OSC 2017 Annual Report for Registrants: 10 Take-aways

Darin Renton

On July 11, 2017, the Ontario Securities Commission released Staff Notice 33-748 Annual Summary Report for Dealers, Advisers and Investment Fund Managers (the Report). Prepared by the Compliance and Registrant Regulation (CRR) Branch, the six-part Report addresses current trends in registration and deficiencies identified through compliance reviews of registrants, the CRR Registrant Outreach program and various policy initiatives – areas that the CRR Branch continues to focus on for the 2017-2018 fiscal year. Like previous reports, the Report summarizes regulatory actions taken, highlights cases of interest and provides additional resources for registrants.

Specific issues discussed in the Report include several that will be familiar from our earlier discussion of the Alberta Securities Commission’s (ASC) Exempt Market Dealer Sweep, including Know Your Client (KYC), Know Your Product (KYP) and suitability, as well as an emphasis on registrants’ obligations to seniors and trending issues such as fintech and cybersecurity (with respect to which a survey has been conducted, with results to follow). 

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Alberta, Manitoba and New Brunswick Adopt MI 61-101

Minority security holders in Alberta, Manitoba and New Brunswick will enjoy enhanced protections as the result of the adoption by their respective provincial securities regulators of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions. MI 61-101 will take effect in the three provinces on July 31, 2017 and will not differ in any substantial respect from the instrument previously adopted in Ontario and Quebec.

Enhanced Protection for Investors

Although reporting issuers listed on major Canadian exchanges have generally been subject to MI 61-101, this initiative by the Alberta, Manitoba and New Brunswick regulators should reduce regulatory burden and provide additional investor protection in those jurisdictions by:

  • Increasing the efficiency of local compliance and enforcement mechanisms;
  • Further harmonizing Canadian securities law; and
  • Providing a local regulator with whom parties may engage.   
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TSX Ex-Dates Transition to T+2

In connection with the settlement cycles in Canadian and U.S. capital markets being shortened to trade date plus two business days (T+2) from trade date plus three business days (T+3), 2017, the TSX is making certain amendments to the TSX Company Manual effective September 5, 2017. In particular the change to T+2 results in the ex-dates for dividends, distributions and other corporate actions being reduced to one business day prior to the record date as will be reflected in the amendments. For further information, please see TSX Notice of Housekeeping Rule Amendments (July 13, 2017).

TSX Adopts Housekeeping Amendments to Company Manual

On May 11, 2017, the TSX published housekeeping amendments to the TSX Company Manual related to non-public interest changes. The amendments include fixing typographical errors, clarifying provisions, updating references to securities legislation and cross references, amending language to reflect changes in technology and the addition of a newly authorized newswire service provider. For further information, please see TSX Notice of Housekeeping Rule Amendments to the TSX Company Manual – Amendments to Parts IV, VI and IX, Form 12 and Appendix B of the TSX Company Manual (May 11, 2017).

IIROC Proposed Amendments to Client ID and Verification Requirements: The Argument for Red Tape Reduction

Darin Renton -

On July 6, 2017, IIROC published for comment IIROC Notice 17-0139 Proposed Amendments to Client Identification and Verification Requirements. IIROC is proposing changes to Part A of Rule 3200 of the proposed IIROC Dealer Member Plain Language Rule Book (the Proposed Amendments). The Proposed Amendments are designed to make IIROC rules consistent with National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and the Proceeds of Crime (Money Laundering) and Terrorist Act and its accompanying regulations, including the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (defined in the Notice as the “AML Requirements”).

Effects of the Proposed Amendments

The Proposed Amendments would:

  • Update the information Dealer Members are required to collect on clients who are not natural persons (such as corporations, partnerships and trusts)
  • Change the amount of time Dealer Members have to confirm certain client information
  • Reduce the number of clients who are exempt from Part A of Rule 3200 of the proposed IIROC Dealer Member Plain Language Rule Book (the IIROC Rules)
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Regulating the Regulators: IIROC 2016 Report Card Released

Darin Renton -

The Investment Industry Regulatory Organization of Canada (IIROC) is the national self-regulatory organization (SRO) that oversees all investment dealers, as well as trading activity on debt and equity marketplaces in Canada. Like other regulated entities, IIROC is subject to the oversight of securities regulators, in this case each of the ten provincial securities regulators that have recognized IIROC as an SRO, collectively, the Recognizing Regulators (RRs). On July 4, 2017, the participating RRs issued their Oversight Review Report of the Investment Industry Regulatory Organization of Canada with the results of their review for the period from April 1, 2015 to July 31, 2016. The previous review was conducted in 2015.

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CSA Withdraw Best Execution Disclosure Proposal

The CSA is withdrawing the best execution disclosure rules proposed in May 2014 in light of amendments to IIROC’s best execution rules which were approved on June 28, 2017. The 2014 proposed amendments to National Instrument 23-101 Trading Rules would have mandated specific dealer disclosure relating to best execution policies. At the time of the proposal, IIROC’s best execution rules did not apply to IIROC dealer members that were not IIROC participants (under the Universal Market Integrity Rules) and the rules did not require participants to disclose best execution policies. The recently approved amendments to IIROC’s best execution rules make the best execution requirements applicable to all IIROC dealer members and impose new disclosure requirements which are substantially similar to those originally proposed by the CSA.

For further information, please see CSA Staff Notice 23-318 Withdrawal of Proposed Amendments Regarding Best Execution Disclosure Under National Instrument 23-101 Trading Rules (July 6, 2017). 

CSA Propose Amendments for Designated Rating Organizations

Proposed rule amendments and policy changes related to designated rating organizations (DROs) and the credit ratings of DROs were published for comment by the Canadian Securities Administrators on July 6, 2017. The amendments to National Instrument 25-101 Designated Rating Organizations are being proposed in an effort to ensure that the European Union continues to recognize the Canadian DRO regime as “equivalent” to new EU requirements for credit rating organizations coming into force on June 1, 2018. In addition, the proposed amendments include revisions to NI 25-101 that reflect new provisions in the March 2015 International Organization of Securities Commissions (IOSCO) Code of Conduct Fundamentals for Credit Rating Agencies.

Concurrently, the CSA are proposing amendments to National Instrument 44-101 Short Form Prospectus Distributions and National Instrument 44-101 Shelf Distributions to recognize the credit ratings of Kroll Bond Rating Agency, Inc. for limited purposes.

The comment period is open until October 4, 2017. For further information, please see CSA Notice and Request for Comment Relating to Designated Rating Organizations (July 6, 2017). 

New Proposal for Prospectus-Exempt Resale of Foreign Issuers' Securities

The Canadian Securities Administrators have published for comment a new prospectus exemption for the resale of securities of a foreign issuer. The proposed amendments would replace the “10% shareholder ownership tests” under section 2.14 of National Instrument 45-102 Resale of Securities with an issuer-focused “Canadian connection” test exempting the resale of securities for non-reporting issuers if the resale is on an exchange or market, or to a person or company, outside of Canada and the issuer is a foreign issuer. Comments are being accepted until September 27, 2017. For further information, please see CSA Notice and Request for Comment Proposed Amendments to national Instrument 45-102 Resale of Securities Proposed Changes to Companion Policy 45-102CP to National Instrument 45-102 Resale of Securities, Proposed Consequential Amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, and Proposed Consequential Changes to National Policy 11-206 Process for Cease to be a Reporting Issuer Applications (June 29, 2017).

OSC Republishes Rule for Distributions Outside of Canada

The Ontario Securities Commission has published amendments to its proposed OSC Rule 72-503 Distributions Outside of Canada originally published last year. The proposed rule is intended to replace “Interpretation Note 1 Distributions of Securities Outside of Ontario” and is being published for comment until September 27, 2017. For further information, please see Second Notice and Request for Comment Proposed OSC Rule 72-503 Distributions Outside Canada and Proposed Companion Policy 72-503 Distributions Outside Canada(June 29, 2017).

Reminder of Transition Periods for Changes to Canada's AML/Terrorist Financing Law Affect Dealers' Client ID Processes

Previously announced amendments to Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (the Regulations) will be coming in force on June 30, 2017.

Those amendments expanded obligations with respect to the identification of politically exposed persons among existing and new account holders, as detailed below. At the same time, the transition period to continue to allow for procedures under the old guidelines for ascertaining a person’s identity has been extended to January 23, 2018.

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Accredited Investor Exemption Still First in Popularity

Foreign and Canadian issuers primarily rely on the accredited investor exemption when raising capital on a prospectus exempt basis, as reported in the recently published OSC Staff Notice 45-715 2017 Ontario Exempt Market Report. The Report, which summarizes capital raising activity by non-investment fund issuers in Ontario’s exempt market during 2015 and 2016, also notes an increase in activity in Ontario’s exempt market and the general take-up of prospectus exemptions that were introduced during 2015 and 2016. Notably, Ontario’s exempt market accounted for less than one-fifth of the total gross proceeds raised by Canadian issuers domestically and less than one-tenth of gross proceeds raised globally.

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Report of Exempt Distribution Certification and Information Requirements Revisited by the CSA

 Viviana Beltrametti Walker and Laura Levine - 

The recently harmonized Form 45-106F1 Report of Exempt Distribution (Report) is once again in the spotlight as the Canadian Securities Administrators, other than the British Columbia Securities Commission, have published for comment amendments to the certification and information requirements in the Report.  

What’s Being Proposed?

The bulk of the proposed amendments apply to Item 10 of the Report (the Certification) which requires that a director or officer of the issuer or underwriter filing the Report certify that he or she has read and understood the Report and that the information it contains is true. The proposed amendments to the Certification include: 

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TSX Intends to Digitize PIFs

The ability to electronically sign personal information forms (PIFs) and declarations required by the Toronto Stock Exchange is being considered pursuant to proposed amendments to the TSX Company Manual published for comment on June 1, 2017. The proposed amendments would also remove the requirement that a PIF, a declaration or a TSX listing application be notarized by a public notary in an effort to improve client experience and reduce regulatory burden on TSX-listed issuers. As indicated in the request for comments, the TSX intends to automate and make PIFs and declarations digitally available in the future. There are currently no similar plans to automate and digitize the listing application.

The proposed amendments are open for comment until July 4, 2017. For further information, please see Amendments to Toronto Stock Exchange Company Manual (June 1, 2017).

Canada Repeals Côte d'Ivoire and Liberia Sanctions while Extending Syria SEMA Prohibitions to More Individuals and Entities

Canadian regulations imposing limited trade sanctions against Côte d’Ivoire and Liberia were recently repealed following the termination of similar measures imposed on the two countries by U.N. Security Council Resolutions 2283 and 2288. The Canadian sanctions had focused primarily on the supply, sale, export or shipment of arms and related material to Côte d’Ivoire and Liberia.

In addition, the Government of Canada has also adopted amendments (here and here) that add a total of 44 individuals to part 2 of Schedule 1 of the Special Economic Measures (Syria) Regulations (the Syria SEMA Regulations). Five entities have also been added to part 1 of the same Schedule, while 2 individuals who were previously named are no longer included. The Syria SEMA Regulations prohibit persons in Canada and Canadians abroad from dealing in the property of the designated persons and have been in force since May 24, 2011.