The Registration, Inspections and Examinations Division of the Ontario Securities Commission (OSC) released its highly anticipated OSC Staff Notice 33-756: Summary Report for Dealers, Advisers and Investment Fund Managers. The report is always a must-read for registrants, as it describes the OSC's compliance and registration work and describes priorities of the division for the current fiscal year. The report also provides a deep dive into regulatory guidance and expectations, and registrants are expected by staff to use this report as a "self-assessment tool". Highlights of deficiencies noted by staff in various compliance reviews are described below.
The report tries to hammer home the importance of full disclosure when completing the main set of registration forms, particularly with respect to criminal charges or solvency events in Form 33-109F4 Registration of Individuals and Review of Permitted Individuals. Additional time was granted in the report to the importance of clear content regarding the circumstances of an individual registrant leaving a sponsoring firm in Form 33-109F1 Notice of End of Individual Registration or Permitted Individual Status, which was noted as a point of regulatory interest.
With respect to service standards, the report repeated information provided previously by staff to the effect that if a registration submission is transitioned to the Registrant Conduct Team for further examination, the filings are not treated as standard nor are they subject to the OSC's service standards.
The report discussed deficiencies related to registerable activities conducted by unregistered firms, particularly those that entered into business arrangements with an unrelated firm for its investment fund manager (IFM) and/or portfolio manager (PM) services. Staff had concerns in instances where the PM, and not the IFM, was in fact the entity that directed the affairs of the investment fund. Staff identified certain clauses in business agreements as being problematic, such as those allowing the PM to change a fund's service providers or otherwise restrict an IFM from exercising its statutory standard of care.
Other deficiencies that were given much space in the report related to referral arrangements between PMs and unregistered firms. Staff was concerned that some registered firms improperly delegated portfolio management activities requiring registration to referral agents, including updating know-your-client (KYC) information and maintaining direct contact with clients to discuss account details or address concerns with their accounts. In addition, if the referral agent has a continuing relationship with the clients (the example given was financial planning services) all fees relating to portfolio management services must be paid directly to the registered firm.
According to the report, there still seems to be an issue with respect to the 2021 requirements to collect trusted contact person information; registered PMs and exempt market dealers (EMDs) must have processes that require the firm to take reasonable steps to obtain this information from the client while collecting the client's other KYC information.
Almost three full pages were devoted to issues found by staff in business continuity planning (BCP) requirements. Staff expects smaller firms (or firms with only few registered individuals) to have a BCP to address a significant business disruption, and such firms should consider designating a person to execute that BCP. Other considerations for the BCP include how the firm will communicate with clients, key personnel, 3rd party service providers and regulators in the event of a disruption, and what information clients need to know to ensure the BCP can be executed. If a BCP executor is appointed, the report includes a further list of considerations for the written agreement with the executor, including confidentiality provisions if the person will have access to confidential client information (with appropriate client authorization). A BCP and potentially a BCP executor will be expected at the time of applying for registration.
Many deficiencies were noted with respect to the calculation of capital markets participation fees, as required by OSC Rule 13-502 Fees. Firms incorrectly deducted revenue relating to activities that require registration or exemptions from registration, or on the basis that they were earned outside of Ontario. Firms also engaged in incorrect calculations for the "Ontario percentage" used to calculate fees, which is dependent on whether the firm has a permanent establishment in Ontario (as defined by the Canada Revenue Agency). Other issues related to incorrect reporting of total gross revenues for the designated financial year, and using the incorrect exchange rate if a firm's annual financial statements are not denominated in Canadian currency.
The report describes the OSC's enhanced process for firms that are late in delivering annual or interim financial filings, or experiencing unresolved capital deficiencies, as both maintaining adequate working capital and delivering financial statements on time are considered fundamental requirements of registration.
As an example of responding to emerging issues, the report noted that because of the higher interest rate environment, some real estate/ mortgage issuers halted or suspended redemptions last year. Staff contacted these market participants to better understand the terms of such halts, the type of disclosure provided to investors, the impact on distributions and the plan to manage liquidity and resuming redemptions going forward. Staff intends to investigate the roles and responsibilities of EMDs in the distribution of real estate and mortgage products more closely this year. EMDs are also reminded by staff that if they are distributing securities on the basis of the offering memorandum exemption, they should implement reasonable procedures to ensure that the offering memorandum contains the required disclosure, including in particular the additional disclosure required for issuers engaged in "real estate activities" or issuers that are "collective investment vehicles".
In addition, while staff remain focused on the "registration as the first compliance review" program, they also intend to conduct reviews of high-risk firms (based on the responses in the latest Risk Assessment Questionnaire), high-impact firms and specialized dealers/derivative dealers.
Please reach out to us if you have any questions about the report, or need another pair of eyes on your compliance policies and procedures to ensure evolving regulatory expectations are considered and remediated.
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