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Pearls of wisdom: Investment management regulatory trends and preparing for the new SRO

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There were pearls, boas and other Harry Styles references aplenty at BLG’s annual investment management seminar, as we welcomed guests back to “BLG’s house” after two years of virtual gatherings. It’s been a busy year for those staying on top of changes in the investment management space, and speakers were full of helpful tips on topics ranging from enforcement and fund management to ESG issues, conflicts of interest and tax challenges — plus information about the new self-regulatory organization (SRO) coming into effect in January 2023.

We’ve summarized some of the main points below. For all the details, watch the webinar recording or skim the full transcript*. Let’s see how many Harry references you can get!

*Recording and transcript available in English only.

What are the key enforcement trends from 2022?

Speaker: David Di Paolo
Find it in the recording: 00:04:03-00:17:32

The areas of emphasis for IIROC and the MFDA are:

Seniors. Once again, protecting seniors and vulnerable clients is a key priority.

Conflicts of interest. Client-focused reforms (CFRs) will be enforced. Expect audits that look for conflict of interest and documentation relating to how conflicts of interest are managed.

Know your product (KYP). Depending on the results of those audits, there will be more investigations. We’re seeing more conflicts of interest in KYP investigations than in the last decade.

When it comes to SRO consolidation, not much is expected to change on the enforcement side in the short-term while the two organizations operate as silos. From summer 2023 to early 2024, we expect more focus on compliance audits and enforcement, accompanied by bigger fines.

What we know (and don’t know) about the new SRO

Speakers: Julie Mansi and Bill Donegan
Find it in the recording: 00:18:07-00:38:10

Heading into Jan. 1, 2023, we will have a new SRO and a new Canadian Investor Protection Fund. All current MFDA and IIROC members will automatically be members of the new SRO and investor protection fund.

What we know:

  • New interim rules have been published.
  • The compliance manual will need to be updated.
  • Policies and procedures will have to be revised.
  • This is an opportunity for organizations to rethink their distribution model, including consolidating their mutual fund dealers and investment dealers into a single platform.

What we don’t know:

  • The name of the SRO, which is important for those looking at creating a new dealer. You don’t want to create documentation, put a name on it and then have to redo it.
  • Details of new fee models, which will significantly influence the business case you develop if you’re changing your business model.
  • The content and timing of the combined rules, including whether changes will be significant.
  • What will happen in Québec.

What’s new for investment funds?

Speakers: Lynn McGrade, Grace Pereira, Donna Spagnolo and John Stanley
Find it in the recording: 00:34:18-00:58:52

In terms of investment funds, this is a time of intense regulatory change and scrutiny, geopolitical risk and market uncertainty, and shifting investing patterns.

ESG disclosure management and marketing

The CSA published Staff Notice 81-334, which sets out the disclosure standards for funds that incorporate ESG criteria, especially in their investment objectives and strategies.

From a regulatory perspective, ESG disclosure isn’t going away, given the popularity of ESG products with investors and the regulators’ mandate to protect these investors. Regulators are looking at ESG-related disclosures in prospectuses as well as in continuous disclosure documents. Regulators in other countries have taken different approaches to ESG integration funds and it remains to be seen whether Canadian regulators will follow their lead.

Conflicts of interest

Registrants have just finished a significant review of their conflicts of interest. This has helped them consider how they will avoid and resolve conflicts in the best interests of investors.

Tax compliance issues

The new FATCA/CRS changes impacting custodians, dealers, portfolio managers and funds are effective Jan. 1, 2023. The latest changes that impact client-name accounts also remove the ability for the parties in those relationships to rely on written agreements to insulate themselves from penalties where it is clear that one party is not fulfilling its FATCA/CRS responsibilities.

Tips to clear the regulatory haze

Speakers: Sarah Gardiner, Jason Streicher (AUM Law), Michael Taylor, Matthew Williams
Find it in the recording: 00:59:27-1:18:15

In this time of great change, here are some tips to set yourself up for success.

  • Update and file your F4 amendments for your current registrants and permitted individuals. You have until June 2023 to file your F4 updates, but this is accelerated if changes in your F4 trigger the requirement to update the form.
  • Develop an internal tracker for outside activities so that the chief compliance officer who is approving an outside activity can see what was done, even if the activity is no longer reportable.
  • Refresh your compliance manual. Confirm it’s up to date, taking a broad perspective in your review.
  • Review the OSC’s latest annual summary report for dealers, advisors and investment fund managers for good guidance on policies and procedures.
  • Have a remote working supervision policy in place and make sure your reps are following it.
  • Update your account documentation for client-refocused reform. To be ready for compliance audits, update your KYC forms, KYC update forms and investment management agreements.

In summary

With the new SRO having come into effect in January, we can expect ongoing changes. If you have any questions about the content from this seminar — or you just want to let us know how many Harry Styles references you counted — reach out to any of the key contacts listed below.

Key Contacts