OSC Releases Summary Report for Dealers, Advisers and Investment Fund Managers for 2019-2020

October 7, 2020

On September 14, 2020, the Ontario Securities Commission (OSC) published a summary report (Report) prepared by the Compliance and Registrant Regulation Branch (CRR), which provides an overview of their work during the 2019-2020 fiscal year, similar to reports from previous years.

The four-part Report outlines the following: 

  1. Information on educational resources and outreach opportunities available to current and prospective registrants;
  2. An overview of key findings and outcomes from compliance reviews and related guidance on compliance expectations; 
  3. A discussion of upcoming initiatives and a summary of new and proposed rules and other regulatory initiatives that may impact registrants; and
  4. A summary of registrant conduct activities, including examples of the types of regulatory actions that should be taken to address non-compliance.

Report Highlights

Flexibility During COVID-19: Compliance reviews have been conducted remotely through telephone or video conferencing with documents being sent through a secure file transfer system. Registrants are encouraged to seek relief measures for any ongoing challenges due to the pandemic.

Fintech and Crypto-assets:
OSC LaunchPad continues to support fintech businesses through the newly created Office of Economic Growth and Innovation. Earlier this year, Canadian Securities Administrators (CSA) published Staff Notice 21-327 to guide entities facilitating transactions relating to crypto-assets and outlining circumstances where securities legislation is applicable. The development of a regulatory approach for crypto-asset trading platforms continues taking into consideration feedback submitted by various stakeholders. The Report also notes that while the current focus is on crypto-asset related businesses, emerging industry trends include cross-border testing of financial products and services, technology-facilitated regulatory compliance services (RegTech), technology-facilitated regulatory supervisions services (SupTech), artificial intelligence, machine learning and open data. In cooperation with international regulators, the OSC participated in the Global Financial Innovation Network cross-border testing pilot that allowed innovative firms to trial and scale new technologies in jurisdictions, the results of which can be found here.

Selection for Compliance Review
With an emphasis on know-your-client (KYC) and suitability obligations, the OSC conducted a suitability sweep of registered firms. Other categories of firms selected for review included those with sizable assets under management considered to be high-impact firms, and high-risk firms based on the 2018 risk assessment questionnaire or identified through the “Registration as First Compliance Review” program. Desk reviews were conducted of foreign firms that relied on international exemptions and of firms that reported financial losses on 2017 and 2018 annual audited statements. Investment fund managers (IFMs) that had recently acquired or purchased assets of another IFM were selected for review, as well as IFMs that are also registered as members of Investment Industry Regulatory Organization of Canada or the Mutual Funds Dealers Association of Canada.

Reliance on International Exemptions
The OSC conducted a desk review of 60 firms based in the United States relying on certain exemptions from the registration requirements found in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) (20 firms in each of the IFM, portfolio manager and exempt market dealer categories). The OSC used the review to gain a better understanding of why such firms rely on an exemption and to assess their compliance. The OSC found that certain firms: (i) did not file up to date forms with the OSC, and (ii) did not always provide clients with the required disclosure (or maintain evidence that the disclosure had been provided). The review also noted some instances of confusion between the international adviser exemption in section 8.26 and the international sub-adviser exemption in section 8.26.1 of NI 31-103. The Report reiterates the OSC’s expectation that a non-Canadian firm relying on the international exemptions implement policies and procedures to verify, on a regular basis, that the firm continues to properly rely on the exemptions and that, in particular, the required disclosure is provided to Canadian clients.

Compliance Deficiencies
Deficiencies were found in registration and commission filings, compliance systems, financial condition and custody, KYP and suitability, conflicts of interest and referral arrangements, and client disclosure and reporting. While the OSC noted a general improvement from past suitability sweeps, the regulator found inadequate collection and documentation of up-to-date KYC information, a failure to consider all components of the client profile when assessing the suitability of investments, inadequate assessment of concentration risk in client profiles, and inappropriate use of client-directed trade instructions. OSC guidance included the following:

  • KYC documentation should be updated at least annually, or at the time the client experiences a material life change
  • Dealers that do not have regular contact with clients must have up-to-date KYC information at the time of each new trade
  • Concentration risk should be assessed using the client’s total holdings in illiquid securities and not solely on the products distributed by the dealer
  • Client-directed trade instructions are not a substitute for conducting a suitability assessment

Additional Category Permitted Clients
Of interest to international dealers and advisers is Re J.P. Morgan Securities LLC in which the OSC approved a novel application for relief when trading and advising with “Additional Category Permitted Clients” on an exempt basis. In an application filed by a United States broker-dealer, the class of clients was expanded to include spouses of individual permitted clients and certain family trusts. The OSC encourages pre-filings for registered firms that wish to apply for similar relief.

Initiatives Impacting Registrants 

On May 27, 2020 the OSC provided a status update on its regulatory burden reduction initiatives. CRR staff completed 21 of the 30 initiatives discussed in the update and the status of the remaining nine initiatives are discussed in the Report.

Significant amendments to National Instrument 31-103 and its accompanying companion policy known as the Client Focused Reforms have been adopted in all Canadian jurisdictions and are relevant to all categories of registered dealers and advisers, with some application to IFMs. Registrants will need to review and amend their compliance systems to ensure they are in line with the Client Focused Reforms which require that the client’s interest always comes first in the client-registrant relationship. Due to potential challenges presented by COVID-19, the phased implementation plan was extended from December 31, 2020 to June 30, 2021 to give registrants more time to comply with the conflicts of interest and referral arrangement requirements. Registrants have until December 31, 2021 to implement the remaining changes to KYC, know your product, suitability determination, relationship disclosure information, misleading communications and compliance training requirements. A CFRs Implementation Committee has been formed to support the transition process and published a list of frequently asked questions on the CFRs Implementation Committee webpage.

Final amendments to National Instrument 45-106 Prospectus Exemptions, NI 31-103 and their companion policies to harmonize the regulatory framework for syndicated mortgages in Canada were published on August 6, 2020. The effective date is March 1, 2021 and will result in a registration requirement for certain firms distributing syndicated mortgages.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

Stay in Touch with Knowledge Hub