The Canadian Securities Administrators (CSA) recently released the results of a compliance review focused on sole proprietorships and other firms with just one registered individual. CSA Staff Notice 31-350 – Guidance on Small Firms Compliance and Regulatory Obligations is the product of a two-year “sweep” that concluded in mid-2016. The sweep examined the policies and practices of 65 small firms, including investment fund managers, portfolio managers and exempt market dealers.

Readers can also refer to our August 2016 post on Staff Notice 33-747Annual Summary Report for Dealers, Advisers and Investment Fund Managers, in which the OSC noted that this analysis was underway.

Common Deficiencies

The CSA sweep uncovered widespread deficiencies, including inadequate or missing business continuity plans (BCPs) (35% of firms), inadequate monitoring systems (71% with inadequate written policies), unfulfilled regulatory filing obligations (34%), non-compliant client statements (45%) and inadequate relationship disclosure materials (63%).

CSA’s Business Continuity and Succession Tips

While the sweep addressed a number of issues, we will spotlight two – business continuity and succession planning – that are significant concerns for many small firms.

The CSA is recommending that, in managing risks related to business interruption, small firms should consider:

• Developing a BCP that is appropriate for their size and business model;

• Designating an individual to execute the BCP (BCP executor); and

• Reviewing the BCP annually.

A BCP executor may be external to the firm, such as a spouse, relative, legal counsel or another registrant. The CSA outlines best practices to ensure that an external BCP executor understands his or her role. Exemptive relief may be granted on an expedited basis to assist in implementing a BCP if the BCP executor would otherwise be restricted from acting for more than one registered firm.

With respect to succession planning, the CSA is advising small firms that their BCPs should describe the succession or winding-up procedures that will be followed in the event that their registered individual dies, is incapacitated or is otherwise absent from the business for an extended period. Such procedures would include (among others) deciding who is responsible for notifying regulators in such circumstances and determining how clients of the firm are to be told of such an event and how they will then be able to access their assets.

Additional Issues

The CSA provides guidance and best practice tips on other issues addressed in the report, which those responsible for compliance at small firms may find useful. Those issues include monitoring systems, annual CCO reporting requirements (even in a sole proprietorship), interim financial statements, and accounting principles and inadequacies in the working capital reporting under Form 31-103F1 – Calculation of Excess Working Capital. Documentation and record-keeping to evidence compliance are key. For example, the CCO of a small firm can meet the annual report requirement by documenting his or her assessment in the firm's board of directors' minutes.

The CSA noted, in concluding, that it intends to continue to monitor small firm compliance issues.