OSC Publishes Annual Compliance Report for Dealers, Advisers and Investment Fund Managers

On July 27, 2023, the Compliance and Registrant Regulation Branch (CRR) of the Ontario Securities Commission (OSC) published its annual Summary Report for Dealers, Advisers and Investment Fund Managers (the Report). The Report provides an overview of the OSC’s regulatory oversight and compliance review activities in the 2022-2023 fiscal year and outlines important information for registrants alongside the areas of focus for the CRR in the coming fiscal year. We encourage all compliance officers to review the report, especially compliance deficiencies, to ensure their firms are in compliance. This article specifically focuses on initiatives and rule changes undertaken over the last year which may impact registrants in significant ways.

Initiatives Impacting Registrants

The Report provides insights into new and proposed rules and other regulatory initiatives that may impact a registrant’s operations. They include the following:

Total Cost Reporting

Amendments for Total Cost Reporting (TCR) were published in April 2023, extending the annual report on charges and compensation (ARCC) to include ongoing costs of owning prospectus-qualified investment funds. Firms will have until January 2026 to prepare TCR-enhanced ARCCs for delivery to clients in January 2027. Because of the complexity of implementation, registrants that distribute with prospectus-qualified investment funds are urged to start TCR implementation and participate in common industry standard development immediately as the implementation date is unlikely to be extended.

Changes to Fee Rules

As of April 3, 2023, changes to OSC Rule 13-502 and OSC Rule 13-503 are in effect. These changes include modifications to capital markets participation fees, elimination of duplicate activity fees for investment fund families and affiliated entities, and removal of late fees for certain late filings (the New Fee Rules). The New Fee Rules include the following:

a) Changes to Capital Markets Participation Fees: The New Fee Rules simplify the annual capital markets participation fee calculation process for both registrant firms and unregistered capital markets participants. The participation fee calculation is now based on the most recently audited financial statements of the firm or participant. In addition, the New Fee Rules clarify the definition of “unregistered investment fund manager” by aligning it with Multilateral Instrument 32-102. Furthermore, deadlines for filing and payment have changed: Form 13-502F4 must now be filed between August 31 and November 2, and the capital markets participation fees must be paid by December 31 for the upcoming calendar year.

b) Elimination of Duplicative Activity Fees in Respect of Investment Fund Families: Amendments to OSC Rule 13-502 ensure that affiliated entities now only pay one activity fee for joint activities. In addition, investment fund families now pay one single activity fee for applications made by two or more investment funds which have the same fund manager or who have affiliated fund managers. Additionally, amendments to OSC Rule 13-503 ensure that only one activity fee is charged to joint applicants undertaking a joint activity in commodity futures trading.

c) Elimination of Late Fees for Certain Late Filings: The New Fee Rules eliminate many late fees for delayed filings. For example, the late fee for delayed delivery of a notice under section 11.9 of National Instrument 31-103 and for the late filing of a Form 33-109F5 for the purpose of amending certain items of Form 33-109F4 have been removed. It should be noted, however, that the calculation of late fees has been revised to use calendar days instead of business days, meaning that remaining late fees will generally be higher under the New Fee Rules.

Dual-Registered Firms and CIRO

As of January 1, 2023, the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada amalgamated to form what is now called the Canadian Investment Regulatory Organization (CIRO). CIRO allows separate mutual fund and investment dealers to now operate within a single legal entity, enabling broader product offerings for investors and facilitating business growth for dealers.

Information Updates Under National Instrument 33-109

Over the course of 2022 and 2023, the Canadian Securities Administrators (CSA) modernized registration information via amendments to National Instrument 33-109. These amendments require registrants to provide more current and accurate information about their activities, while also attempting to reduce regulatory burden on registrants. Changes included a new framework for reporting outside activities, extended deadlines for reporting changes, and a reduction in duplicate filings by corporate groups. New requirements for individuals mandate that reports include business titles, professional designations and non-securities regulation licence numbers (in the case where individuals are licensed in a non-securities capacity to engage with the public).

OSC and FSRA of Ontario Co-ordination on Syndicated Mortgages

On July 1, 2021, Ontario securities law amendments transferred primary regulatory oversight of most syndicated mortgages from the Financial Services Regulatory Authority (FSRA) to the OSC. This shift primarily affected non-qualified syndicated mortgages offered to retail clients. However, FSRA continues to oversee qualified syndicated mortgage investments (QSMIs) and syndicated mortgages distributed to permitted clients by entities registered or licensed under the Mortgage Brokerages, Lenders and Administrators Act, which have not raised the same level of investor protection issues. Because of this, the OSC introduced a registration exemption in Rule 45-501, exempting entities which distribute QSMIs or syndicated mortgages to permitted clients from the requirement to register as dealers provided that they are FSRA-licensed mortgage brokers.

Following the amendments, the OSC and FSRA regularly consult on shared oversight matters. These consultations involve providing consistent guidance to market participants, assisting FSRA-licensed mortgage brokers and administrators in applying for registration as dealers, and consulting on compliance reviews of entities that operate within both regimes.

Firms that operate in the syndicated mortgage space under one or both of these regulatory regimes should be aware of the ongoing discussions between regulators and ongoing developments in this area.

Institutional Trade Matching and Settlement Blanket Orders

On July 1, 2020, the OSC amended National Instrument 24-101 (NI 24-101), imposing a three-year moratorium on the exception reporting requirement. This moratorium, which ended on July 1, 2023, meant that registered dealers and advisers were not obliged to deliver Form 24-101F1 to the OSC. Proposed amendments to NI 24-101, expected to come into force on May 27, 2024, aim to permanently eliminate this requirement. To bridge the gap, local blanket orders (effective July 2, 2023) were issued by the OSC and other securities regulators, granting relief from this requirement.

If you are a registrant or are considering registration and would like to discuss how these initiatives may impact your operation, or to ensure you are compliant with securities legislation, please contact a member of the Aird & Berlis LLP Investment Management & Registration Group.