On July 11, 2017, the OSC published the Compliance and Registrant Regulation Branch’s (“CRR”) annual report: OSC Staff Notice 33-748 Annual Summary Report for Dealers, Advisers and Investment Fund Managers (the “Report”).
CRR encourages registrants to read and use the Report to enhance their understanding of OSC’s expectations of registrants and interpretation of regulatory requirements, understand the initial and ongoing requirements for registration and compliance requirements, review and raise awareness of new and proposed rules and other regulatory initiatives, and as a self-assessment tool to strengthen a firm’s compliance with Ontario securities law.
The Report highlights areas of registrant outreach which are intended to strengthen Staff communication with registrants on compliance practices, including the Registrant Outreach Program and OSC LaunchPad. CRR also summarizes current trends in registration and highlights deficiencies identified through compliance reviews of registrants (including Staff’s proposed acceptable practices to address them and unacceptable practices to prevent them), policy initiatives and other areas of focus for the 2017/18 fiscal year. Further, the Report summarizes the types of regulatory action CRR has taken when they have found serious non-compliance and misconduct at firms and by registered individuals. It also highlights cases of interest and provides additional resources for registrants. The following are some key takeaways from the Report:
1. OSC areas of focus for upcoming compliance reviews: CRR staff indicate in the Report that they will be focusing their compliance reviews this year in the following areas: firms who have a significant number of senior investors as clients; compliance with the new prospectus exemptions that came into force in fiscal 2016; fund expenses; funds that have large holdings in illiquid securities and their valuation procedures; high-risk firms identified from the 2016 Risk Assessment Questionnaire; and firms that participated in the “Registration as the First Compliance Review” program to assess their compliance after participating in the program.
We can assist you by preparing your firm for a compliance review.
2. CRR involvement in regulatory projects that potentially impact the regulatory landscape in Ontario: These initiatives involve: syndicated mortgages, targeted reforms and best interest standard projects, review of compensation practices and exempt market dealer activities and financial planning.
We have been following and will continue to follow these policy initiatives and will continue to bring you relevant updates.
3. Common deficiencies in individual and firm registration filings: The Report indicates that CRR continues to see non-disclosure of, or incorrect and incomplete information on, individual filings. CRR reminds firms that it is their responsibility to know the applicants they intend to sponsor registration and to keep abreast of changes to the information previously submitted by the individuals. CRR also reminds firms that individuals sponsored by the firm must not use misleading titles on the firm website or social media. Firms must ensure their personnel are aware that securities law prohibits holding oneself out to be in the business of trading or advising in securities unless the individual is registered or exempt from registration in accordance with Ontario securities law.
4. Seniors and vulnerable investors: The Report indicates that CRR will continue to place focus and compliance resources on conducting focused reviews of firms doing business with senior investors. CRR Staff has found that some PMs do not have written policies and procedures to adequately address the provision of investment advisory services to vulnerable investors. CRR intends to issue guidance and best practices for registrants who are dealing with senior investors to address the particular needs and issues unique to them. The Report recommends that firms review and assess their policies and procedures, including the adequacy of their processes used to identify and respond to issues unique to working with senior investors, and provides some suggested practices.
Please let us know if we can assist you with developing these policies and procedures or provide training on best practices for your staff.
5. Lending firms: CRR conducted reviews of a sample of “lending firms” as part of a sweep. Two firms reviewed were registered as IFMs, but based on their business model, did not need to be registered as an IFM.
We would be pleased to consult with firms that operate, or intend to operate, in a similar fashion to these lending firms to assess the appropriate registration categories given their business model.
6. Marketing in public places: In the Report, CRR reiterates Staff’s expectation that marketing materials must comply with CSA Staff Notice 31-325 Marketing Practices of Portfolio Managers. Even an eye-catching “hook” in a public advertisement must comply with regulatory requirements. CRR indicates in the Report that it is not reasonable for firms to rely upon the “small print” at the bottom of an advertisement as a way to cure a potentially misleading marketing statement, particularly when the small print would only be seen briefly, partially, or if the person is directed to the firm’s website for essential clarification.
We would be happy to review your marketing materials for compliance with securities law and CRR Staff guidance.
7. Cybersecurity: Cybersecurity is a current priority for the CSA. The CSA is currently reviewing the findings from a CSA-wide survey and has committed to provide registered firms with guidance about cybersecurity and social media practices in the upcoming fiscal year.
8. Dealer deficiencies: CRR Staff continues to find that dealers have inadequate books and records to demonstrate that they have conducted their own product due diligence. Further, CRR Staff has identified a number of individuals who act on behalf of a dealer and trade in securities without being registered to do so. EMDs must have processes in place to document KYP and monitor individuals sponsored by the firm. CRR Staff also found that registrants were not appropriately using prospectus exemptions. CRR Staff intends to provide additional guidance to assist registrants in their understanding and application of newer prospectus exemptions.
9. Online Advisers: As a result of compliance reviews of online (robo) advisers, CRR Staff identified deficiencies that are common among traditional portfolio managers and deficiencies unique to online advisers, such as inadequate written policies and procedures manuals, inadequate client statements, incorrect calculation of excess working capital, unsubstantiated marketing claims, and inadequate ratio of ARs to clients.
Common online adviser deficiencies included inadequate online KYC questionnaires, inadequate evidence to support that a system-recommended model portfolio was reviewed and approved for suitability by an AR and inadequate KYC update processes. Staff also found that some online advisers who did not have a comprehensive KYC questionnaire and/or software mechanisms as described in CSA Staff Notice 31-342 Guidance for Portfolio Managers Regarding Online Advice, did not always contact clients or prospective clients to have a meaningful discussion with them. Yet other online advisers did not maintain evidence to support that an AR had, in fact, a meaningful discussion with clients or prospective clients.
We have worked with online advisers in developing appropriate KYC processes for their business model and would be pleased to work with you to tailor KYC policies and procedures for the online adviser space.
10. Conflicts identified among certain advisers affiliated with IIROC member firms: CRR Staff conducted a sweep of PM firms who are affiliated with an IIROC member firm and identified conflict of interest concerns, including those with respect to selecting brokers for executing trades on behalf of their managed account clients (including investment funds). CRR Staff found significant concerns with the practice of some PMs placing the majority of their managed account clients’ trades with their affiliated dealers. The Report highlights the importance of establishing procedures and responding to conflicts of interest in a manner commensurate with a registrant’s obligations to its clients.
11. Common deficiencies for investment fund managers: CRR Staff highlighted some common deficiencies among IFMs, including inadequate oversight of outsourced functions and service providers, inappropriate mutual fund sponsored conferences, inadequate insurance coverage and inappropriate use of trust accounts. Particularly, the Report noted instances of IFMs that were not complying with the requirement to hold fund assets separately from firm assets, and the requirement that fund assets be in designated trust accounts. Further, some IFMs did not maintain adequate records of supervision over client assets held in trust accounts. The Report provides some best practices and highlights unacceptable practices.
12. Disclosure of Outside Business Activity: The OSC has previously issued guidance on the requirement for timely disclosure and consideration of conflicts with respect to OBAs. In the past year, CRR Staff have observed a number of instances where registrants and applicants for registration have failed to disclose, or were late in disclosing, positions of influence with religious and community organizations. Staff may recommend that “restricted client” terms and conditions be imposed on registrants conducting outside business activities that potentially pose a conflict of interest with their registerable activity.
We would be pleased to speak with you with respect to your (past or present) OBA reporting obligations.