Annual Summary Report for Dealers, Advisers and Investment Fund Managers Compliance and Registrant Regulation OSC Staff Notice 33-748 July 11, 2017 Table of Contents Introduction ............................................................................................... 7 1. Outreach to registrants ........................................................................ 12 1.1 Registrant Outreach program ........................................................................ 12 1.2 OSC LaunchPad ........................................................................................... 14 1.3 Registrant Advisory Committee ...................................................................... 17 1.4 Communication tools for registrants ............................................................... 17 1.5 Topical Guide for Registrants ......................................................................... 18 1.6 Director’s decisions by topic and by year ........................................................ 18 2. Registration of firms and individuals .................................................... 20 2.1 Update on registration initiatives ................................................................... 20 2.2 Current trends in deficiencies and acceptable practices .................................... 22 3. Information for dealers, advisers and investment fund managers ....... 32 3.1 All registrants .............................................................................................. 32 3.2 Dealers (EMDs and SPDs) ............................................................................. 47 3.3 Advisers (PMs) ............................................................................................ 57 3.4 Investment fund managers ........................................................................... 66 4. Acting on registrant misconduct……………………………………………………76 5. Key policy initiatives impacting registrants .......................................... 90 5.1 Syndicated mortgages ................................................................................. 90 5.2 Targeted reforms and best interest standard .................................................. 90 5.3 Review of compensation practices ................................................................. 92 5.4 Proposed amendments to registration rules for dealers, advisers and investment fund managers ............................................................................................ 93 5.5 Derivatives regulation .................................................................................. 94 5.6 Dealers and advisers servicing foreign resident clients from Ontario .................. 96 5.7 Independent dispute resolution services for registrants .................................... 97 5.8 Proposed exemptions for distributions of securities outside of Canada ............... 98 5.9 Efforts to move to T+2 settlement cycle ........................................................ 98 5.10 International Organization of Securities Commissions (IOSCO): Committee 3 – Market Intermediaries (C3)........................................................................... 99 6. Additional resources .......................................................................... 102 Appendix A – contact information for registrants .................................. 103 2 OSC Staff Notice 33-748 DIRECTOR’S MESSAGE For the 2017-2018 fiscal year, the Compliance and Registrant Regulation (CRR) Branch continues to focus on conducting compliance reviews, our registrant outreach program, and various policy initiatives. We continue to strive for strong and open lines of communication with registrants and look for ways to better achieve this goal. In the past year, the Ontario Securities Commission (OSC) introduced the OSC LaunchPad. OSC LaunchPad is the first dedicated team assembled by a securities regulator in Canada to provide direct support to eligible financial technology businesses in navigating the regulatory requirements. Additional information regarding the initiative can be found at OSC LaunchPad’s dedicated site. Our Registrant Outreach program continues to be very popular and well attended by registrants. For those of you who may have missed a topic or would like to refresh what you previously heard, you can find the materials from past sessions on the Registrant Outreach web page. We would like to take this opportunity and remind registrants that:  Know your client (KYC) and suitability are fundamental obligations that registrants owe to their clients. However, these areas continue to be the top deficiencies noted in compliance reviews for all registrant categories. Firms need to do more to focus their resources in these areas to reduce the number of deficiencies.  Firms play an important gatekeeper role in the registration regime. As such, firms need to provide complete and accurate information in all registration applications filed with us. Firms are also encouraged to assess their existing policies and procedures relating to the due diligence reviews they conduct on applicants that they put forward for registration. As gatekeepers, firms are responsible for assessing that the applicants they sponsor have the required proficiency, integrity and are a suitable candidate to represent their firm.  Investors must always be a priority and we expect firms to process transfer requests in a timely and efficient manner without unnecessary delays. We will take issue with any anti-competitive practices in relation to requests from clients to transfer their assets to another firm. 3 OSC Staff Notice 33-748 This year, we are focusing our compliance reviews in the following areas:  firms who have a significant number of senior investors as clients,  compliance with the new prospectus exemptions that came into force in fiscal 2016,  expenses charged by a fund manager to its funds,  funds that have large holdings in illiquid securities and their valuation procedures,  continue reviewing high-risk firms identified from our 2016 Risk Assessment Questionnaire (the 2016 RAQ), and  firms that participated in the “Registration as the First Compliance Review” program to assess their compliance after participating in the program. CRR is also involved in a number of projects that have impacted or will impact the regulatory landscape in Ontario. These initiatives include:  Syndicated mortgages - as detailed in the 2017 Ontario Budget, the government plans to transfer regulatory oversight of syndicated mortgage investments from the Financial Services Commission of Ontario (FSCO) to the OSC. The OSC will be working with the government and FSCO to plan an orderly transfer of the oversight of these products.  Targeted Reforms and Best Interest Standard projects – the objective of these projects are to enhance the obligations that dealers and advisers owe to their clients.  Review of compensation practices - we will continue to review the compensation practices of firms to inform our views of the potential material conflicts of interest that arise from certain compensation arrangements.  Publication of amendments to National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations pertaining to custody requirements, CRM 2 and exempt market dealer activities - these amendments are designed to provide further clarity to registrants and enhance compliance.  Financial planning – On November 1, 2016, the Final Report from the Expert Committee appointed by the Minister of Finance was published with policy recommendations on regulating financial planning. The OSC is working with the government and other stakeholders to respond to the recommendations of the Expert Committee. 4 OSC Staff Notice 33-748 Over the course of the last few years we have increased the number of compliance reviews, provided additional guidance to industry on various topics and areas of concern and introduced and enhanced our Registrant Outreach program. We are hopeful that these additional activities have had a positive impact on overall compliance by registrants. There appears to be some evidence of this as the firms selected for review last year had fewer significant deficiencies than in the prior year. We are encouraged that firms are more aware of compliance issues and are responding to them more effectively. We look forward to continuing to build on these improvements and our relationship with firms in the current year. Debra Foubert Director, Compliance and Registrant Regulation Branch 5 OSC Staff Notice 33-748 INTRODUCTION 6 OSC Staff Notice 33-748 Introduction This annual summary report prepared by the CRR Branch (this annual report or report) provides information for registered firms and individuals (collectively, registrants) that are directly regulated by the OSC. These registrants primarily include:  exempt market dealers (EMDs),  scholarship plan dealers (SPDs),  advisers (portfolio managers or PMs), and  investment fund managers (IFMs). The CRR Branch registers and oversees firms and individuals that trade or advise in securities or act as IFMs in Ontario. Individuals Firms 67,793 1,0101 PMs EMDs SPDs IFMs 2962 2153 5 4944 Registrants overseen by the OSC Although the OSC registers firms and individuals in the category of mutual fund dealer and dealing representatives and firms in the category of investment dealer, these firms and their registered individuals are directly overseen by their SROs, the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC), respectively. This report focuses primarily on registered firms and individuals directly overseen by the OSC, but the firms directly overseen by the SROs should review the registration section of this report (Section 2). Executive Summary In this annual report, Section 1 provides an update on our Registrant Outreach program that helps strengthen our communication with registrants on compliance practices. This annual report is a key component of our outreach to registrants. 1This number excludes firms registered as mutual fund dealers or firms registered solely in the category of investment dealer or other registration categories (commodity trading manager, futures commission merchant, restricted PM, and restricted dealer). 2 This number includes firms registered as sole PMs and PMs also registered as EMDs, and in other registration categories. 3 This number includes firms registered as sole EMDs and EMDs also registered in other registration categories. 4 This number includes sole IFMs and IFMs registered in multiple registration categories. 7 OSC Staff Notice 33-748 We strongly encourage registrants to read and use this annual report:  to enhance their understanding of our expectations of registrants and our interpretation of regulatory requirements,  to understand the initial and ongoing registration and compliance requirements,  to review and be made aware of new and proposed rules and other regulatory initiatives, and  as a self-assessment tool to strengthen their compliance with Ontario securities law and, as appropriate, to make changes to enhance their systems of compliance, internal controls, and supervision.5 Sections 2 and 3 of this report respectively summarize current trends in registration and in deficiencies identified through compliance reviews of registrants (including acceptable practices to address them and unacceptable practices to prevent them). A summary of these matters and where more information can be found in this annual report are outlined in the table below: Current Trends in Registration – Section 2 Deficiency Trends Update on Initiatives  Firms failing to know the applicants they sponsor (pg.23)  Registration Outreach  Use of misleading titles (pg.23) Roadshow (pg.20)  Late Item 5 updates for notices of termination filings (pg.24)  Review of insurance  Incorrect Item 5 updates for notice of termination filings (pg.25) requirements (pg.21)  Incomplete information with respect to surrender applications or category  Automatic acceptance of removals (pg.25) notices of termination and  Unclear/evolving business models at time of application for registration (pg.28) update/correct termination information submissions on  Delayed or no response to staff inquiries (pg.28) NRD (pg.22)  Lack of information provided with respect to wire transfer payments for EFT  OSC responsibility for exempt firms (pg.28) registration of MFDA  Estimate as to the proportion of the fees attributable to registerable activities in member firms and Ontario (pg.29) individuals (pg.22)  Chief compliance officers for international firms (pg.29) 5 The content of this annual report is provided as guidance for information purposes and not as advice. We encourage firms to seek advice from a professional advisor as they conduct their self-assessment and/or implement any changes to address issues raised in this annual report. 8 OSC Staff Notice 33-748 Current Trends in Compliance Reviews of Registrants – Section 3 Deficiency Trends Update on Initiatives All  Inadequate collection/documentation of  Seniors and vulnerable investors (pg.38) Firms KYC/suitability information (pg.35)  “One-person” firms and business  Client account statement common continuity/succession planning (pg.39) deficiencies and missing information in  Lending firms (pg.40) trade confirmations (pg.36)  High impact sweep (pg.41)  Common deficiencies and previously  Marketing in public places (pg.43) published guidance (pg.37)  Cybersecurity (pg.44)  Excessive fees (pg.44)  Whistleblower review (pg.45) EMDs  Inadequate documentation to support  Dealers distributing securities in reliance of assessment of products (pg.47) the new prospectus exemptions (pg.50)  Individuals trading without  Derivatives – trade repository and data appropriate registration (pg.48) reporting compliance reviews (pg.55)  Applications for dealer registration  U.S. online equity funding portals (pg.56) relief in connection with leverage  Registration and oversight of foreign broker employee share offering (pg.49) dealers (pg.56) PMs  Vulnerable investors – lack of policies  PM-IIROC member dealer service and procedures (pg.57) arrangements (pg.59)  PMs with inappropriate access to client’s  Online advisers (pg.60) custody accounts (pg.58)  PM with IIROC affiliate compliance reviews (pg.63) IFMs  Repeat common deficiencies (pg.66)  Focused reviews on mutual fund sales  Holding client assets (pg.67) practices (pg.70)  Prohibited investments resulting in a  Advisor discount fee arrangements survey fund becoming a substantial security (pg.72) holder (pg.69)  Summary of Investment Funds and Structured Products Branch policy initiatives (pg.73) 9 OSC Staff Notice 33-748 Section 4 highlights the types of regulatory action we take when we find serious non- compliance and misconduct at registered firms and by registered individuals. A summary of these matters and where more information can be found in this annual report is included in the following table: Summary of Registrant Misconduct – Section 4 Registrant Misconduct Topics Regulatory actions taken during  Summary chart of regulatory actions taken (pg.76) April 1, 2016 – March 31, 2017 Cases of interest  Novel dealer business model, conflicts of interest, controls and supervision (pg.78)  Disclosure of outside business activity including community involvement / positions of influence (pg.81)  Registration of individuals with prior disciplinary history (pg.82) Contested opportunity to be heard  False client documentation (pg.84) decisions by topic  Misleading staff or sponsoring firm (pg.85)  Compliance system and culture of compliance (pg.86)  Outside business activity (including off-book dealing) (pg.88) Section 5 summarizes new and proposed rules and policy initiatives impacting registrants. Section 6 concludes with details of where registrants can obtain more information about their regulatory obligations and provides CRR Branch contact information. 10 OSC Staff Notice 33-748