Last December’s regulatory recap was popular with our subscribers, so we’re doing the same thing again. We’ve included links to the relevant articles, in case you’d like to catch up on your reading.
A. Client-Focused Reforms
On October 3, the Canadian Securities Administrators (CSA) finalized their client-focused reforms to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) (CFRs or Amendments). These reforms represent a fundamental shift toward a best interest standard, without actually imposing an all-encompassing obligation for registrants to act in the best interests of their client. AUM Law has been highlighting different aspects of the CFRs in the following publications:
- Our mid-October Special Bulletin focused on key differences between the June 2018 proposals and the final CFRs.
- Our October bulletin provided a closer look at the conflict of interest provisions (including the referral provisions).
- Our November bulletin highlighted the know-your-client (KYC), know-your-product (KYP) and suitability requirements.
Our next article in the series will be included in our January 2020 monthly bulletin.
Implementing the CFRs will require changes to your policies, procedures, compliance training and client-facing documentation. We encourage registrants to start looking closely at how these reforms will affect their operations so that they can identify and resolve interpretation questions and other implementation challenges, organize and budget for the needed resources to effect the required changes, and develop project plans. Please contact us to discuss how we can help you make the transition as painless as possible.
B. Regulatory Burden Reduction
The Ontario Securities Commission (OSC) kicked off 2019 by initiating a consultation process to identify actions that will reduce regulatory burdens and improve the investor experience in Ontario capital markets. As its Burden Reduction Task Force digested the comments they received online and through roundtable discussions, market participants began to see burden reduction initiatives get incorporated into the OSC’s annual statement of priorities, some of its administrative processes and certain regulatory initiatives. The CSA also announced reforms designed, at least in some respects, to reduce regulatory burdens. Examples of OSC and CSA regulatory burden initiatives include the following:
- In May, wrote about on the OSC’s decision to apply a two-year moratorium on late fees payable when registrants disclose new, or report changes to, outside employment or other business activities (OBAs) past the ten-day filing deadline. We also reported on the CSA’s plans to integrate and update its regulatory filings systems, including the National Registration Database (NRD), System for Electronic Document Analysis and Retrieval (SEDAR) system, and the System for Electronic Disclosure by Insiders (SEDI).
- In June, we reported that the OSC had dropped its requirement that investment fund managers (IFMs) for pooled funds apply for approval to act as trustees.
- In July, we highlighted that OSC’s new service standards and timelines for various administrative processes, including registration-related matters.
- In September, we reported that the OSC had amended its fee rules to make the annual, capital markets participation fee certification process easier. We also reported on the CSA’s proposals to streamline certain aspects of the investment funds regulatory framework.
In November, we discussed the Burden Reduction Task Force’s first progress report and blueprint for how the OSC plans to take the burden reduction initiative forward in the next few years. Although we don’t expect to see wholesale changes overnight, the OSC appears committed to improving the regulatory framework and its regulatory processes systematically and as quickly as it is practicable to do.
We also discussed the Ontario Government’s November announcement that it will establish a task force to solicit feedback and make recommendations on how to modernize the Securities Act. Although reform projects like these usually take a long time to produce tangible results, we think that is possible that some initiatives could be fast-tracked if they support the burden-reducing priorities already identified by the OSC.
C. Changes to the Anti-Money Laundering and Anti-Terrorist Financing (AMLTF) Regime and Canadian Sanctions Laws
The AMLTF and Canadian sanctions regimes continue to change. Registrants, exempt advisers and exempt dealers must stay on top of their existing obligations and keep informed of potential changes in the regulatory landscape.
- In January, we wrote about FINTRAC’s updated guidance on suspicious transaction report (STR) requirements. FINTRAC’s revised guidance outlines how to identify a suspicious transaction, what an STR is, and how FINTRAC assesses firms’ compliance with the STR requirements.
- In February, we discussed FINTRAC’s new Assessment Manual (Manual) and revised Administrative Monetary Penalties (AMP) Policy. The Manual includes practical information on how FINTRAC plans, scopes and conducts exams, as well as how it communicates with firms before and after exams are completed. We also reported that a FINTRAC representative’s comments at an OSC seminar generated some uncertainty about what registrants should do when a document used for identification at the time of account opening expires.
- In March, we wrote that FINTRAC clarified that a firm does not have to re-identify a client if the client’s identification information that it had originally used expires before conducting a transaction on the client’s behalf.
- In July, we reported that the Canadian government had finalized changes to the regulations made under the AMLTF regime. Burden-relieving amendments (e.g. to permit the use of electronic means of verifying identity) came into force in July. The legislative amendments for virtual currency dealers are set to come into force on June 1, 2020, and remaining amendments to the reform package (such as those relating to confirmation of corporate clients’ identity and keeping beneficial ownership information up-to-date) are set to come into force on June 1, 2021.
- In September, we published an FAQ on how registrants can use electronic copies of photo ID documents to identify people under the dual process method.
In addition to the changes noted above, there also were some changes to monthly reporting requirements under the AMLTF and Canadian sanctions laws. Registered firms, exempt dealers and exempt advisers are required to file monthly reports with their principal securities regulator indicating whether or not the firm holds any property belonging to or controlled by persons appearing on various “designated persons” lists made under Canadian AMLTF and economic sanctions laws. In May, we reported that amendments to the federal regulations reduced the number of lists that firms had to check for monthly reporting purposes to just two:
- The Regulations Establishing a List of Entities under the Criminal Code (RELE List); and
- Justice for Victims of Foreign Corrupt Officials (Sergei Magnitsky Law) (SLM List).
Although firms are only required to file monthly reports based on checks against the two lists referred to above, they are still expected to continuously monitor these and several other lists made under various Canadian regulations to ensure that they are not dealing with designated persons. If your firm is subject to these monitoring and reporting requirements, AUM Law can advise you on the requirements, help you conduct the searches, and/or prepare and file the required reports.
D. Senior and Vulnerable Investors
In 2019, regulators continued to focus their attention on senior and vulnerable investors who, as a class, are especially vulnerable to financial exploitation.
- In June, we reported on CSA Staff Notice 31-354 Suggested Practices for Dealing with Older or Vulnerable Clients.
- In July, we draw our readers’ attention to guidance published by Autorité des Marchés Financiers (AMF) on how financial firms can protect vulnerable clients, as well as the 2019 Seniors Report published by the Ombudsman for Banking Services and Investments (OBSI).
- In October, we highlighted two OBSI case studies that illustrate some of the challenges that firms face when dealing with senior investors and their adult children.
- In November, we presented an FAQ about the kinds of issues that firms should consider if a senior client indicates that they have given a power of attorney over their account to one of their children.
AUM Law can conduct a targeted review of your policies, procedures and account documentation for senior and vulnerable investors, help you make changes as needed, and provide compliance training on this theme that is tailored to your firm’s operations.
E. Case Law
In 2019, we wrote about a number of regulatory decisions that we think offer lessons for our readers.
- In January, we wrote about how the U.S. Securities and Exchange Commission (SEC) had settled its first enforcement actions with robo-advisors. The cases highlighted some of the pitfalls for firms that use digital media as part of their marketing and communications strategies.
- In February, we reported that the Acting Director of the OSC’s Investment Funds and Structured Products Branch had refused to issue a prospectus receipt for the proposed public offering by 3iQ Corp. of a non-redeemable investment fund that was going to invest substantially all its assets in cryptocurrency. 3iQ challenged that decision, and in October, the OSC set aside the Director’s decision, clearing the way for the public offering to move forward.
- In April, we wrote about how the Clifton Blake settlement agreement serves as another reminder that it doesn’t take a lot of distribution activity to trip over the “business trigger” for registration. In our article “Breaking up Shouldn’t Be Hard to Do”, we discussed an OBSI case study that illustrates why it is important for registrants to be forthright with their customers when the customer’s representative leaves the firm.
- Our May article on the settlement reached between the OSC and NextBlock Global Limited regarding misleading statements in slide decks emphasized that an offering memorandum is defined by its content and purpose, not its format or a label.
- In June, we reported that the Canadian Radio-Television and Telecommunications Commission (CRTC) fined the chief executive officer of nCrowd, Inc. $100,000 for his company’s breaches of Canada’s Anti-Spam Legislation (CASL). We also discussed a settlement agreement between the British Columbia Securities Commission (BCSC) and Beleave Inc. regarding its alleged involvement in illegal distributions of securities and inappropriate reliance upon the consultant exemption in National Instrument 45-106 Prospectus Exemptions (NI 45-106).
- Our July bulletin included three articles about settlement agreements. In Ontario, the OSC reached settlements with crypto-consultant CoinLaunch Corp., which had breached the registration requirements, and with Caldwell Investment Management Ltd. (CIM) regarding non-compliance with CIM’s best execution obligations. We also reported on the British Columbia Securities Commission’s settlement with Genus Capital Management over its misuse of soft dollars.
- In August, we discussed the U.S. Securities and Exchange Commission’s enforcement action against Canadian-based crypto-currency issuer Kik Interactive.
- In September, we wrote about the settlements reached by Royal Bank of Canada (RBC) and The Toronto-Dominion Bank (TD) with the OSC regarding inadequate supervision of the firms’ FX trading businesses. RBC and TD FX traders shared confidential, customer information in chatrooms with FX traders at other firms.
F. Data Privacy and Digital Security
Data privacy and cyber-security continued to be high priority regulatory issues in 2019.
- In January, we discussed FINRA’s Report on Selected Cybersecurity Practices, which included some useful findings and guidance on topics such as mobile devices, insider threats, penetration testing, phishing, and branch controls.
- In March, we wrote about the new cyber security incident reporting guidelines published by the Office of the Superintendent of Financial Institutions (OSFI). Although the guidelines are relevant primarily for OSFI-regulated firms, we wouldn’t be surprised to see the CSA incorporate some of the guidelines’ elements into the securities regulatory framework.
- In May, we reported on the Government of Canada’s new Digital Charter as well as its discussion paper outlining proposals to modernize the Personal Information Protection and Electronic Documents Act (PIPEDA). Potential changes could affect the way organizations obtain consent from individuals to collect and use their personal information, introduce a data mobility right (enabling individuals to require an organization to direct that their digital information be transferred to another organization), motivate firms to self-regulate under codes of conduct, and expand the Government’s oversight and enforcement powers.
- In May, June and again in September, we wrote about the Canadian Office of the Privacy Commission (OPC) consulting on data transfers (especially cross-border data transfers) between organizations. In the May consultation documents, the OPC expressed the view that a transfer of personal information between organizations for processing likely is a “disclosure” that triggers consent requirements. In June, we reported that the OPC had reframed its consultation paper to take into account the Digital Charter and the Government of Canada’s consultation on potential changes to PIPEDA. In September, we reported that there had been significant pushback from organizations and their advisers regarding the OPC’s interpretation of whether a transfer of data to facilitate processing of information constitutes a “disclosure”. The OPC announced that it would drop this interpretation and maintain the status quo until the law is changed.
G. Exam Report Cards
The summary reports that regulatory staff publish about their oversight of market participants are valuable tools that can help firms learn more about recent and proposed regulatory initiatives, what staff consider to be problematic (or, conversely, beneficial) practices, and how staff interpret legislation and rules. In 2019, we wrote about:
- The compliance priorities of FINRA, IIROC and the SEC (January);
- FINRA’s review of broker-dealers’ cyber-security practices (January);
- The MFDA’s targeted review of approved persons’ books of business (April);
- The SEC’s review of firms’ practices for safeguarding customer information (April);
- The Annual Summary Report on Dealers, Advisers and Investment Fund Managers published by the OSC’s Compliance and Registrant Regulation (CRR) Branch (August); and
- The OSC’s Corporate Finance 2019 Annual Report (this month).