OSC publishes comprehensive summary of registrant initiatives and compliance reviews

The Ontario Securities Commission yesterday released OSC Staff Notice 33-738, a report prepared by its Compliance and Registrant Regulation Branch, that is intended to assist registrants, including dealers, advisers and investment fund managers, in complying with regulatory obligations.

Key Policy Initiatives

First, the report sets out the new and proposed rules that impact registrants including Phase 2 of the Client Relationship Model Project, the potential best interest standard for dealers and advisers, the ongoing development of OTC derivatives regulation and the review of prospectus exemptions. Notably, on the latter point, the OSC states that it intends to publish a second consultation note regarding any new proposed prospectus exemptions.

KYC and Suitability Focus

The report also considers the OSC's continued focus on know-your-client obligations and requirements regarding suitability. On this issue, the report states that "significant deficiencies" continue to be identified in respect of registrants' compliance. The report discusses the OSC's recent targeted review of over 85 exempt market dealers and portfolio managers, and provides highlights of recent enforcement cases focusing on KYC and suitabilty.

Issues identified in the reviews include, among others (i) the inadequate collection and/or documentation of KYC information required to confirm a client's identity, ascertain if the client was an insider of a reporting issuer, or assess the suitability of proposed investments; (ii) unsuitable investments being made; (iii) inadequate or a lack of written policies and procedures regarding KYC, know-your-product and suitability obligations; (iv) EMDs improperly relying on the accredited investor exemption; and (v) portfolio managers not updating KYC information at least annually. A number of best practice guidelines were also provided.

Registration Requirements

With respect to registration requirements, the report considers recent developments including with respect to the registration exemptions that apply to non-resident investment fund managers and the registration and oversight of foreign broker-dealers. On the latter topic, the report suggests that the OSC will review comments received on the recent IIROC proposal and consider changes to NI 31-103 to limit the types of activities that EMDs may conduct. Current trends in registration issues are also considered, including with respect to internet platforms and other unregistered entities engaged in registrable activities, mortgage investment entities, misrepresentations in registration applications and late filings.

Compliance Reviews

The outcomes from ongoing compliance reviews of registrants are also provided. Notably, in respect of all registration categories, 34% of the outcomes of compliance reviews resulted in registrants requiring enhanced compliance, while 47% were identified as requiring significantly enhanced compliance.

Information is also provided regarding what to expect from, and how to prepare for, an OSC compliance review. Suggested practices to prepare for a compliance review are also provided. Common deficiencies identified in compliance reviews include inadequate compliance systems, CCOs not adequately performing responsibilities, inadequate relationship disclosure information, inaccurate calculations of excess working capital, inappropriate sales of registrants' securities to clients, and the failure by CCOs to submit annual compliance reports.

Deficiencies identified with respect to EMDs include inadequate compliance systems and supervision, inadequate collection and documentation of KYC information, insufficient product due diligence and improper reliance on the accredited investor exemption. In respect of advisers, deficiencies identified include the unfair allocation of investment opportunities, improper use of consolidated account statements and lack of awareness of trade-matching requirements.

With respect to investment fund managers, current deficiencies include insufficient oversight of outsourced functions and service providers, improper valuation of restricted securities, inappropriate expenses charged to funds, inadequate insurance coverage and misleading marketing practices. Suggested practices are provided for the various identified issues.

New and Proposed Rules and Initiatives

In respect of new and proposed initiatives impacting all registrants, the report states that the OSC is currently developing an online submission process that will require the electronic submission of Form 31-103F1 Calculation of Excess Working Capital for all registrants whose principal regulator is the OSC. The OSC is also planning to conduct a targeted review of Form 31-103F1 filings.

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