CSA Sweep Uncovers Small Firm Business Continuity Plan Deficiencies

Darin Renton -

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.

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CSA Reconsider as Industry Takes Aim at Targeted Reforms

Darin Renton

On May 11, 2017, the Canadian Securities Administrators (the CSA) published CSA Staff Notice 33-319 Status Report on CSA Consultation Paper 33-404 Proposals to Enhance the Obligations of Advisers, Dealers, and Representatives Toward Their Clients (the Notice). The Notice provides a high level summary of the CSA’s consultation process to date and outlines next steps in respect of a proposed set of regulatory amendments to National Instrument 31-103 (the targeted reforms). The targeted reforms relate to know your client (KYC) and know your product (KYP) requirements, the suitability obligation, conflicts of interest and the use by registrants of business titles and proficiency (among other things).

In addition to the targeted reforms, which are discussed below, the Notice also states that only Ontario and New Brunswick have decided to continue to work toward articulating a regulatory best interest standard. The provinces of Quebec, Alberta, Manitoba and British Columbia have decided not to continue to work on the best interest standard.

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Dark Trading Functionality Enhancements Proposed by the TSX

Simon Romano

Enhancements to the Toronto Stock Exchange’s on-book dark trading functionality were proposed by the TSX on April 27, 2017 and are open for comment before May 29, 2017. Currently, the TSX’s on-book functionality consists of dark limit orders, dark mid-point orders and the option to include a “minimum quantity” condition. In a dark market, orders are not displayed unless and until an execution occurs. In a lit market, orders as well as executions are displayed. Lit markets may also include dark order types or partly dark order types (such as “iceberg orders” where only a small portion of a larger volume is displayed). Dark or partly dark order types are used by people who do not want their orders fully displayed. For example, a very large sell order could lead to price suppression, including due to its supply and demand impact.

If adopted, the proposed enhancements and amendments to the TSX Rule Book would include:

  • If adopted, the proposed enhancements and amendments to the TSX Rule Book would include: The addition of certain dark pegged order types (primary peg, market peg, minimum price improvement peg);
  • The addition of a “Seek Dark Liquidity” feature for use only with orders marked Immediate or Cancel (IOC) or Fill or Kill (FOK);
  • Modification of the current Minimum Quantity functionality to be more consistent with other markets and the addition of a new feature called Minimum Interaction Size intended to address participant concerns around potential information leakage when executing against small orders on a dark basis; and
  • The addition of an option to randomize the refresh size for the displayed quantity within a specified range for iceberg users to obscure the presence of their iceberg order.
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TSX Proposes Enhancement to Opening Auction

Simon Romano - 

The TSX Rule Book will be required to allow for the cancellation of LOO orders at the end of the opening allocation. The LOO order type is intended to provide additional options for participants to manage their opening orders by specifying that the order is to participate only in the opening auction, subject to its indicated limit price. Aequitas and U.S. equity marketplaces have similar features.

The proposal has been published for comment by May 29, 2017. The TSX expects the amendments to become effective in Q3 2017. For further information, please see TSX Equities Trading Notice 2017-012 - TSX Equities Proposes Changes to Dark Trading and Opening Auction Functionality(April 27, 2017) and TSX Inc. Notice of Proposed Amendment and Request for Comments Enhancement to the Opening Auction Functionality (April 27, 2017).

OSC Amends Director Designation

Pursuant to the Securities Act (Ontario), the Ontario Securities Commission is permitted to assign certain of its powers and duties under the Act to a “Director” which includes, among others, the Executive Director of the OSC and persons employed by the OSC in a designated position. Effective April 18, 2017, the Executive Director of the OSC has amended and restated its March 2010 Designation and Determination (of Positions for the Purpose of the Definition of Director) to reflect the following changes: (i) the change in name of a branch of the OSC; (ii) the elimination of a position in the Compliance and Registrant Regulation Branch; and (iii) the change in responsibilities of staff of the Corporate Finance Branch for purposes of granting exemptions from fees for the late filing of insider reports on Form 55-102F2 under OSC Rule 13-502 Fees. For further information, please see the new Executive Director’s Designation and Determination, dated April 18, 2017.

Mutual Funds to Settle T+2

 Darin Renton

The Canadian Securities Administrators, other than the British Columbia Securities Commission, have published for comment very minor proposed amendments to National Instrument 81-102 Investment Funds which would shorten the standard settlement cycle for conventional mutual funds from three days after the date of a trade (T+3) to two days after the date of a trade (T+2) (the Proposed Amendments), codifying the expectation that conventional mutual funds will settle on T+2 to remove any possibility of confusion. 

Three Key Amendments

The Proposed Amendments will:

•   Shorten the time for payment of the issue price of securities and redemption proceeds from a T+3 settlement cycle and to a T+2 settlement cycle;

•   Require a mutual fund, in the case where payment of the issue price of the securities has not been received, to redeem the securities on the third business day after the pricing date, rather than on the fourth; and

•   Harmonize the payment of redemption proceeds under National Instrument 81-104 Commodity Pools on a T+2 settlement cycle.

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T+2 Settlement Comes to Canada

 Transition to a shorter settlement cycle for equity and long-term debt market trades is expected to occur in Canada on September 5, 2017. The standard settlement cycle for such trades will be shortened from three days after the date of a trade (T+3) to two days after the date of a trade (T+2) pursuant to amendments to National Instrument 24-101 Institutional Trade Matching and Settlement adopted by the Canadian Securities Administrators on April 27, 2017. The timing of the transition will coincide with the date markets in the United States are expected to move to a T+2 settlement cycle. 

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Red Tape Reduction for Funds and Managers among OSC's Priorities

Darin Renton -

Initiatives of interest to funds and managers feature prominently in the Ontario Securities Commission’s 2017-2018 Draft Statement of Priorities (OSC Notice 11-777). These include new initiatives, such as a welcome proposal to reduce redundant and ineffective disclosure and reporting requirements for investment funds, as well as ongoing initiatives such as the development of a “best interest standard”.

The Draft Statement, which we previously discussed in a more general context, sets out the priority actions that the OSC will take in 2017-2018 to address each of its regulatory goals. It was published on March 23, 2017, with a 60 day comment period as noted below.

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Foreign Auditors Could Face Oversight in Canada

Stakeholders have been invited to provide feedback on the desirability and feasibility of oversight requirements for work conducted by foreign audit firms for Canadian issuers, as described in a CSA Consultation Paper published on April 25, 2017. Responding to a proposal by the Canadian Public Accountability Board (CPAB), the CSA is exploring amendments to National Instrument 52-108 Auditor Oversight which would require foreign audit firms involved in the audit of a reporting issuer’s financial statements (Component Auditors) to register as a participating audit firm (a PAF).

The Need for Oversight

The Consultation Paper stems from CPAB’s request that the CSA amend NI 52-108 to require that Component Auditors register as PAFs providing CPAB with a legal basis to inspect their audit work in most foreign jurisdictions. Currently, a PAF who engages the work of a Component Auditor must comply with Canadian auditing standards which provide that the PAF is responsible for the direction, supervision and performance of the overall audit but a Component Auditor is not required to register as a PAF. As described in the Consultation Paper, CPAB has not always been granted access to audit evidence in instances where Component Auditors have performed a substantial portion of the audit work for a reporting issuer. According to CPAB, 597 reporting issuer audits in 95 foreign jurisdictions involved a Component Auditor in 2016.

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Update on Cyber Security: CSA publishes results of roundtable on response to Cyber Security Incidents

Jérémie Ste-Marie and Vanessa Coiteux - 

The results of the Canadian Securities Administrators' (CSA) February 27, 2017 roundtable on cyber security issues were published in a Staff Notice on April 6, 2017. Primarily analyzing the importance of cooperation, coordination and information sharing with regards to incident response, the Staff Notice follows this year's publication of CSA Multilateral Staff Notice 51-347, which focused on cyber security risk disclosure, and is in line with CSA Staff Notice 11-332 Cyber Security (Notice 11-332), which reiterated that cyber security is one of CSA's top priorities.

Participants at the roundtable included various Canadian securities market stakeholders – including marketplaces, clearing agencies, registrants, reporting issuers, regulatory authorities and cyber security experts – and focused on two hypothetical cyber security scenarios designed to assess how they would respond in the event of a large-scale cyber security incident in order to gain a better understanding of the respective roles of entities and regulators in case of a cyber-attack. Keeping in mind the potentially have far-reaching implications of cyber-attacks that go well beyond the immediate organizations that are affected, the participants concluded that cooperation, coordination and information sharing were crucial in responding to a cyber incident.

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OSC investor panel supports "Best Interest" standard and ban on conflicted advice by Investment Advisors

Encouraging the adoption of a best interest standard for investment advisors continues to be a key goal of the Investor Advisory Panel (IAP) of the Ontario Securities Commission, according to the IAP’s newly released 2016 Annual Report. Other top priorities of the seven-member panel include:

  • Conflicts of interest and conflicted compensation;
  • Accuracy in risk profiling;
  • Strengthening the Ombudsman for Banking Services and Investments; and
  • The future of the IAP within the new Capital Markets Regulatory Authority.

Eliminating Conflicts

The Report underscores the IAP’s view that conflicts of interest and conflicted compensation are unacceptable and that proposals in CSA Consultation Paper 33-404 requiring merely that such conflicts be disclosed are insufficient from a retail investor perspective. In 2017, the IAP intends to prepare a response to the CSA paper arguing that embedded commissions and conflicted compensation must be banned outright.

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Increased enforcement highlighted in annual IIROC report

The annual Enforcement Report published by the Investment Industry Regulatory Organization of Canada (IIROC) on April 19, 2017 highlights IIROC’s increased enforcement activity in 2016, as well as an increase in complaints, proceedings, and sanctions imposed on disciplined individuals. Notably, however, IIROC’s collection rate for fines levied against individuals dropped to 8% in 2016.

Increased Activity

IIROC’s enforcement activity increased in 2016:

  • 138 investigations were completed (124 in 2015).
  • 1,459 complaints were received (1,341 in 2015).
  • 55 proceedings were commenced (25% increase from 2015).
  • $3.12 million of sanctions were imposed on disciplined individuals ($2.95 million in 2015).
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The OSC's FinTech Hackathon: a hint of what's to come?

As part of the Ontario Securities Commission’s “OSC LaunchPad” initiative, more than 120 members of the FinTech community were brought together in late 2016 to find solutions to capital markets regulatory problems. The results of this effort are described in the Ontario Securities Commission’s recent publication “OSC RegHackTO: Insights from Canada’s first regulatory hackathon”. “RegHackTO”, the first hackathon by a Canadian securities regulator, aimed at engaging with the FinTech community to better understand how technology could assist in the modernization efforts of the OSC and the financial services sector more broadly.

What is a “Hackathon”?

A hackathon is a design competition in which computer programmers and software developers collaborate on innovative technology projects. Culminating with competitors pitching solutions to a panel of judges, the OSC’s hackathon focused on four key problem areas:

  • RegTech (automated reporting and insider trading detection);
  • Know-Your-Client (KYC)/identity authentication;
  • Financial literacy (advisor ratings and investor education); and
  • Transparency in the capital markets (distribution pricing and fees; access to information).

The competitors worked on their solutions over a period of three days, November 25-27, 2016.

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OSC seeks comments on Proposed Rules of Procedure

Proposed Rules of Procedure and Forms and Practice Guidelines have been published for comment by the Ontario Securities Commission which will replace the current rules and guidelines and apply to all proceedings before the OSC where the OSC is required to hold a hearing pursuant to the Securities Act (Ontario) or the Commodity Futures Act (Ontario). The rules and guidelines are being published for a 60-day comment period ending on June 19, 2017, following which they will be implemented.

For further information, please see “OSC Publishes Updated Rules of Procedure and Practice Guideline for Comment” (April 20, 2017) and Notice and Request for Comments Regarding the Rules of Procedure and Forms and Practice Guideline of the Ontario Securities Commission (April 20, 2017).

TSX revisits proposal for enhanced equity compensation plan and corporate governance disclosure

The disclosure requirements for security-based compensation arrangements for TSX-listed issuers are once again being considered pursuant to proposed amendments to the TSX Company Manual published by the Toronto Stock Exchange (TSX) on April 6, 2017. The revised proposal addresses comments received in response to a TSX request for comments from May 2016, in which a number of commenters expressed concerns about the increase in regulatory burden that could potentially result from the amendments (see our previous post). In this revision, the TSX has scrapped the previously proposed disclosure form (Form 15) and the burn rate formula for the new burn rate disclosure obligation has been revised. Amendments are also being made to better align the time periods covered by TSX-required disclosure with executive compensation disclosure requirements in National Instrument 51-102F6 Statement of Executive Compensation.

Proposed Disclosure Obligations

If adopted, the amendments to the TSX Company Manual would change the proxy circular disclosure obligations with respect to security based compensation arrangements as follows:

  • Plan maximum. Clarification has been made to the disclosure requirement regarding securities awarded or to be awarded under a plan. The maximum number of securities issuable under each plan as either a fixed number (accompanied by the relative percentage of the issuer’s issued and outstanding securities) or fixed percentage will be required.
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