A. “A” is for AML-ATF and Alternative Mutual Funds
AML-ATF: The money laundering and terrorist financing environment has evolved substantially in the past few years. Registrants, exempt advisers and exempt dealers must stay on top of their existing compliance and reporting obligations and keep informed of potential changes in the regulatory landscape.
- In February, we wrote about the updated guidance issued by the Canadian Securities Administrators (CSA) on reporting obligations relating to suppression of terrorism and Canadian sanctions, as well as the federal government’s discussion paper, which was published to support Parliament’s five-year review of its anti-money laundering and anti-terrorist financing (AML-ATF) legislation.
- In June, the Federal Government proposed amendments to the AML-ATF regime to help address deficiencies in Canada’s regulatory framework and operationalize some of the legislative changes to Canada’s regime enacted in 2017.
- In August, FINTRAC updated its guidance on beneficial ownership.
- In November, we discussed the recommendations developed by the House of Commons’ Standing Committee on Finance regarding potential reforms to the AML-ATF regime.
- In this month’s bulletin, we’re advising you that the Federal Government has amended the schedule for the Justice for Victims of Corrupt Foreign Officials Regulations to include seventeen Saudi nationals linked to the murder of Jamal Khashoggi.
Alternative Mutual Funds: In October, we reported on Canada’s second most eagerly anticipated legalization of a product line (alternative mutual funds) and followed that article up with a brochure, which you can access online here.
“B” is for Best
An all-encompassing “best interest” standard might be off the table for now, but we think the regulatory framework for registrants is fundamentally shifting in that direction anyway.
- In June, we reported on one of the year’s most significant regulatory developments, when the CSA proposed changes to National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) relating to the know-your-client (KYC), know-your-product (KYP), suitability, conflicts of interest, and relationship disclosure information (RDI) requirements. Although the proposed changes do not include a comprehensive “best interest” obligation, specific best interest-like obligations are incorporated into various provisions in NI 31-103, with some representing new requirements and others codifying what regulators consider to be good practice.
- In the same month, we also reported that the staff of the Ontario Securities Commission (OSC) were pursuing a case against Caldwell Investment Management for allegedly failing to provide best execution for its clients. That case is working its way through the hearing process, and we likely won’t learn the outcome until sometime in 2019.
- The 2017-18 annual report published in August by the Compliance and Registrant Regulation (CRR) Branch at the OSC also addressed a range of topics that emphasize the importance of registrants putting clients’ interests first.
- This month, we write about the Financial Planning Standards Council’s amendments to its Standards of Professional Responsibility, which will, among other things, replace the existing “client first” strategy with a comprehensive duty of loyalty.
C. “C” is for “Cannabis”, Crypto-Commotion and the CCMRS
Cannabis: The much anticipated legalization of cannabis in Canada, combined with the U.S. government’s rescission of its forbearance approach to the enforcement of federal laws relating to that controversial weed, led to a bit of reefer madness in 2018.
- In January, we wrote about the implications of the U.S. government’s rescission of the Cole Memorandum;
- In February, we reported that the CSA had revised Staff Notice 51-532 – Issuers with Marijuana-Related Activities to provide for more specific and prominent risk disclosures, in light of the illegal nature of marijuana under U.S. federal law; and
- In October, we discussed the CSA’s review of disclosure practices by reporting issuers in the cannabis industry.
Crypto-Commotion: Crypto assets continued to attract a great deal of attention in 2018 and, as a result, we wrote about the subject frequently.
- In January, we wrote about proposed rule changes in the United States that would facilitate the listing of Bitcoin exchange-traded funds (ETFs), compared the initial coin offering (ICO) process to a traditional initial public offer process, and reported that regulators globally including the International Organization of Securities Commissions (IOSCO) were expressing concern about ICOs;
- In our February article “Fintech Regulation: A Myriad of Things”, we reported that the British Columbia Securities Commission (BCSC) was seeking feedback on a range of fintech issues, including regulatory concerns about ICOs and about firms that manage crypto-currency funds;
- In our April article “Is Bitcoin a Security? Definitely Maybe”, we discussed a case that illustrates how regulators are dealing with challenges regarding the application of securities laws to cryptocurrency;
- We followed up in May with an article about North American securities regulators’ coordinated crackdown on fraudulent crypto-currency investment products;
- In June, the OSC issued a report discussing financial consumers’ understanding of crypto-assets and its staff published follow-up guidance on token offerings; and
- In November, we noted that the House of Commons Standing Committee on Finance’s recommended that the AML-ATF regulatory framework be extended to deal with crypto-exchanges and crypto-wallets.
CCMRA: Will we, or won’t we, live long enough to see a national securities regulator?
- In May, the governments participating in the Cooperative Capital Markets Regulatory System (CCMRS) published for comment draft prospectus and related registration exemption regulations under the proposed Capital Markets Act, while also acknowledging that the Capital Markets Regulatory Authority (CMRA) would not be ready for launch by the end of 2018.
- In November, some celebrated and others scorned the Supreme Court of Canada’s ruling that the proposed CCMRS is constitutional and that the draft Capital Markets Stability Act (CMSA) falls within the federal Parliament’s power to regulate trade and commerce. Although this ruling removes a major obstacle from the path toward a national regulator, political obstacles (including a looming federal election with a Liberal government that wishes to keep its seats in Quebec) remain. We aren’t holding our breath waiting for the CMRA to get up and running.
D. “D” is for Data Privacy / Digital Security, Derivatives, and Diminished Capacity
Data Privacy and Digital Security: The countdown clock ticked down loudly to the November 1 in-force date for the “breach of security safeguards” provisions in the Digital Privacy Act (DPA), and firms, individuals, governments and regulators continue to face challenges about what constitutes an acceptable use of personal data and how to keep that personal data secure.
- In April, we wrote about the DPA’s data breach notification, reporting and record-keeping requirements, which came into force on November 1;
- In July, we wrote about how the CSA experienced unauthorized access to the National Registration Database (NRD); and
- In October, we wrote about the Privacy Commissioner of Canada’s new Guidelines for Obtaining Meaningful Consent to the collection, use, and disclosure of personal data.
Derivatives Regulation: The CSA initiative to modernize the regulatory framework for over-the-counter (OTC) derivatives took a big step forward this year.
- In April, we wrote about the CSA’s proposed registration framework for OTC derivatives dealers and advisers; and
- In June, we wrote about the CSA’s draft business conduct rules for OTC derivatives.
After the comment period closed, the CSA organized roundtable discussions about the proposed regulatory framework and staff are now considering the feedback they received through the comment and roundtable processes. We expect to see at least one further round of consultations before the OTC derivatives regime is finalized so that, among other things, gaps in the draft registration framework (such as transition provisions) can be filled in. Therefore, we don’t expect the regime to be finalized before late 2019 at the earliest.
Diminished Capacity: Financial sector regulators are increasingly concerned about investors with diminished capacity, including seniors in particular, since they are especially vulnerable as a class to financial exploitation. We wrote about the OSC’s Seniors Strategy in March and in our August article on the OSC’s CRR Annual Report, we highlighted the results of the OSC’s sweep of firms with substantial numbers of senior and vulnerable investors.
E. “E” is for Exam Report Cards and Exempt Distributions
Exam Report Cards: The summary reports that regulatory staff publish regularly about their oversight of registrants and issuers are valuable tools that can help firms learn more about recent and proposed regulatory initiatives, what staff consider to be problematic (or, conversely, positive) practices, and how staff interpret legislation and rules. In 2018, we wrote about:
- The Financial Consumer Agency of Canada’s review of the big banks’ sales practices (March)
- The CSA’s 2017-18 Enforcement Report (July)
- The OSC’s Continuous Disclosure (CD) Review Program Report (July)
- The OSC’s Compliance and Registrant Regulation Branch Report (August)
- The OSC’s Corporate Finance Branch Report (October)
- The review by the Québec Autorité des Marchés Financiers (AMF) of investment funds’ fund facts disclosures (October)
- The BCSC’s Compliance Report Card for registrants (November)
- The OSC’s Exempt Market Report for 2017 (November)
- The annual Compliance Exams Report published by the U.S. Financial Industry Regulatory Authority (FINRA) (December)
- The Risk Alert Report published by the U.S. Securities and Exchange Commission (SEC) after its sweep focused on electronic messaging (December)
Exempt Distributions: Elements of the exempt market regime were tweaked this year, and we also saw the regulators paying close attention to whether certain prospectus and/or registration exemptions were used appropriately. In 2018, we wrote about:
- Finalization of OSC Rule 72-503 for distributions outside Canada (January)
- To wrap or not to wrap: offering documents provided to Canadian-resident investors (January)
- Easing the resale restrictions on privately placed securities of foreign issuers (April)
- New custody rules for prospectus-exempt funds, which came into force on June 1 (May)
- An issuer’s obligation to prove its entitlement to rely upon a prospectus exemption (as part of our discussion of the Valt.X case in October)
- The OSC’s Corporate Finance Branch Report (October)
- Finalization of changes to Form 45-106F1 – Report of Exempt Distribution (July and October)
- Revocation of the “Northwest Exemption” for prospectus-exempt trades (August)
- Delivery of offering documents when issuers are relying on the offering memorandum exemption (August, as part of our discussion of the OSC’s CRR Branch Report)
- The OSC’s Exempt Market Report for 2017 (November)
- FINRA’s Annual Compliance Exams Report for US Broker-Dealers (December)
And last but not least, we have written an article this month to remind investment funds that file some of their Reports of Exempt Distribution on Form 45-106F1 that the filing deadline is January 30, 2019 for the relevant distributions made in 2018.
F. “F” is for Fintech
Fintech and its cousin regtech remain popular, even if they’re weren’t quite as cool as cannabis in 2018.
- In February, we wrote about a grab bag of fintech topics;
- In August, we reported that the OSC and AMF had joined the Global Financial Innovation Network established by a group of financial sector regulators; and
- In September, we discussed FINRA’s white paper on RegTech.
G. “G” is for Guidance
Guidance: We don’t always agree with it, but we’re grateful that the regulators share their views on how they interpret securities legislation and rules. In 2018, the CSA published guidance on a wide range of topics including the following:
- AML-ATF compliance and reporting obligations (February);
- Staff Notice 51-532 – Issuers with U.S. Marijuana-Related Activities (February);
- Staff Notice 46-308 – Securities Law Implications for Offerings of Tokens (June);
- The securities law implications of Canada’s bail-in debt regime (August); and
- Staff Notice 51-356 - Problematic Promotional Activities by Issuers (November).
In addition, we wrote about:
- The Mutual Fund Dealers Association’s principles-based sanction guidelines (May);
- FINTRAC’s updated guidance on beneficial ownership (August); and
- The Financial Service Commission of Ontario’s guidance for its licensees (including mortgage brokers) on fair treatment of customers (October).
H. “H” is for Housing (because we didn’t want to go all the way to “R” to write about real estate)
Recently, investments in real estate (and mortgages on real estate) have become very popular, especially among individuals, and so it’s not surprising that financial sector regulators flagged this sector as an area of investor protection concern. In 2018, we wrote about: