OSC Compliance and Registrant Regulation Branch Flags Areas of Concern with Registrant Compliance

September 10, 2019
  • On August 8, the Ontario Securities Commission (OSC) Compliance and Registrant Regulation Branch (CRR) published a Summary Report for Dealers, Advisers and Investment Fund Managers (the Report).
  • The Report provides an overview of the CRR’s work over the 2018-2019 fiscal year, including oversight activities that identified a number of areas of concern with registrants’ regulatory compliance, as well as associated guidance.
  • A discussion of upcoming initiatives that may affect a registrant’s operations is also included.

Compliance Reviews

Of particular interest to registrants, the Report summarizes key findings and outcomes from compliance reviews conducted during the 2018-2019 fiscal year, and provides guidance on the following areas of concern identified by the CRR:

Registration and Commission filings:

  • Incorrect information provided in respect of Form 33-109F4 Registration of Individuals and Review of Permitted Individuals, including requests for inappropriate categories for applicants’ activities and insufficient information provided;
  • Applicants certifying the truthfulness and completeness of Form 33-109F4 without reviewing or discussing the application with a supervisory officer;
  • Issuers soliciting investments through websites and social media without the involvement of a registered dealer or reliance on an appropriate registration exemption; and
  • Firms employing individuals who conducted trading activities without being registered, or who were registered in the wrong category;

Compliance systems:

  • Inconsistent and inaccurate responses provided in firms’ risk assessment questionnaire;
  • Lack of oversight of dealing representatives who speak multiple languages, where the risk of client misinformation increases; and
  • Inadequate processes to identify and value illiquid assets, and non-compliance with illiquid asset concentration restrictions;

Financial custodian and custody:

  • Investment fund managers that have not updated their prime brokerage agreements to meet enhanced custody requirements of registered firms;

Know your client (KYC), know your product (KYP) and suitability:

  • Inadequate client suitability assessments, specifically in regard to concentration risk;

Conflicts of interest and referral arrangements:

  • Issues respecting non-compliant sales practices, including deficiencies in the provision of non-monetary benefits and inadequate internal controls to monitor the provision of such benefits;
  • Registered advisers investing in the securities of a related issuer without taking the proper steps to disclose and obtain client consent;
  • Registered firms allowing prohibited inter-fund trades between investment funds that are not reporting issuers that are both managed and advised by the registered firm;
  • Short-term and excessive trading; and
  • Referral agents conducting activities that require registration, or that are representing themselves as being able to perform registerable activities.

The Report provides associated guidance for each deficiency, setting out the appropriate actions registered firms should take to address areas of concern.

Initiatives

The Report also outlines a number of recent and pending registration initiatives that are expected to impact registrants in the near future. These include:

Misconduct

Finally, the Report provides a summary of regulatory actions undertaken by the CRR over the last fiscal year. Actions taken depended on the seriousness of misconduct. Examples of CRR actions over the last year include denying registration in 45 cases, imposing terms and conditions on registrants in 48 cases, and the referral of 10 matters to the Enforcement Branch. The Report also summarizes a number of notable decisions and settlements.

For more information, see OSC Staff Notice 33-750 Summary Report for Dealers, Advisers and Investment Fund Managers.

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