSA) in conjunction with the Canadian Investment Regulatory Organization (CIRO) completed its first round of regulatory "sweeps" to assess how registrants, including investment fund managers, portfolio managers, exempt market dealers, investment dealers and mutual fund dealers, were complying with new conflicts of interest requirements. The results of the sweeps were conveyed in Staff Notice 31-363 Client Focused Reforms: Review of Registrants' Conflicts of Interest Practices and Additional Guidance.

As a brief reminder, amendments to National Instrument 31-103 and its Companion Policy that came into force on June 30, 2021 require registrants to take reasonable steps to identify existing and reasonably foreseeable material conflicts of interest and to address those conflicts in the best interest of clients. Staff Notice 31-363 noted a substantial number of deficiencies with respect to how firms were identifying, documenting, disclosing and generally dealing with conflicts of interest. This prompted the CSA to include additional guidance for registrants in the notice.

Factors to consider in handling conflicts of interest

When it comes to the handling of conflicts of interest, there are a number of factors registrants need to consider.

Identification

Firms must be able to identify conflicts of interest, which includes any situation where the interests of a client and those of the registrant are divergent or inconsistent, where a registrant may be influenced to put its interests ahead of its clients, or where monetary or non-monetary benefits (or potential detriments to which the registrant may be subject) may compromise the trust that a reasonable client has in the registrant.

Thirty-four percent of reviewed firms failed to identify one or more material conflicts of interest.

Materiality assessment/controls

An assessment of the materiality of a particular conflict requires the exercise of professional judgement and should always consider whether the conflict may reasonably be expected to affect the decisions of the client or the recommendations or decisions of the registrant in the circumstances.

Twenty-eight percent of reviewed firms had inadequate controls to address certain material conflicts of interest in the best interests of clients.

Disclosure

Disclosure continues to be a necessary but not sufficient step in the handling of conflicts. If a material conflict cannot be resolved in the best interest of a client, then the conduct must be avoided. Written disclosure is a necessary component of managing any material conflict that can be resolved in the best interest of a client and must include a description of the nature and extent of the conflict, the potential impact on and the risk that the conflict could pose to the client, and how the material conflict has been (or will be) addressed.

Fifty-three percent of reviewed firms had missing or incomplete disclosure related to material conflicts of interest.

Policies and procedures

Registered firms must have robust conflicts sections in their policies and procedures manual which address, among other things, the definition of a conflict of interest, processes for registered individuals to report or escalate conflicts, processes and criteria the firm uses to determine materiality, and guidance on how a material conflict will be addressed in the best interests of the client.

Sixty-six percent of reviewed firms had inadequate policies and procedures related to conflicts of interest.

Training

Registered firms must provide training on conflicts of interest that must be specific and tailored to the firm's operations and size, provide examples of material conflicts that exist at the firm, mention and provide details of the internal reporting process where an individual has identified a material conflict, and be presented to all individuals that should be included in the training.

Firms should document their training efforts including copies of modules or content used at sessions, attendance logs to track which employees attended the training, and details of how any employees who missed the training were otherwise trained at a subsequent date.

Seventeen percent of reviewed firms had a lack of or inadequate training on conflicts of interest.

Documentation and recordkeeping

Registered firms should create a conflicts of interest inventory or matrix that documents, among other things, a description of each identified material conflict, a description of the firm's materiality assessment, the potential impact and risk the conflict can pose, the controls the firm has in place to manage or address each material conflict and how they are sufficient to address the conflict in the best interests of the client, and how the firm has disclosed the conflict to clients.

Firms must also maintain records of periodic reviews conducted on their conflicts inventory which demonstrate that all previously identified conflicts remain relevant and that there are no new conflicts, and which provide evidence of tests performed by the firm of the controls implemented and their effectiveness in addressing each material conflict in the best interest of the client.

Under ten percent of reviewed firms had inadequate conflicts of interest record keeping.

Typical situations leading to conflicts of interest

Staff Notice 31-363 provides a non-exhaustive list of typical situations firms encounter where material conflicts of interest may arise:

Third-party compensation
Fees charged to clients
Director positions with issuers
Trades alongside clients (EMD relationships)
Managing and distributing prospectus-exempt proprietary issuers
Proprietary products
Supervisory compensation
Referral arrangements
Internal compensation arrangements and incentive practices

The CSA cautioned that if the results they expected to achieve through the client focused reforms do not materialize in the practices of registrants, new and additional rules will be considered. Registrants should also expect that regulatory staff will consider referring any perceived non-compliance to enforcement.

2. Total cost reporting

The CSA jointly with the Canadian Council of Insurance Regulators (CCIR) released the much-anticipated final amendments to Total Cost Reporting (TCR) for investment funds and segregated funds. The TCR Enhancements will have far-reaching implications as set out below:

Who is impacted

The amendments to National Instrument 31-103 and its Companion Policy apply to all registered dealers, advisers, and investment fund managers with respect to all prospectus-qualified funds and exchange-traded funds. The amendments do not apply to prospectus-exempt funds or labour-sponsored investment funds, although the CSA left open the possibility of extending the TCR enhancements to capture these funds at a future date. While not yet published, the CSA indicated that it expects CIRO to amend its relevant rules, policies and guidance to materially harmonize with the new TCR requirements.

What is changing

The amendments will impact the annual report on charges and other compensation that must be delivered to clients pursuant to Section 14.17 of National Instrument 31-103. In addition to existing cost disclosures, annual reports on charges and other compensation will need to reflect the following for each client account as a whole and for all investment fund securities¹ owned by a client during the year:

the aggregate amount of fund expenses, in dollars, for all investment funds;
the aggregate amount of any direct investment fund charges (e.g., short-term trading fees or redemption fees) in dollars for all investment funds; and
the fund expense ratio, as a percentage, for each investment fund class or series.

These new elements will also impose additional requirements on investment fund managers to provide the necessary information to dealers and advisers "within a reasonable period of time" to enable them to meet their cost reporting obligations. There is additional guidance relating to the appropriate calculation and reporting of the new reportable information.

When the changes will happen

The TCR changes will take effect on January 1, 2026, meaning registrants will be delivering their first annual reports incorporating the enhanced cost disclosures for the year ending December 31, 2026. The CSA has extended the transition period in light of industry comments but was explicit that firms should not expect an extension and should begin proactively reviewing their systems and conducting advanced planning and testing well in advance of January 1, 2026, to ensure a smooth transition.

3. OSC Staff Notice 33-755 – Summary Report for Dealers, Advisers and Investment Fund Managers

The Compliance and Registrant Regulation (CRR) branch of the Ontario Securities Commission (OSC) released its annual Summary Report for Dealers, Advisers and Investment Fund Managers (the Report), which highlights the work of the CRR branch over the past year and draws attention to those topics which will be prioritized for compliance reviews in the year to come. Some of the concerns addressed in the Report included:

Investment fund manager registration. A firm that directs or manages the business, operations or affairs of an investment fund is required to register as an investment fund manager (IFM) with the OSC. While the question of when a firm crosses the threshold to requiring registration as an IFM is highly fact-specific, there is helpful guidance in Companion Policy 32-102CP, which lists non-exhaustive factors² to consider when deciding whether IFM registration is required.

In addition, IFMs are bound by Section 116 of the Securities Act (Ontario), which imposes a standard of care on IFMs when exercising their powers and discharging their duties. The OSC has flagged certain agreements and arrangements that purport to restrict an IFM's ability to exercise its discretion with respect to the operation, business, or affairs of its fund(s) as potentially offside the Securities Act. IFMs and firms contracting with IFMs should exercise caution when negotiating contractual language to ensure that the IFM is not improperly delegating or restricting its core functions. Doing so may lead the OSC to conclude that the entity imposing those restrictions or receiving delegated powers is, in reality, functioning as an IFM and thus requires registration.
Widely disseminated hypothetical performance data. The OSC has continued to flag concerns where hypothetical performance data is published on firm websites and is accessible to all prospective clients. The OSC has taken the position that understanding and appreciating the inherent risks endemic to hypothetical data requires a level of knowledge and sophistication on the part of investors. Since it is not possible to ascertain or verify the sophistication level of prospective clients viewing a firm's website, firms should restrict the returns portrayed on their websites to actual performance returns generated for clients of the firm.
Issues with crypto asset trading platforms. The OSC continued to identify deficiencies with the ways in which crypto asset trading platforms (CTPs) were complying (or not) with securities laws. In particular, the OSC identified CTPs that did not meet the custody requirements for client assets outlined in section 14.6 of National Instrument 31-103, which requires client assets to be held separate and apart from firm assets. CTPs must review custodial arrangements to ensure they meet the standards set out in CSA Staff Notice 21-332, maintain an effective control and supervisory system to address custodial risks, perform regular reconciliations of crypto assets held in custody for clients to the clients' crypto asset liabilities, and maintain written policies and procedures that address custodial arrangements. The OSC also identified instances where the chief compliance officers (CCOs) of CTPs either did not provide their annual compliance report to the board of directors, or provided a report which lacked the necessary detail to evidence the CCO's thorough assessment of the CTP's compliance function.

Looking ahead, the CRR branch will continue to focus on assessing how registrants are implementing amendments brought about by the CFRs, with a particular emphasis on the Know Your Client, Know Your Product and suitability requirements in the next round of sweeps currently underway. The CRR branch will also continue to review CTPs as well as firms identified as high-risk following an analysis of the 2022 risk assessment questionnaire.

4. OSC Staff Notice 81-734 – Summary Report for Investment Fund and Structured Product Issuers

The annual Summary Report published by the Investment Fund and Structured Product Issuers (IFSP) branch of the OSC provides an overview of key operational highlights, regulatory policy initiatives, and emerging issues and initiatives impacting investment funds in Ontario.

ESG funds remained one of the primary focuses of the IFSP branch throughout fiscal 2023, and ESG-related topics unsurprisingly featured repeatedly in this year's Report:

Prospectus reviews of ESG funds. In accordance with the guidance provided in CSA Staff Notice 81-334 ESG-Related Investment Fund Disclosure, the OSC continues to review the prospectuses and related documents of funds whose investment objectives explicitly reference ESG factors (ESG-Related Funds) as well as those funds which consider ESG factors in the investment selection process (ESG-Consideration Funds).

With respect to ESG-Related Funds, most of Staff's concerns centered on ensuring that disclosure was sufficiently clear with respect to the types of ESG strategies being used, the specific ESG factors relevant to the manager's analysis, and how such factors were being evaluated and monitored by the manager. With respect to ESG-Consideration Funds, Staff has clarified that these funds will need to be clear on the extent to which ESG considerations factor into the fund's investment process.

Staff advised that if the prospectus disclosure refers to the incorporation of ESG considerations and the consideration of ESG factors and/or the use of ESG strategies plays a limited role in the investment process of the fund, this must be clearly stated. Simply disclosing the consideration of ESG factors will be insufficient without further clarification on the weight given to those factors and the impact they may have in the portfolio selection process.
Continuous disclosure, sales communications, and portfolio holdings of ESG-Related Funds. In addition to the prospectus-based reviews noted above, Staff also conducted reviews of the continuous disclosure, sales communications and portfolio holdings of ESG-Related Funds with a focus on:
- ensuring that where an IFM indicates in sales communications or offering documents that a fund incorporates ESG considerations, the IFM's policies and procedures contain content relating to the incorporation of those considerations;
- addressing instances where funds may hold investments which are contraindicated by the fund's own investment strategies or that may be inconsistent with the ESG values of the fund (the example given being a green fund that has exposure to fossil fuel companies);
- identifying instances where ESG-Related Funds voted against ESG-related shareholder proposals and reviewing to determine whether such votes were consistent with the IFM's proxy voting guidelines; and
- reviewing sales communications and websites of funds and IFMs to ensure they do not include statements which conflict with a fund's offering documents or are otherwise untrue or misleading.
Of particular note, Staff reminded IFMs of the process set out in OSC Staff Notice (Revised) 51-711 Refilings and Corrections of Errors and the publication "Use of Refilings and Errors List for corrections to continuous disclosure filings, website and social media". Where Staff identifies a communication which is misleading or in conflict with information contained in a regulatory offering document (whether in a continuous disclosure filing, on the fund's website, or on social media) Staff can request that the IFM correct the error and issue a news release advising of the correction. Staff also has the ability to place the fund issuer on the OSC's Refilings and Errors List as a result.

Some other notable reminders in this year's Report included:

Marketing materials. OSC Staff Notice 81-720 Report on Staff's Continuous Disclosure Review of Sales Communications by Investment Funds provides helpful guidance to firms when presenting sales communications through alternative media (e.g., Facebook, LinkedIn, X). The principles set out in Staff Notice 81-720 apply to the social media accounts of both firms and their employees where those employees use personal social media to market specific investment funds or performance. The guidance states that "staff expect that all information, including disclaimers, should be easily comprehensible to the retail investor on their first viewing of the advertisement", and the required warning language set out in section 15.4 of NI 81-102 must not be "more than one click away". IFMs should review the use of personal social media accounts with their employees to remind them that fund-related posts from personal accounts are not insulated from requirements governing sales communications.
Cybersecurity breaches. The sophistication of cyber criminals along with the increasing reliance by IFMs on technology in their fund operations makes the identification and management of cybersecurity risks all the more imperative for firms. While there is currently no requirement for IFMs to report cybersecurity breaches to the CSA, firms still have a number of regulatory obligations and considerations to keep in mind when preventing and responding to cybersecurity incidents including:
- establishing a system of controls and supervision sufficient to manage the risks associated with their business;
- conducting adequate due diligence, including an assessment of internal controls and disaster recovery capabilities where firms have outsourced a function to a service provider;
- conducting periodic assessments to identify and strengthen potential cybersecurity vulnerabilities and to evaluate the effectiveness of incident response plans; and
- considering reporting obligations in the event of a breach (i.e., to the relevant privacy commissioner(s), clients and, at the firm's discretion, to the CSA depending on the magnitude of the breach).

5. Launch of SEDAR+

On July 25, 2023, the System for Electronic Data Analysis and Retrieval + (SEDAR+) officially consolidated and replaced its predecessor, SEDAR, the national Cease Trade Order (CTO) database, the Disciplined List database, and certain other filings previously made in paper or through various electronic filing portals. While the new platform promised to usher in new streamlined processes and improved accessibility (including the ability to access the platform 24 hours a day, 7 days a week), the onboarding and initial functionality of SEDAR+ have posed significant challenges for market participants.

For most issuers, where securities are distributed to Canadian-resident "accredited investors" on a prospectus-exempt basis—or certain other prospectus exemptions are relied upon—a report of the trade must be filed with the applicable Canadian securities regulatory authorities. Certain provinces also require the filing of any offering memorandum that was delivered to prospective investors in connection with the distribution. Those filings must now be made through SEDAR+, requiring issuers to set up issuer profiles and complete filing authorizations, adding to the administrative burden (particularly for funds and other entities that may offer securities through a number of related vehicles).

On July 20, 2023, the CSA provided some relief in the form of Coordinated Blanket Order 13-933, which provides a temporary exemption from the requirement to file reports of exempt distribution and, where applicable, any offering memorandum through SEDAR+ for distributions of eligible foreign securities to permitted clients. The relief was provided while the CSA "consider potential enhancements to the functionality of SEDAR+". The temporary exemption, which is currently set to expire in January 2025, allows the required filings to be made directly to the relevant securities regulatory authority, bypassing SEDAR+.

6. Canadian Investment Regulatory Organization (CIRO)

This year, the former Mutual Fund Dealers Association (MFDA) and Investment Industry Regulatory Organization of Canada (IIROC) said goodbye to the "New SRO" moniker and officially became the Canadian Investment Regulatory Organization, the unified SRO regulating mutual fund and investment dealers across Canada. The two former organizations' investor protection funds also consolidated into a single investor protection fund. There were a number of developments on the CIRO front this year including:

Rules consolidation project – Phase 1. Although the MFDA and IIROC are officially amalgamated from an organizational perspective, different rules continue to apply depending on whether a firm is an investment dealer or mutual fund dealer regulated by CIRO. CIRO has now taken the first step to consolidating the existing rulebooks into what will be known as the CIRO Dealer and Consolidated Rules (the DC Rules). The first phase of consolidation sets forth the structure of the DC Rules, including the adoption of new rule interpretation provisions, definitions of common application throughout the rules, rule exemption provisions, and general standards of conduct applicable to all activities of dealers, their employees, and "Approved Persons".

Efforts to consolidate these rules will hopefully make compliance for registered firms simpler while ensuring that like activities are regulated in a like manner and that opportunities for regulatory arbitrage are minimized. While rule drafting has commenced for the remaining four phases of the consolidation project, CIRO has not provided a timeline, and firms can expect the entire process to take at least a few years.
CFR FAQ reminder. CIRO and the CSA provided an update to the Client Focused Reforms Frequently Asked Questions compendium dealing with the issue of firms and advisers participating in various firm or adviser ranking contests or lists.

The regulators' concerns stem from the potential for a prestigious-sounding award to mislead a client with respect to the proficiency, experience or qualifications of a registered individual. As explicitly stated in NI 31-103, Investment Dealer Partially Consolidated Rule 3640, and Mutual Fund Dealer Rule 1.2.5, if inclusion in a ranking contest or award considers to any extent a registered individual's sales activity, revenue generation or assets under management, reference to that award on the firm's website, registered individual's webpage or LinkedIn profiles, or indeed any publicly available website, will be offside the rules. Registered individuals must also not use awards or recognitions in client-facing interactions³.

Of particular note for registered firms is the clarification that a compliance deficiency can be found even where the award or recognition was referenced by the contest sponsors and not the registered firm or individual. Firms should closely monitor the participation of all registered individuals in any adviser ranking contest and should ensure that any awards or recognitions that are publicly announced do not contravene the relevant rules.
- New proposed proficiency model. CIRO released a consultation paper on a new proficiency model that would shift the proficiency regime as it relates to individuals at investment dealers from a course- and exam-centric model to an assessment-centric model with mandatory education and training. The consultation proposes a general industry exam which would demonstrate a minimum core competency for prospective Approved Persons. To enroll further in a category specific exam, applicants would need to receive a "firm sponsorship"⁴, which can be as simple as a letter from a dealer setting out an offer of employment conditional on the applicant's successful completion of the relevant exam. In total, there will be nine Approved Person exams, including tailored exams for derivatives representatives, traders, CCOs and Portfolio Managers. CIRO is currently reviewing comments in response to the consultation and aims to have amendments to the proposed proficiency rule by the fall of 2024.
- Proposal on distributing disgorged funds. Currently, hearing panels of CIRO (as with IIROC and the MFDA prior) have the power to issue orders for disgorgement to prevent respondents found guilty of misconduct from retaining any benefits they derived as a result of that misconduct. Any amounts collected pursuant to a disgorgement order are deposited into the CIRO restricted fund the same as amounts collected from fines and settlements. Funds deposited into the restricted fund may only be paid out towards purposes specified in CIRO's recognition orders, which do not currently permit the payment of funds to harmed investors.
  
  CIRO's proposal seeks to change this by creating a new channel through which disgorgement amounts could be collected and paid out directly to eligible harmed investors. The proposal contemplates qualifying the class of eligible investors by restricting it to those who suffered a direct financial loss as a result of the contravention(s) which gave rise to the disgorgement order. CIRO is currently reviewing comments received in response to the proposal and an update is expected in 2024.
- Arbitration program review. From 2020 to 2022, IIROC commissioned a review of its arbitration program, which provides a confidential forum through which complainants can pursue their claims against dealers or advisers, culminating in a decision (with awards up to $500,000) that is binding on all parties. The working group which conducted the review came up with 17 concrete recommendations to enhance the program which were opened for public comment. The recommendations included increasing the maximum award amount to $5 million, publishing the decisions of arbitrators, and shortening the 90-day time requirement for commencing an arbitration claim to 30-45 days. CIRO is currently reviewing comments, and additional updates are expected in 2024, including whether the existing arbitration program will be made available to complainants on the mutual fund dealer side of CIRO.

7. Derivatives business conduct rule

Over a decade in the making, this year the CSA published a finalized derivatives conduct rule in the form of Multilateral Instrument 93-101 (MI 93-101) and Companion Policy 93-101CP, which will provide standards to govern the country's derivatives markets. Canada had been the only remaining country in the G20 which had not developed a framework to govern the conduct of derivative market participants.

For those well-versed with NI 31-103, MI 93-101 will feel like a familiar read, as the CSA has borrowed many concepts and standards from NI 31-103. For example, when assessing whether a person or company is properly characterized as a derivatives dealer or adviser, MI 93-101 contains a "business trigger" test similar to that found in NI 31-103. MI 93-101 also takes a multi-tiered approach to investor protection by stratifying the levels of obligations owed to a derivatives party depending on their level of sophistication. Derivatives parties may fall into one of three categories:

Eligible derivatives party (EDP). The definition of an EDP is expansive and captures, among others, Canadian financial institutions, derivatives and investment dealers registered under securities legislation of a jurisdiction of Canada, a qualifying clearing agency, and a person or company, other than an individual, that has net assets of at least $25 million as reflected in its most recent financial statements.
Non-eligible derivatives party. A derivatives party not captured under the definition of an EDP.
Eligible derivatives party who is either an individual or eligible commercial hedger who has provided a written statement that it "waives protections provided in Multilateral Instrument 93-101" and specifies which protections that statement applies to.

How a derivatives party is categorized under MI 93-101 will have implications for which provisions in the instrument apply to that party with the exception of the following "core" provisions:

Fair dealing
Know Your Derivatives Party
Tied selling
Conflicts of interest
Complaints handling

While the instrument will take effect on September 28, 2024, there is a transition period of five years during which the definition of eligible derivatives party is expanded to include certain qualifying parties including permitted clients, non-individual accredited investors (Ontario), an eligible contract participant (as defined in the U.S. Commodity Exchange Act) and an accredited counterparty (Québec) to name a few. The derivatives firm also has the option to obtain a written representation from a derivatives party confirming that they are considered to be an eligible derivatives party on the basis of the enumerated categories set out in Part 8 of the instrument. A firm can rely on this representation during the transition period so long as it was made prior to September 28, 2024.

MI 93-101 is currently published as a multilateral instrument since British Columbia has not yet adopted its contents. The CSA clarified that the British Columbia Securities Commission plans to adopt substantially similar rules to those outlined in MI 93-101 at a later date, at which time the CSA intends for MI 93-101 to be converted into a National Instrument.

8. Ombudsman for Banking Services and Investments

Following an announcement from the Minister of Finance, the Ombudsman for Banking Services and Investments (OBSI) has been officially designated as the exclusive external complaints body for banking in Canada. Canadian banks previously had a choice between using OBSI or ADR Chambers Banking Ombuds Office as their preferred external complaints body. Effective November 1, 2024, banking services and investment firms will need to register with and make the OBSI complaints process available to their customers⁵.

OBSI can currently make "recommendations" for firms to compensate harmed investors up to a maximum of $350,000 backed only by the ability to "name and shame" those firms that decline to meet OBSI's compensation recommendations. In late 2023, the CSA released a proposal which included a framework making OBSI the designated independent dispute resolution service for the entire investment industry. The proposal would deliver to OBSI the ability to issue binding decisions with respect to compensation amounts that would be enforceable as orders of the court. The proposal contemplates the addition of an optional review stage which would allow firms and complainants to raise issues with OBSI's initial compensation decision before a final court-enforceable ruling could be issued.

The proposal is out for comment until February 2024.

9. Title protection frameworks

Manitoba has followed Québec, New Brunswick, Saskatchewan and Ontario by publishing a consultation paper proposing to regulate the use of the "financial advisor" or "financial planner" titles in the province. In Ontario, the use of either the financial planner or financial advisor title is only permitted if the individual has a credential from a credentialling body recognized by the Financial Services Regulatory Authority of Ontario (FSRA). There are currently four⁶ such recognized bodies, with CIRO also applying for recognition.

Under powers granted by the Financial Professionals Title Protections Act, 2019, FSRA has the power to issue compliance orders and conduct examinations of the business and activities of any individual using either title without a valid credential, or any person or entity representing that it is an approved credentialing body without a valid approval. Firms should ensure that any individuals using either the financial planner or financial advisor title have a valid credential from a recognized credentialling body or are covered by a relevant transition period.

10. Review on the use of chargebacks

In early 2023, the Canadian Council of Insurance Regulators (CCIR) and Canadian Insurance Services Regulatory Organization (CISRO) published a news release building on their 2022 consultation⁷, which identified potential risks of customer harm stemming from the use of chargebacks. While some consumer advocates had called for the banning of chargebacks altogether, in line with the deferred sales charge (DSC) ban which came into effect for segregated funds on June 1, 2023, the insurance regulators declined to ban chargebacks. Instead, the regulators advised that they would be developing guidance on the appropriate controls for the management of conflicts of interest posed by the use of chargebacks in segregated funds.

Chargebacks are a compensation structure whereby advisors are paid an upfront commission on the sale of a fund which must be repaid if the client redeems their investment before a fixed schedule as determined by the dealer. Unlike the DSC, with chargebacks the consequences of selling prematurely are borne by the advisor, creating a potential conflict of interest as the advisor is financially incentivized to keep the client invested in the product through its full term.

While the use of chargebacks is less prevalent in the mutual fund industry than in the segregated funds space, the CSA also announced that it was launching a review of the use of chargebacks over concerns about potential conflicts of interest associated with the practice. The CSA's review will include a survey of securities registrants on their use of chargebacks and will include the involvement of CIRO staff.

Footnotes

1. With the exception of labour-sponsored investment funds and prospectus-exempt funds.

2. These factors include marketing an investment fund, establishing a distribution channel for the fund, overseeing the day-to-day administration of the fund, and preparing the fund's prospectus or other offering documents, among others.

3. Including, among other things, displaying the award/recognition in their physical or virtual office, including the award/recognition in their email signature block, or mentioning the award verbally in client meetings or in media interviews/publications.

4. This is in line with the approach adopted by the Financial Industry Regulatory Authority (FINRA) in the United States, which requires candidates to obtain the sponsorship of a member firm prior to writing the Series 7 exam.

5. Note that unlike the rest of Canada, the law in Québec allows the Autorité des marchés financiers to act as mediator or conciliator in disputes between registered firms and their clients.

6. FP Canada; Institute for Advanced Financial Education (IAFE); Canadian Securities Institute (CSI); and the Canadian Institute of Financial Planner (CIFP).

7. See Discussion Paper on Upfront Compensation in Segregated Funds – https://www.cisro-ocra.com/Documents/View/2497

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.

Canada: 10 Canadian Developments That Will Set The Stage For Securities Registrants In 2024