The Compliance and Registrant Regulation Branch (the "CRR") of the Ontario Securities Commission (the "OSC" or the "Commission") has released OSC Staff Notice 33-755 – Summary Report for Dealers, Advisers and Investment Fund Managers (the "Report") covering the 2022-2023 fiscal year. This annual report has become an important source of guidance for registrants to learn the issues that are top of mind for regulators.
The CRR continued its sweep of firms with small numbers of compliance staff (described as "less than or equal to one full-time employee") and assets under management of less than $25M. Through the sweep, the CRR identified common deficiencies among these firms, which largely involved a lack of adequate policies, procedures and records. These include inadequate written policies and procedures covering cyber security and key person risk, a lack of collection and documentation of know-your-client information, and deficient reporting to clients and insufficient investment management agreements.
Registered crypto asset trading platforms ("CTPs") were also reviewed. In February 2023, the CRR launched a desk review of registered restricted dealer CTPs where the OSC was the principal regulator to "understand key practices and controls surrounding custody arrangements over clients' crypto assets, corporate governance structures, insurance bonding policies, and management of conflicts of interest". Based on the results of the desk review, CRR issued the following guidance for registered CTPs and CTPs applying for registration:
- Custody: Registered CTP dealers and dealer applicants are advised to (i) "review custodial arrangements with Third-Party Custodians"; (ii) "maintain an effective system of controls and supervision to address custodial risks and safeguard clients' crypto assets", including "implementing and maintaining an adequate process to recover clients' assets in the event of a bankruptcy of any custodian" and "disclosing the details of the custody arrangement to clients"; (iii) perform reconciliations on a regular basis of the crypto assets held in custody for clients to the clients' crypto asset liabilities"; and "maintain written policies and procedures that address custodial arrangements".
- Compliance: CTP Chief Compliance Officers ("CCOs") must be cautious when considering the use of meeting minutes in lieu of free-standing reports to show they are fulfilling their compliance obligations. While this may be appropriate for smaller firms, the Report advises CCOs must still be mindful of "the nature, size and operations of [their] CTP when determining how to report and document their annual compliance assessment."
- Supervision of outsourcers: CTP firms remain responsible for all functions they outsource. The CRR provides an example of where CTPs did not review or approve marketing materials prepared by third-party service providers prior to publication, leading to the publication of marketing materials with misleading or inaccurate statements.
Separate from CTPs, the Report also highlights deficiencies in other areas:
- Investment Fund Managers ("IFMs") considerations: Securities laws require IFMs to "exercise the powers and discharge the duties of their office honestly, in good faith and in the best interest of the investment fund". Any arrangement or agreement that restricts an IFM from exercising the statutory standard of care is not in compliance with securities law, including agreements that limit or restrict the IFM's ability to change service providers, including portfolio managers and sub-advisors, for the funds. Persons or companies acting as IFMs are also required to be registered as an IFM or receive an exemption from the registration requirement before attempting to engage in the business, operations or affairs of an investment fund.
- Marketing Partnerships with third parties: Registered firms are to establish policies geared towards overseeing their arrangements with marketing partners while also making sure to verify claims and statements that such partners make about the firm's products.
- Registered firms operating start-up funding portals: During funding campaigns that are launched by firms pursuant to the crowdfunding prospectus exemption in NI 45-110, such firms still retain access to client assets which may affect the level of insurance they require, notwithstanding qualification as an exempt market dealer (EMD). Moreover, the Report advises that registered EMDs that use crowdfunding portals must consider factors such as an investor's post-investment concentration in exempt-market products before making investments.
- Recordkeeping obligations of registered firms based outside Canada: Foreign-based firms registered in Ontario should be mindful of any conflicting requirements between their home jurisdictions and Ontario securities law" as well as "controls that are sufficient to provide reasonable assurance that the registrant is able to respond promptly to any requests for information from the OSC".
Initiatives Impacting Registrants
CIRO and Dual Registered Firms
On January 1, 2023, the Investment Industry Regulatory Organization of Canada amalgamated with the Mutual Fund Dealers Association to form the New Self Regulatory Organization of Canada. This name was changed to the Canadian Investment Regulatory Organization ("CIRO") on June 1, 2023.
A key feature of the newly formed CIRO is that it enables separate mutual fund and investment dealer businesses to carry on as one legal entity, thereby removing barriers for investors seeking broader product offerings and dealers that wish to grow their business by attracting dealing representatives. The Report also notes the dual registered firm model through CIRO provides operational and efficiency advantages. For example, before CIRO's inception, businesses that conducted investment dealer and mutual fund dealer activity as one legal entity were not permitted.
Co-ordination on Syndicated Mortgages
On July 1, 2021, amendments were made to Ontario securities laws resulting in the transfer of primary regulatory oversight of most syndicated mortgages, including non-qualified syndicated mortgages offered to retail (non-permitted) clients, from Financial Services Regulatory Authority of Ontario ("FSRA") to the OSC.
Since these amendments took effect, OSC and FSRA staff have consulted on several topics to make oversight easier, including on how consistent guidance may be provided to help market participants navigate the new FSRA and OSC regimes, and how regulators can assist FSRA-licensed mortgage brokers and administrators who wish to apply for registration under the Ontario Securities Act. Oversight of qualified syndicated mortgages and syndicated mortgages that are distributed to permitted clients by a person registered under the Mortgage Brokerages, Lenders and Administrators Act, 2006, remains the purview of FSRA.
Current consultations between OSC and FSRA staff are focused on identifying an appropriate regulatory response for circumstances where FSRA firms purport to make renewals of syndicated mortgages without complying with prospectus requirements, or other Ontario securities laws.
Annual Trends and Highlights
CRR regulatory actions remained constant during the fiscal 2022-2023 year compared to those of the previous fiscal year. The most common concern noted in the Report involved the non-disclosure of material information by individual applicants and registrants. In these instances, the CRR opened several files based on dismissals for cause or other identified misconduct by individuals while registered with former sponsoring firms.
Moreover, in light of new amendments to NI 33-109 that took effect on June 6, 2022, the Report notes that the OSC also updated its forms to clarify that reductions of debt by way of consumer proposals constitute solvency events that must be disclosed, and "that any relevant solvency events must be disclosed regardless of how long ago they occurred".
CRR will recommend terms and conditions be placed on registrants where necessary. Examples of terms and conditions noted are (i) where a firm improperly valued some of the investments in its fund's portfolio and was required to engage an independent consultant to rectify the error and (ii) in a case of significant mismanagement of a firm's funds and other clients' accounts, the firm was required to restrict the activities of a senior, non-registered individual and restrict its overall business activities, as well as engage an independent monitor to oversee and report to the OSC on the firm's compliance and remediation efforts.
Activities Prior to Registration
The OSC's Registrant Conduct Team ("RCT") identified several firm and individual applicants who engaged in dealing, advising and/or IFM activities prior to obtaining appropriate registration. In response to applicants that engage in registerable activity before obtaining registration, the RCT may:
- "require payment of capital market participation fees and/or late fees in respect of years where the firm has engaged in registerable activity
- require key compliance roles (such as the UDP or CCO) be filled by individuals other than those who engaged in or authorized improper activity
- require that the firm, or a registered third-party, collect KYC information and perform a suitability assessment for pre-registration capital raises, including rescinding trades with ineligible investors or offering the right to investors to redeem unsuitable investments; and
- potentially refer applicants to the Enforcement Branch [of the OSC] if [staff] believe that the firm has contravened the registration requirements in section 25 of the Act."
The Report also highlights that some firms or individuals have serviced clients in a jurisdiction where the firm or individual is not registered, in reliance on the client mobility exemptions in sections 2.2 and 8.30 of NI 31-103 to continue dealing with and advising clients who move to another jurisdiction in Canada without registering in that specific jurisdiction, while failing to comply with the requirements of these exemptions. Accordingly, CRR staff advise that, "use of the client mobility exemptions must be disclosed to the clientprior to acting as a dealer or adviser to the client in the client's new jurisdiction of residence where the firm or individual is not registered, and a Form 31-103F3 must be filed with the local jurisdiction."
This Report serves as both a guide to the priorities of the CRR, as well as a reminder for registrants that a myriad of rules and regulations applies to their businesses. It offers a helpful, but not exhaustive, guide to material compliance issues registrants may face. Beyond reviewing the Report, registrants should work closely with legal counsel to understand and address compliance requirements.
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