On March 1, 2017, the Panel of Commissioners of the OSC (Panel) issued its much anticipated decision with respect to Waverley Corporate Financial Services Ltd. (Waverley), an exempt market dealer (EMD), and Don McDonald, Waverley’s Ultimate Designated Person (UDP) and Chief Compliance Officer (CCO). This decision arose from an appeal of the decision of the Director of the Compliance and Registrant Regulation (CRR) branch, issued in late 2016, which found, amongst other things, that Waverley’s “Issuer-Connected DR Model” (described below), contravened subsection 25(1)(b) of the Ontario Securities Act, which requires dealing representatives to act on behalf of their sponsoring firms.
The Panel’s decision is noteworthy as it provides important clarity on the OSC’s view of Waverley’s Issuer-Connected DR Model, which in the OSC’s words relies “primarily upon marketing its services to issuers (Sponsoring Issuers), who introduce dealing representatives (Representatives, or DRs) to Waverley in order to market their securities.” In the OSC’s further view, Waverley markets its services to issuers as a way of helping issuers avoid the financial costs and compliance responsibilities that would be required of issuers if they were to register as dealers themselves (“captive dealers”).
In its decision, the Panel did not prohibit outright Waverley’s business model or practice of sourcing Representatives from Sponsoring Issuers, as had been requested by CRR Staff. Instead, the Panel concluded that the Waverley DRs were acting on behalf of Waverley and not in contravention of subsection 25(1)(b).
However, the Panel also concluded that Waverley did not properly manage conflicts of interest, and did not have adequate systems of control and supervision, particularly with respect to referral arrangements.
The Panel further found that Mr. McDonald did not fully understand his responsibilities as a registrant and did not demonstrate the proficiency necessary to establish and maintain policies and procedures that reasonably ensured compliance with Ontario securities legislation by Waverley and its representatives in a manner that was attuned to Waverley’s business and compliance risks. In particular, the Panel found the Mr. McDonald failed with respect to his understanding, identification and proper management of conflicts of interests, and failed to implement a system of control and supervision that adequately responded to the close alignment of interests between Waverley’s Representatives and their Sponsoring Issuers.
Accordingly, the Panel imposed terms and conditions to address these deficiencies by means of improved disclosure, more robust supervisory controls and procedures relating to Waverley’s oversight of its Representatives’ interactions with customers, and a prohibition on certain roles that Representatives can perform for their Sponsoring Issuers and their affiliates. One Term and Condition we find particularly curious requires all Waverley DRs’ “telephonic” communications with customers, potential customers and others to be recorded, monitored and stored by Waverley. This would include all cell phone calls. We will leave it to you to decide how feasible and practical this is!
As mentioned, this decision is instructive as it provides express support of Waverley’s Issuer-Connect DR Model. It should also serve as a cautionary tale, however, that compliance programs are not a “one size In Brief cont’d Blockchain-Based Models May Trigger Registration Requirements Firms participating in blockchain-based activities, or utilizing other types of distributed ledger technology, are being advised by the OSC to contact its fintech team, OSC LaunchPad, to determine whether these activities may require the firm to register with securities regulators, or issue a prospectus. Products or other assets tracked and traded as part of a distributed ledger may be considered securities, and thus may trip certain regulatory requirements. 4 aumlaw.com fits all” affair, and must be established and implemented carefully. In our view, this decision is a “mustread” for compliance professionals as it contains Commission findings and views, particularly regarding addressing conflicts of interest, that are instructive to all registrant categories, not only to EMDs.