The Registration, Inspections and Examinations Division (“RIE”) of the Ontario Securities Commission (“OSC”) has released its annual Summary Report for Dealers, Advisers and Investment Fund Managers (the “Report”) for the 2023-2024 fiscal year. Formerly known as the Compliance and Registrant Regulation Branch, RIE oversees firms and individuals that trade in, or advise on, securities or commodity futures as well as firms that manage investment funds in Ontario. As in previous years, the Report summarizes RIE’s recent activities, focusing on education and outreach, regulatory oversight and guidance, current initiatives and enforcement. The Report also serves as a useful reference in the management and oversight of compliance programs for Canadian registered and exempt firms.
Report Highlights
Oversight activities
In 2023-2024, compliance reviews undertaken by OSC staff (“Staff”) included:
- Presence reviews: reviews of 24 registered firms that had not been reviewed since their initial compliance review. Most of these firms were regulated by foreign regulators and/or had limited activity in Canada;
- High-risk firm reviews: reviews of registered firms that had been categorized as “high-risk” by reason of their proposed business operations, compliance systems and/or individuals’ proficiency. These reviews assessed compliance with Ontario securities law, and Staff identified significant, common deficiencies related to compliance systems, conflicts of interest disclosure and financial condition;
- Client Focused Reforms (“CFRs”) sweep: reviews of registered firms to assess compliance with the know-your-client, know-your-product and suitability determination requirements that had been introduced as part of the CFRs under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. This sweep was commenced with the Canadian Securities Administrators (“CSA”) and the Canadian Investment Regulatory Organization, and Staff plan to publish their findings and additional guidance once the reviews are complete;
- Business arrangements sweep: reviews of 10 Ontario-based firms that had entered into a business arrangement with an unrelated registered firm for its investment fund manager (“IFM”) and/or portfolio manager (“PM”) services. This sweep was intended to ensure that the roles and responsibilities of each party aligned with their registration category and were not misrepresented in offering documents and marketing materials; and
- Focused reviews: reviews related to emerging issues, such as certain real estate and mortgage issuers having halted or suspended redemptions as a result of higher interest rates. Staff anticipate looking further into the roles and responsibilities of exempt market dealers (“EMDs”) in the distribution of real estate and mortgage products and will continue to follow up directly with market participants as required.
Registration and compliance deficiencies
The Report also discusses key and/or novel issues that Staff identified, namely:
- whether a PM should be appointed to the top fund in a fund of fund structure, even if the portfolio of the investment fund is limited to only one underlying investment;
- constating documents that had not appropriately appointed the person or company that directed the business, operations or affairs of an investment fund (i.e., the IFM);
- instances of registrable activities being conducted by unregistered firms, particularly through arrangements where a firm had entered into a business agreement with an unrelated registered firm for its IFM and/or PM services;
- business models where all compliance functions and the chief compliance officer’s responsibilities had been outsourced to a third-party service provider;
- inadequate collection of trusted contact person information by PMs and EMDs;
- the use and/or publication of certain awards or recognitions in client-facing communications;
- inadequate disclosure of how material conflicts of interest arising out of proposed ownership changes in, or asset acquisitions of, registered firms had been or would be addressed in clients’ best interest;
- improper delegation of PM activities that required registration to referral agents who were not registered;
- representatives of foreign advisers that were not relying on the international adviser exemption conducting registrable activities without being registered with the appropriate Canadian securities regulators;
- business continuity planning, particularly for small firms and firms with few registered individuals;
- an increase in the number of registered firms using the issuer-sponsored dealing representative business model;
- dealers’ obligations with respect to the offering memorandum prospectus exemption;
- the inclusion of related party receivables, which are considered to be high-risk, in registrants’ excess working capital;
- incorrect applications of OSC Rule 13-502 Fees in calculations of capital markets participation fees;
- a trend of registration applications that were incomplete or had insufficient information;
- IFM proficiency; and
- matters related to crypto asset trading platforms, such as registration, marketing, conflicts of interest and mandatory arbitration clauses.
To guide registrants, the Report provides Staff’s views and suggested best practices in respect of each issue identified.
Enforcement activities
According to the Report, Staff imposed terms and conditions and denied registration more frequently in 2023-2024 than in the previous fiscal year. This was attributed, in part, to a number of previously undisclosed reportable events coming to light as firms completed their filing updates, as well as Staff acting in response to an increased number of matters in which individuals were not truthful or cooperative with their former sponsoring firms.
What’s Next?
The Report indicates that Staff continue to support several ongoing initiatives, among them, the CSA proposal to create a binding dispute resolution framework, the CSA coordinated exemption to allow EMDs to participate in prospectus offerings and certain OSC TestLab initiatives aimed at supporting early-stage capital raising.
Staff also noted that a number of firms have, in the past, submitted applications to surrender their registration very late in the calendar year. The Report reminds registrants that applications received after the cutoff date published by the OSC may not be processed in time for the firm to be excluded from the capital markets participation fees that become due in January of the following calendar year.
