The Canadian Securities Administrators (CSA) recently released their 2022 Annual Activities Report (Report) summarizing their key oversight activities and assessments of self-regulatory organizations (SROs) and investor protection funds (IPFs) for the calendar year 2022.

Formally designated as CSA Staff Notice 25-310, the Report covers the CSA's assessment of the following SROs and IPFs:

  • The former Investment Industry Regulatory Organization of Canada (IIROC) and Mutual Fund Dealers Association of Canada (MFDA) which amalgamated as of January 1, 2023 into a single SRO that, since June 1, has been officially known as the Canadian Investment Regulatory Organization (CIRO); and
  • The former Canadian Investor Protection Fund (Former CIPF) and MFDA Investor Protection Corporation (MFDA IPC), which were combined as of January 1, 2023 under the Canadian Investor Protection Fund (CIPF) name.

We previously wrote about the application proposals for CIRO and the CIPF, which were published for comment last year.

Key Oversight Activities and Observations

The CSA performs oversight activities through a CSA Market Regulation Steering Committee and oversight sub-committees made up of representatives of each securities regulator. The oversight subcommittees hold quarterly meetings with each SRO and semi-annual meetings with each IPF, as well as ad hoc meetings relating to specific issues.

Oversight of amalgamation

Oversight of the amalgamation process for the SROs and IPFs was prioritized over the past year consisting of the review and approval of proposed new and amended rules, policies and constating documents as well as bi-weekly meetings to discuss and resolve issues as they arose. The CSA organized staff to manage the various aspects of the integration process into different workstreams, in order to consider comments and stakeholder input in the following areas:

  • establishment of an enhanced governance structure,
  • review of SRO/IPF recognitions and approval/acceptance applications,
  • drafting SRO/IPF Recognitions Approval/Acceptance Orders and Memoranda of Understanding,
  • considering any ancillary/consequential legislative amendments,
  • revising methodology for CSA oversight of SROs and IPFs to align with the oversight principals for CIRO and CIPF,
  • advancing the analysis of the issues relating to directed commissions/incorporated agents,
  • enhancing market information sharing between the CSA and CIRO, and
  • review of applications by the MFDA and IIROC seeking to use funds collected by the respective SROs from enforcement fines to pay for certain costs related to the SRO amalgamation.

IIROC activities

In 2022, IIROC oversaw all investment dealers and trading activity in debt and equity marketplaces in Canada and was approved as an information processor for corporate and government debt securities. The CSA note the following from meetings and discussions with IIROC:

  • Rule review: the CSA approved IIROC's rule amendments relating to the futures segregation and portability customer protection regime. This aligns with rule changes at the Canadian Derivatives Clearing Corporation to implement a new customer protection futures segregation and portability regime based on the use of a gross customer margin model.
  • Market surveillance: upgraded infrastructure now processes and handles approximately 3 billion real-time messages per day (up from 1 billion pre-pandemic). In addition to equity messages, the system now also intakes derivatives trading data messages after a Memorandum of Understanding was implemented between IIROC and the Montreal Exchange regarding cross-market surveillance of the securities and derivatives market to mitigate market integrity breaches.
  • Order Execution Only (OEO) Service Levels: quantitative and qualitative data was collected from dealers with OEO trading platforms to assist in the consideration of investor protection issues that may arise from complaints from clients about service and interrupted access to investments. CIRO is currently reviewing options for an appropriate regulatory response to this highly technology dependent rapidly growing sector.
  • Short Selling: the CSA and CIRO are reviewing responses to a request for public feedback on areas for regulatory consideration to keep the regulatory framework current and appropriate. They are doing so in light of feedback with respect to short selling and international developments that we wrote about here.
  • Advertising and Social Media Guidance: an update to existing guidance is being developed by CIRO to reflect trends such as the growing use of social media influencers, gamification and third-party research reports based on non-traditional inputs such as social media sentiment indicators. The update is expected to be issued for public comment in 2023.
  • Crypto/Digital Assets: applications from crypto-trading asset platforms (CTPs) continue to be reviewed by CIRO under the guidance of CSA staff on the application of IIROC rules and securities legislation to CTPs so that targeted applications for exemption based on customized terms and conditions for each business model can be considered. Last October, Coinsquare Capital Markets Ltd. became the first CTP admitted to IIROC. The CSA granted it exemptive relief from certain IIROC requirements as well as time-limited relief from the prospectus and trade reporting requirements and certain provisions of the marketplace operation rules. In collaboration with CSA staff, CIRO is planning to develop new rules and guidance and standardized compliance procedures relating to crypto assets.
  • Cybersecurity Incidents: CSA staff were kept apprised of cybersecurity incidents that were reported to IIROC by their dealer members. IIROC developed further guidance on compliance with cybersecurity incident reporting requirements and a cybersecurity self-assessment tool was made available to dealer members to enable them to assess the strength of their cybersecurity defence systems and policies and areas for improvement.
  • Client Focused Reforms (CFRs): the CSA, IIROC and MFDA harmonized their compliance modules related to CFR conflict of interest requirements. Through its annual request for information form, CIRO is collecting data to assist in compliance risk assessment and CFR conflict of interest review has been incorporated into regularly scheduled business conduct compliance exams. In conjunction with the results of the CSAs targeted conflict of interest compliance sweep, the regulators plan to publish consolidated findings and provide further guidance and enhanced conflict requirements.
  • OEO Trailer Ban: the OEO trailer ban, which we previously wrote about, came into effect on June 1, 2022. Its purpose is to prohibit fund organizations from paying trailing commissions to, and the solicitation and acceptance of trailing commissions by, dealers who are not subject to a regulatory obligation to make a suitability determination. Subsequently, a temporary exemption was put in place to facilitate the implementation process and IIROC updated its OEO compliance module to review the process to ensure all switches are conducted correctly, rebates are paid, and trade confirmations and other client communications are sent in accordance with the conditions of the temporary exemption.

MFDA activities

In 2022, the MFDA oversaw mutual fund dealers in Canada, except Québec where mutual fund dealers operating in the province were directly regulated by the Autorité des marchés financiers. The CSA note the following from meetings and discussions with the MFDA:

  • Cybersecurity: although smaller members tend to have limited resources in dealing with cyber security issues, they were found to be more prepared and invested in cyber protection than other sectors due to the generally high level of threat to the financial services industry. External consultants were engaged to test security controls, review the results of a mandatory cybersecurity survey and provide specific feedback to members.
  • Client Research Project: based on research reports from 2016 and 2019 which provided insight into members' business models, approved persons and clients, and a 2021 mandatory data request, the MFDA worked with external consultants to analyze and publish the results in a report on December 30, 2022.
  • Expanded Cost Reporting: in collaboration with the CSA, IIROC and the Canadian Council of Insurance Regulators, the MFDA was involved in the development of enhanced cost disclosure reporting requirements for investment funds and segregated fund contracts which was published for comment in 2022, with plans for implementation in 2026.
  • Continuing Education: work continued with respect to continuing education requirements for mutual fund approved persons and the launch of the continuing education reporting and tracking system (CERTS).

Former CIPF activities

The Former CIPF provided certain protection to eligible clients of IIROC dealer member firms suffering losses if client property held by a member firm was unavailable as a result of insolvency of a dealer member. The CSA note the following from meetings and discussions with the Former CIPF:

  • Crypto Assets: crypto assets, crypto contracts, and other crypto-related property were expressly excluded from the new CIPF's coverage policy. However, CIPF plans to regularly review the scope and terms of the policy with a focus on custody, control and pricing of crypto assets.
  • Simulation Exercises: participants engaged in phase 2 simulation exercises with a focus on the manner in which operational strategies, tools and regulatory processes changed during the pandemic and how these changes could impact the handling of a member firm insolvency. Other topics for future phases of simulation exercises are being considered.
  • Review of Adequacy of Level of Assets, Assessment Amounts and Assessment Methodology: the adequacy of the level of resources available in relation to risk exposure of IIROC member firms was reviewed using existing parameters, consisting of a credit-risk based fund model to project liquidity resource requirements.
  • Insolvencies: there were no IIROC member insolvencies in 2022 which involved the Former CIPF.

MFDA IPC activities

The MFDA IPC provided certain protection to eligible clients of MFDA mutual fund dealer member firms suffering losses as a result of the insolvency of a mutual fund dealer member. The CSA note the following from meetings and discussions with the MFDA IPC:

  • Fund Size Target: the annual review of the general fund size is monitored for ongoing stability and the general fund size target of $50 million was reached.
  • Insolvencies: there were no MFDA member insolvencies in 2022 which involved the MFDA IPC.
  • Governance: the code of conduct for staff that was implemented in 2021 to mitigate any potential conflicts of interest will be expanded to include contract employees as recommended by CSA staff.

The full Report can be found here.

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