Over the past two years, financial services firms that are dealers, advisers and/or investment fund managers have implemented much of the dramatic changes to the Canadian regulatory landscape brought about by National Instrument 31-103 Registration Requirements and Exemptions and the related registration and prospectus exemption rules. Although many of the deadlines have passed, the need to focus on compliance continues. The purpose of this Bulletin is to help registrants’ senior management, boards of directors, CCOs and compliance staff understand what will be important during 2011.
KEEPING TRACK OF REGULATORY CHANGES
During 2010, two proposals to amend NI 31-103 and related rules were published for comment. The Canadian Securities Administrators are considering the comments made on the proposals and can be expected to publish either revised proposals or final rules during 2011.
- The “first year amendments” published in June 2010 - comment period ended September 30, 2010.
- The investment fund manager registration amendments published in October 2010 – comment period ended January 13, 2011.
Investment dealers (IIROC members) and mutual fund dealers (MFDA members) will also want to monitor the transition to the final “client relationship model” rules of their respective SROs.
- Revised drafts of the proposed IIROC rules – Proposals to implement the core principles of the Client Relationship Model – were published for comment January 7, 2011 [available here]. The comment period ends March 7, 2011.
- Final rules of the MFDA relating to proficiency requirements, performance reporting, complaint handling and relationship information disclosure are now in force, but transition periods apply. See MR – 0075 Relationship Disclosure – December 3, 2010 [available here] and the revised MFDA Rules.
The CSA have also indicated that they continue to work on other matters, such as cost disclosure and performance reporting, a “sub-adviser” exemption for portfolio managers, capital accumulation plans and reporting to regulators about complaints. It is conceivable that at least one additional rule proposal will be published for comment in 2011.
UNDERSTANDING REGULATORY EXPECTATIONS
The CSA expect that registrants review their compliance systems, as well as their written policies and procedures, to ensure they are kept up-to-date and reflect regulatory expectations. We strongly recommend that registrants review and update their written policies and procedures during 2011, particularly if this was not done in advance of the changes brought about by NI 31-103. Inadequate written policies and procedures and compliance systems are perennial deficiencies noted by the various members of the CSA.
Reports published during 2010 by the respective registrant regulation and compliance staff at the Ontario Securities Commission and the British Columbia Securities Commission [available here and here] detail the findings of staff regarding common compliance issues noted during audits of registrants. Significant subject areas noted in these reports include
- Referral arrangements and confusion over responsibilities for the client
- Misleading sales communications and advertising
- Best execution practices
- Risk management controls and business continuity plans
- Inappropriate use of side letters and preferential treatment given to one or more investors in a fund
- Responsibility for valuation and error correction.
WHAT’S IMPORTANT FOR 2011
The regulatory developments and compliance matters that will require attention during 2011 are outlined below. For ease of reference, we provide links to the Investment Management Bulletins of Borden Ladner Gervais LLP (BLG) that provide additional information and to applicable regulatory notices.
The Autorité des marchés financiers and the Chambre de la sécurité financière have regulatory jurisdiction over mutual fund dealers operating in Québec. References in this Bulletin to MFDA rules should be read as including the Québec regulations applicable to mutual fund dealers.
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