The Ontario Securities Commission ("OSC") recently released its annual Summary Report for Dealers, Advisers and Investment Fund Managers (the "Report"), prepared by the Compliance and Registrant Regulation Branch, for the 2022-2023 fiscal year.

As in previous years, the Report provides an overview of the OSC's compliance initiatives over the past year and is divided into four parts related to: (i) education and outreach; (ii) regulatory oversight activities and guidance for registrants (which may serve as a self-assessment tool to strengthen compliance); (iii) initiatives impacting registrants; and (iv) OSC Staff action taken in response to registrant misconduct.

The OSC reported that its activities over the past year focused on the following:

  • compliance sweeps of high-impact firms, firms with limited compliance staff, registered firms that distribute mortgage investment entities ("MIEs") and crypto asset trading platforms' ("CTPs'") custodial arrangements;
  • reviews of the implementation of the client focused reforms ("CFRs") in conjunction with the Canadian Securities Administrators and the Canadian Investment Regulatory Organization ("CIRO"), certain results of which were published in a report on registrants' conflicts of interest practices, discussed in a recent post; and
  • the formation of a new operational team to focus on specialized dealer business models such as derivatives and restricted dealers.

Report Highlights

MIEs

An ongoing desk review of registered firms that distribute MIEs was conducted using a questionnaire to gather information about issuers and MIE loan portfolio performance.

Registrants with limited compliance staff

The OSC continued its sweep of firms with a small number of compliance staff. Although most of these firms were found to have adequate resources and an effective compliance system, common deficiencies related to certain written policies and procedures, reporting to clients, the collection and documentation of know-your-client ("KYC") information, portfolio manager ("PM") investment management agreements, books and records, the oversight of service providers, the holding of client assets in trust and documentation to support reliance on the accredited investor exemption.

CTPs

Desk reviews of registered restricted dealer CTPs commenced in February 2023 to examine practices around custodial arrangements, corporate governance structures, insurance bonding policies and the management of conflicts of interest. CTPs already registered or seeking registration were found to have deficiencies with respect to custodial arrangements, compliance practices related to the Chief Compliance Officer's annual assessment and reporting of compliance structure and business continuity plans and the oversight of marketing materials prepared by third-party service providers.

Investment fund manager ("IFM") registration considerations

The OSC warns that any agreements with an unregistered market participant that restrict an IFM from exercising its standard of care, including restrictions on an IFM's ability to change service providers such as PMs and sub-advisers or on its decision-making capacity related to the operation of a fund, are considered to be registrable activity.

Start-up funding portals

OSC Staff reviewed registered exempt market dealers ("EMDs") with online portals where issuers offer securities by relying on prospectus exemptions such as the crowdfunding exemption. EMDs are advised to be mindful of how insurance requirements might be impacted by access to client assets held in trust during a crowdfunding campaign period. EMDs are also reminded of their obligation to make a suitability determination before accepting a transaction, by taking into account factors such as an investor's concentration in exempt-market products after the transaction to ensure that they are not overconcentrated. Furthermore, any person entering the portal should acknowledge that they are aware that the portal is operated by a registered dealer who will provide suitability advice.

Custody

Custody-related deficiencies included inadequate reconciliation of client assets between a PM's internal portfolio management system and custodians' records and PMs' failure to maintain their own independent client asset records in violation of their obligation to maintain books and records. In respect of dealers that distribute units of certain investment funds, it was also found that cash-in-transit was not being held in a manner that showed the beneficial ownership of those assets.

Recordkeeping obligations of foreign firms

Foreign-based registrants are required to establish, maintain and apply policies, procedures and controls to reasonably assure that they are able to respond promptly to any requests for information from the OSC. As a part of business risk assessment, any conflicts of laws issues that may impact such registrants' ability to comply with Ontario securities law and requests from the OSC should be identified and planned for, including those related to confidentiality or privacy in local jurisdictions.

Initiatives Impacting Registrants

Registrants should take note of the following:

  • The next Risk Assessment Questionnaire ("RAQ") is anticipated to be sent to registrants in May 2024 by email.
  • Total cost reporting ("TCR") amendments, which were published on April 20, 2023, and discussed in a previous post, will expand the annual report on charges and other compensation to include information about the ongoing costs of owning prospectus-qualified investment funds. Firms will have until January 2026 to begin integrating these amendments for delivery to clients in January 2027, after which compliance will be monitored. A TCR Implementation Committee has been established to assist with the interpretation of the TCR requirements and resolution of operational issues.
  • Amendments to the fee rules, which we also discussed in a previous post, became effective on April 3, 2023.
  • Following the amalgamation of the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada, which resulted in the creation of CIRO, separate mutual fund and investment dealer businesses are now able to carry on as a single entity by becoming dually registered with the OSC. The OSC and CIRO are considering dual-registered firm applications together, with the first such applicant having become registered on March 24, 2023.
  • Primary oversight of most syndicated mortgages was transferred from the Financial Services Regulatory Authority of Ontario ("FSRA") to the OSC in July 2021, and the two regulators are jointly coordinating guidance and compliance approaches. A new registration exemption was introduced for exempt firms and individuals that distribute syndicated mortgages to qualified "permitted clients" and qualified syndicated mortgages, provided that they are FSRA-licensed mortgage brokers.
  • Proposed amendments to National Instrument 24-101 Institutional Trade Matching and Settlement that would permanently eliminate the exception reporting requirement are expected to come into force on May 27, 2024. As we discussed in a previous post, the initial three-year moratorium on exception reporting expired on July 1, 2023, and was replaced by local blanket orders in the interim.

Looking Ahead

The OSC notes that next year's compliance oversight activities will continue to consider the effectiveness of the implementation of the CFRs, with a focus on KYC, know-your-product and suitability determinations, compliance reviews of high-risk firms identified through the 2022 RAQ and compliance reviews of CTPs.

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