July 2, 2020 staff of the Canadian Securities Administrators (CSA) issued a notice (Notice) setting out guidance regarding the registration requirements for chief compliance officers (CCOs) under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) for certain Chief Compliance Officer models.
The Notice provide guidance on the three CCO models:
1) an individual applying to be the CCO for more than one firm (the shared CCO model);
2) a firm applying to have multiple CCOs, each responsible for one or more business lines and/or different registration categories within the firm (the multiple CCO model); and
3) an individual applying to be the CCO of a non-traditional or specialized firm, such as a fintech firm, where industry-specific experience may be considered as relevant experience for the purposes of assessing the individual’s proficiency (the specialized CCO model).
Shared CCO Model
Under this model, an individual can act as the CCO for more than one firm. Currently, some affiliated firms have been approved to use a shared CCO model. The Notice states that CSA Staff are open to the possibility of unaffiliated firms using a shared CCO model as well. However, for some smaller firms, a shared CCO may suffice. The shared CCO model may also allow firms with only one individual to separate the role and function of the CCO from that of the UDP and sole director. In reviewing an application by a firm to designate as CCO an individual who holds that position with another firm, OSC staff will consider the following factors:
Proficiency: The shared CCO must be able to demonstrate they have the proficiency to act as CCO for each firm’s business. Typically, before an individual could be approved as a CCO in a shared model, the individual would have to have had prior experience as a CCO.
Conflicts of Interest: The shared CCO, and the firms sponsoring such applicant, must be able to identify, and appropriately respond to, the existing or potential conflicts of interest resulting from the shared CCO model.
Confidentiality: The shared CCO, and the firms sponsoring such applicant, must be able to demonstrate that they will be able to continue to meet their obligations to protect the confidential information of clients.
Capacity: The shared CCO must be able to demonstrate their capacity to act as a CCO for more than one registered firm. Effective Compliance System: Firms that make use of a shared CCO must continue to comply with their obligation under section 11.1 of NI 31-103 to maintain an effective compliance system.
According to the Notice the shared CCO model does not contemplate a registered firm outsourcing its CCO’s responsibilities to a third-party service provider. An individual acting as CCO of a registered firm must still be an officer, partner or sole proprieter of the registered firm, and a firm may choice to structure its affairs such that the CCO is either an employee or independent contractor of the firm.
Multiple CCO Model
Under this model, and with the necessary exemptive relief to permit it, a firm can designate multiple CCOs with each CCO responsible for one or more registration categories and/or business lines within the firm. For example, a firm that is registered as an investment fund manager, portfolio manager and exempt market dealer may apply to have three CCOs, one for each of the firm’s three registration categories.
Specialized CCO Model
Under this model, where an individual applies to be the CCO of a non-traditional or specialized firm, staff may consider the individual’s business experience when assessing proficiency and experience requirements.
The experience demonstrated by the individual being considered for the CCO position should be relevant for both the category of registration and the business of the firm sponsoring the individual. Other business experience may be considered relevant for the purposes of assessing whether the individual meets the experience requirements set out for a CCO in NI 31-103 when a firm applying for registration demonstrates that it is engaged in a non-traditional or specialized business.
An individual may be considered proficient to be the CCO under the specialized CCO model but may not be considered proficient to be the CCO of a registered firm with a different business model. In these cases, CSA staff may recommend terms and conditions on the CCO’s registration to this effect.
Registrants are inviting to reach out to CSA registration staff if they:
· would like to discuss how any of these models might be relevant to them,
· wish to combine two or more of the models above with respect to one firm,
or · identify other related models, as similar considerations may apply.
All applications will be reviewed by CSA Staff on a case by case basis.
CSA Staff ask that all comments be provided on the Notice by e-mail to firstname.lastname@example.org on or before September 30, 2020.
The report can be found at: https://www.osc.gov.on.ca/en/NewsEvents_nr_20200702_csa-introduce-guidance-chief-compliance-officer-arrangements-businesses.htm
For more information, please call Barbara Hendrickson at BAX Securities Law (647) 403-4606.
This publication is not intended to constitute legal advice. No one should act on it or refrain from acting on it without consulting with a lawyer. BAX does not warrant or guarantee the accuracy or currency or completeness of the publication. No part of this publication may be reproduced without the prior written permission of BAX Securities Law.