As discussed in our recent posting, the Ontario Securities Commission (OSC) has identified regulatory burden reduction as one of its key priorities for the coming year. The Ontario government is actively encouraging these initiatives. The OSC recently established a Burden Reduction Task Force and announced a series of related roundtable discussions for stakeholders.
The second roundtable of the series was held May 6 on topics related to registration, compliance and investment funds.
Late Reporting of Outside Business Activity
OSC panelists acknowledged that reporting of Outside Business Activities (OBA) under NI 31-103 is considered by many market participants to be something of an over-reach. Late fees for OBA reporting failures of up to $5,000 per year can add up quickly, especially for firms with many individual registrants.
OSC Staff representatives described an expedited OSC rule that will provide an OBA late fee moratorium in Ontario pending reform of the regime by the CSA on a national scale. OBA filings would continue to be required during the fee moratorium. No start date for the moratorium has yet been announced.
Changes Proposed for Registrants
Marketplace participants attending the roundtable made suggestions for change that include:
- Promoting a “know your registrant” culture at the OSC by appointing a Staff member as the “relationship manager” of a group of registered firms so that the Staff member can become familiar with the business models of those firms over time and facilitate Staff-registrant interaction.
- Remove the requirement for separate Fund Facts documents (or ETF Facts documents) for each series of a mutual fund or exchange traded fund (ETF) and instead allow a single consolidated Fund Facts document (or ETF Facts document) for each fund that is referable to a single investment portfolio.
- Lengthen the simplified prospectus renewal cycle from 12 to 25 months. Under this suggested approach material changes that occur during the simplified prospectus renewal cycle would still need to be disclosed as currently required, including by filing necessary amendments to the fund’s offering documents. Fund Facts renewals would remain on an annual renewal cycle.
- With respect to the biennial Risk Assessment Questionnaire (RAQ) that registered firms are required to complete in Ontario, panelists offered the following suggestions:
- The RAQ cycle should be every 3 years instead of every 2 years, or be replaced with an online “real time” reporting portal.
- Because the OSC uses data gathered through the RAQ to apply a risk ranking to firms and firms with higher risk rankings are more likely to be targeted by the OSC for compliance reviews, Staff should make its RAQ risk rating methodology public and disclose what it does with the large volume of RAQ information it collects.
- The OSC should publish RAQ data collected on an anonymous, aggregated basis, for improved transparency.
- Compliance reviews should not be used as a vehicle for reforming or changing registrant compensation practices.
- There should be better harmonization between NI 31-103 and IIROC Dealer Member Rules with respect to institutional clients. Minimum asset amounts required for a non-individual to meet the “permitted client” definition in NI 31-103 ($25 million), and the “institutional client” definition under IIROC Dealer Member Rules ($10 million) are quite different. Currently, firms are still required to conduct suitability in respect of clients that meet the $10 million threshold but not the $25 million threshold.
- With respect to alternative mutual funds, investment fund managers should have more flexibility regarding the type of leverage (margin vs. derivatives) they may use. Currently, the rules prescribe both a 50% cap on margin and a 300% aggregate cap on all forms of leverage used by a fund. The prescribed 50% cap on margin should be removed and the 300% aggregate retained.
- A chief compliance officer (CCO) should be permitted to work part-time for several smaller firms, so that several firms would share a single experienced CCO.
A final roundtable is scheduled for the end of May and will focus on burden reduction initiatives applicable to trading, marketplaces, issuer requirements and derivatives. Members of our Securities Regulation and Investment Products Group will attend this upcoming roundtable and post again.