As many market participants know, every year the Ontario Securities Commission (OSC) publishes an Annual Summary Report for Dealers, Advisers and Investment Fund Managers covering the activities of the Compliance and Registrant Regulation branch. This year’s report was released in the form of OSC Staff Notice 33-746.
Among the more salient topics covered in the report are sneak previews of the final forms of the offering memorandum exemption and the crowdfunding regime the report indicates are soon coming to Ontario. These new developments were initially published for comment in March 2014 for a period of three months and the OSC intends to publish them in final form later this fall, with a coming-into-force date to follow soon thereafter.
As alluded to above, the report also discusses deficiencies identified by the OSC during the past year’s compliance reviews (as well as repeat deficiencies), along with regulatory guidance on accepted practices. Some of the deficiencies include:
- Inadequate referral arrangements
- Incomplete and/or inadequate books and records
- Failure to complete adequate KYC, KYP and suitability assessment
- Inadequate update of clients’ KYC and suitability information
- Inappropriate practice of “renting out” a firm’s registration
- Inadequate supervision of dealing representatives
- Failure to provide adequate disclosure of underwriting conflicts
- Failure to provide adequate relationship information
- Inadequate written policies and procedures on portfolio management
- No collection of clients’ insider status
- Commingling of client assets
- Prohibited inter-fund trading
Outside Business Activities
The report also continues to remind registrants of one of the OSC’s recent hot button topics – the obligation to report outside business activities (OBAs) and late fees resulting from failures to disclose on time. More specifically, the report discusses amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations that came into force in January 2015, along with related changes to its companion policy that have added guidance regarding conflicts of interest in connection with registrants and permitted individuals serving on boards or having other OBAs. The report provides examples of the types of activities that the OSC would expect individuals to report:
- Employment – all employment activities with the sponsoring firm and outside of the sponsoring firm.
- Officer and director positions – all officer and director positions with the sponsoring firm and outside of the sponsoring firm (regardless of whether the individual is in a position of power or influence), including positions with hospitals, charities, cultural and religious organizations and general partnerships.
- Equivalent positions to an officer or director – these include positions where the individual is in a position of power or influence over clients or potential clients, but also non-leadership roles, such as:
- Roles handling investments or monies of an organization, such as being on a charity’s investment or finance committee (as these roles are similar to activities performed by registrants)
- Acting as a pastor (as this role places the individual in a position of influence over his or her congregation)
- Mentoring youth through an organization (as it places the individual in a position of influence over potential clients, including family members of the youth)
- OBAs – these include activities where the individual is in a position of power, position of influence or position that places the individual in contact with clients or potentially vulnerable clients (e.g., seniors), such as teachers (elementary, secondary and college), registered nurses, early childhood educators, volunteer ministers and support workers working with clients with mental health issues, abused women or the elderly.
- Holding companies – ownership stakes in holding companies require disclosure as they allow a person to perform, control or influence a business activity indirectly. However, de minimis ownership interest of 1% or 2% do not generally require disclosure.