On September 21, 2015, the Ontario Securities Commission’s (OSC) Compliance and Registrant Regulation Branch (CRR) released its Annual Summary Report for Dealers, Advisers and Investment Fund Managers, also known as OSC Staff Notice 33-746 (the Report). The CRR oversees over 1,000 firms and nearly 67,000 individuals in the industry. The Report is divided into five main sections, dealing respectively with (i) new policy initiatives, (ii) registrant outreach, (iii) registration initiatives, (iv) key findings from ongoing compliance reviews and (v) enforcement responses with respect to registrant misconduct.
The 96-page Report is a valuable resource and worth reading in its entirety. This post summarizes a number of the key issues that the Report identifies.
The Report reviews a range of policy initiatives under the categories listed below. As indicated, many of these have been discussed in previous posts on this blog:
- Cost disclosure, performance reporting and client statements (CRM2 amendments to NI 31-103 and the related interim relief orders);
- Expanded exempt market review (NI 45-106 amendments, proposed offering memorandum exemption and crowdfunding rules);
- Best interest standard (currently in the early stages of consideration);
- EMD scope of activities
- Outbound advising and dealing
- Derivatives regulation (compliance review with respect to reporting under the Trade Repository Rule 91-507);
- Registrant custody practices;
- Independent dispute resolution services for registrants (OBSI report);
- Ongoing amendments to registration requirements, exemptions and ongoing registrant obligations (Amendments to NI 31-103).
The Report briefly discusses the progress of its Registrant Outreach program, which since its initiation in 2013 has included 26 in-person and web-based seminars that have been attended by 4,100 individuals. Other initiatives include the establishment of the Registrant Advisory Committee and various communications initiatives.
The Report notes the success of the OSC’s pre-registration review program, in which key personnel of firms applying for their initial registration are interviewed with respect to their understandings of regulatory requirements and also with respect to their business plans. It also refers to concerns about peer-to-peer (P2P) lending websites conducting business in Ontario and reviews current trends in registration deficiencies.
Key Findings from Ongoing Compliance Reviews
This section begins by describing the compliance review process, including how the “targets” are selected and the nature and purpose of “sweep reviews” of recently registered firms. The Report notes that firms are selected for compliance reviews based on a number of factors which include the firm’s response to the most recent risk assessment questionnaire, the firm’s compliance history, complaints and tips from third parties and intelligence from other OSC branches, self-regulatory organizations or another regulator. This is followed by a discussion of common compliance issues (e.g. inadequate referral arrangements, inadequate record-keeping, failure to provide notice of ownership changes or of acquisitions, inadequate KYC, poor supervision and numerous others). There is also an extensive discussion of reporting requirements surrounding outside business activities, which include officer and director positions but can extend as far as certain volunteer and charitable activities where an individual is in a position of power or influence or is in contact with potential clients who may be vulnerable.
Acting on Registrant Misconduct
Recent regulatory action against registrants is the subject of the last major section of the Report. Over the 2014-2015 fiscal year, there were a total of 64 actions, of which eight were referred to the OSC’s Enforcement Branch. The included summaries of contested matters show that the use of pre-signed forms is a significant issue for the regulator, as are failures to properly collect KYC and suitability information.