Page 8 - Newcom

8 | INVESTMENT EXECUTIVE REGULATORS’ REPORT CARD Regulators’ efforts
to cut red tape continue
Mid-November 2020
added that having one person serving as both CCO and ultim- ate designated person of one firm as well as CCO of a rival firm could lead to “conflicts of inter- ests and divided loyalties.”
For example, if both firms ran into compliance issues at the same time, the shared CCO might prioritize the firm where they have more extensive duties — at the expense of the second- ary firm, the PCMA letter sug- gested. A firm could hold back certain information from the shared CCO due to competitive concerns.
Both the PCMA and the
Association of Canadian Compliance Professionals suggested the CSA consider outsourcing to alleviate com- pliance costs for smaller firms without compromising investor protection.
The CSA’s initial approach didn’t include outsourcing, but as the industry adapts to today’s realities, the appetite for innov- ation is strong. IE
with the Canadian Securities Administrators (CSA) to cre- ate a regulatory framework for cryptosecurities. Pinnington anticipates the framework will be published by early 2021.
The CSA is focused on emer- ging digital trends, as evidenced by its CSA Regulatory Sandbox initiative. The sandbox launched in 2017 with a mandate to let financial services businesses test innovative products and services while still keeping investor pro- tection measures in place.
The CSA website lists 11 deci- sions or terms and conditions for registration or exemption relief, 10 of which involve cryptoasset firms.
Lise Estelle Brault, chair of the CSA Regulatory Sandbox com- mittee and a senior director at the Autorité des marchés financiers, says the decisions posted on the CSA’s website don’t do justice to the work done by the sandbox.
“Unfortunately, the several hundred calls and meetings that are held across the coun- try with people and firms that are arriving to us through [the website] are not showing any- where,” Brault says, noting that “the greatest outcome of the sandbox” has been to make the CSA “accessible.”
This engagement did not stop during the disruptions caused by the pandemic. For example, when Toronto-based Wealthsimple Digital Assets Inc. — a cryptoasset trading platform — requested access to the sandbox over the summer, regulators “were responsive and flexible,” says Lori Stein, a part- ner with Toronto-based Osler Hoskin and Harcourt LLP, who was involved in Wealthsimple’s application.
While predicting where the sandbox may go from here is dif- ficult, Brault anticipates artificial intelligence services will begin appearing in the sandbox.
“[My] crystal ball may not be very accurate,” Brault says, “but with the growth of artificial intelligence, I’m curious to see whether this is going to change significantly the way financial products are distributed.” IE
Adapting to the pandemic has revealed new efficiencies
For example, concerns about shared CCOs include ensuring that one person can handle the workload generated by serving more than one firm while also dealing with conflicts of interest and preserving confidentiality.
According to the Investment Industry Association of Canada (IIAC), most investment deal- ers question whether they could share a CCO with a rival firm.
The IIAC stated in a submis- sion to the CSA that the approach could work among affiliated firms, and may work among exempt market dealers (EMDs) or portfolio managers.
However, small investment dealers don’t believe that shar- ing a CCO with a competitor is
viable. The IIAC’s submission stated that dealers believe the position is “too crucial” and too demanding to enable a shared CCO for competing investment dealers.
For EMDs, the idea appears more feasible. The Private Capital Markets Association of Canada (PCMA) stated in its comment letter that it supports the concept of shared CCOs, noting that there is a shortage of qualified individuals. Enabling sharing may allow EMDs to attract better-quality CCOs than those dealers could on their own, the PCMA letter stated — thereby improving compliance and investor protection.
However, the PCMA letter
n BY JAMES LANGTON for the investment
industry, one of the few positives to come out of Covid-19 may be increased compliance flexibility.
The regulators’ response to the pandemic features relief measures designed to facilitate the sudden shift to remote work- ing. Most measures are intended to be temporary, but some chan- ges may stick around.
For example, while in-person audits, compliance exams and enforcement hearings are likely to resume, other measures — such as allowing greater use of e-signatures and more flexible oversight arrangements — may remain long after the pandemic is finally subdued.
The industry’s efforts to adapt to the pandemic reveal “many new, more efficient and effective ways of doing business,” noted Andrew Kriegler, president and CEO of the Investment Industry Regulatory Organization of Canada (IIROC), in the organiz- ation’s annual report released in September.
Kriegler stated that aban- doning these innovations would “condemn us to years more of inefficient, duplicative and overly burdensome practice.”
Efforts to reduce the regu- latory burden were already in motion well before the indus- try was forced to operate via remote-working arrangements.
According to Investment Executive’s past Report Cards, the top priority for many in the industry was slimming down the regulatory burden through structural reform. Regulators appear to share that ambition.
Despite the pandemic dis- rupting and delaying a host of policy initiatives, the Canadian Securities Administrators (CSA) still launched its review of the self-regulatory framework in the summer. (See story on page 1.)
Furthermore, as part of an effort to root out needless regu- latory burdens, the Ontario Securities Commission (OSC) published a report last year that details 107 reform recommen- dations, including 30 initiatives that target problems facing the dealers and fund managers the OSC oversees.
Those initiatives include streamlining registration requirements, speeding up com- pliance reviews and eliminating duplicate requirements.
So far, the OSC reports that it has completed 21 of those 30 pro- jects, while six are on track and three others should be finalized by next spring.
Regulators are embracing new approaches to chief com- pliance officer (CCO) arrange- ments that aim to give firms more latitude in designing their
supervisory structures.
In July, the CSA published
a proposal that would permit firms to share CCOs; broaden the experience requirements to allow for more specialized CCOs in certain niches (such as fintech); and enable large firms to use multiple CCOs for various business lines.
How well these measures will work in the real world remains to be seen. Feedback from the industry reveals that the added flexibility is welcome, but prac- tical considerations may limit adoption.
Regulators try to boost fintech adoption
From e-signatures to artificial intelligence, regulators are trying to get ahead
reviews. If a small or mid-sized firm cannot afford to conduct the review on its own, the MFDA pays for a consultant to test that dealer’s cybersecurity. As of late October, that consultant had performed 30 reviews.
DATA INNOVATION
In 2019, IIROC announced it would use the Nasdaq SMARTS surveillance technology to help its market surveillance team monitor trading activity on Canada’s debt and equities mar- kets in real time.
Such technology became critical during pandemic lock- downs, when markets were volatile and regulatory staff were setting up home offices, says Victoria Pinnington, senior vice-president, market regula- tion, with IIROC.
Pinnington notes that the move to remote work was “seamless” and “very secure,” with the market surveillance team able to communicate in real time. In mid-March 2020, at the peak of volatility, the sur- veillance team processed 1.4 billion trading messages a day — 3.5 times more than were pro- cessed in March 2019, when the daily rate was about 400 million messages.
LOOKING AHEAD
Both SROs anticipate more firms will raise questions about adopt- ing technology.
At the MFDA, McGuinness anticipates growing interest in using automation to meet regu- latory requirements and to aid in portfolio management, for example.
Pinnington says IIROC will continue to work with provin- cial regulators on cryptosecur- ities. IIROC has working groups on the matter and, in March 2019, IIROC published a joint notice
n BY FIONA COLLIE securities regulators
know technology is changing the industry. That knowledge is clear in the work regulators have done in recent years, and in particular during the Covid- 19 lockdown, to help the indus- try adapt.
The fintech-related work done during the pandemic lockdown was “really an acceleration of the work we’re doing in support of transformation,” says Irene Winel, senior vice-president, member regulation and strategy, with the Investment Industry Regulatory Organization of Canada (IIROC).
For example, IIROC released guidance on e-signatures in March 2019 stating that if a firm allows e-signatures for account openings, it must allow e-signatures for account transfer requests too.
The importance of using e-signatures grew throughout the pandemic.
IIROC issued exemption relief for client signatures as well as for other issues, such as suspending late filing fees. As of Aug. 31, IIROC received 165 applications for exemp- tion relief from 66 dealer firms. Of those applications, 17 were from firms request- ing alternative measures to “wet” signatures, of which the self-regulatory organization (SRO) approved 15.
In June, the Mutual Fund Dealers Association of Canada (MFDA) updated its guidance on e-signatures, reminding firms of the pitfalls inherent in such
technology. The MFDA’s guid- ance prompts firms to consider fraud risks and to institute con- trols to protect the confidentiality and security of electronic docu- ments, says Karen McGuinness, senior vice-president, member regulation, compliance, with the MFDA.
“We do encourage people to use [e-signatures],” says McGuinness. “We just think you have to use [them] respon- sibly, and we wanted to give some guidance on areas that [member firms] should remem- ber when they’re implementing e-signature technology.”
The SROs also have enhanced cybersecurity support for mem- ber firms in recent years.
IIROC provides access to experts and third-party con- sultants, has conducted table- top test scenarios and released notices on trends in cybersecur- ity and about systems for man- aging digital platforms, such as cloud services.
“[The focus on cybersecur- ity began] before the pandemic, but it has increased and there’s more to come,” Winel says. (IIROC published two webcasts on cybersecurity at the end of October.)
At the MFDA, cybersecur- ity also is top of mind. Early in the pandemic, the SRO had cybersecurity consultants talk about the risks of remote-work arrangements for both dealers and individuals.
“We did that pretty quickly because we do understand not all of our members have the resour- ces to do this kind of thing,” McGuinness says.
MFDA members also must participate in cybersecurity