OSC Annual Report 2009 Francais
OSC


Compliance

Deliver fair, vigorous and timely compliance programs

Compliance reviews were a major part of the OSC’s response to developments in the markets in 2008–09. Another key initiative was the OSC’s contribution to the development of proposals in response to regulatory concerns with respect to the sale of non-bank sponsored asset-backed commercial paper (ABCP) in Canada.


In the fall of 2008, the OSC implemented a phased response to the market crisis involving a number of compliance reviews (see Responding to Market Developments tables below). The reviews involved public companies, investment funds and hedge funds. OSC staff remain alert for any signs of possible misconduct.

Reviews of public company disclosure

Staff in the Corporate Finance Branch are closely monitoring continuous disclosure (CD) filings of public companies, especially in the banking/financial services sector as well as highly leveraged companies. In the past year, the OSC conducted reviews of the information publicly disclosed by 100 public companies. These companies accounted for approximately 52% of the total market capitalization of Ontario-based companies listed on the Toronto Stock Exchange and TSX Venture Exchange as at September 30, 2008.

Responding to market developments in 2008–09: Reviews of public companies

The OSC conducted targeted continuous disclosure compliance reviews of 100 public companies in Ontario, representing a market capitalization of approximately $366 billion. The 100 public companies were chosen using a risk-based selection process, and were ultimately comprised of companies in the banking and financial sector and highly leveraged firms.

* Source: TMX Group

The companies were asked to provide detailed and transparent disclosure about the effect of the prevailing market environment on operations, cash flows and future prospects. The OSC also focused on relevant accounting requirements including financial instruments disclosure, going concern and impairment. Generally, the disclosures provided by the companies were appropriate. However, staff continue to monitor the disclosure filings of the type of companies involved in the reviews.

Staff have taken proactive steps to alert companies to issues of concern and areas where the OSC expects robust year-end disclosure. For example:

  • 90 public companies with defined benefit pension plans were advised that the OSC expects to see disclosure of the impact of pension funding obligations on their capital, liquidity and financial position.
  • In January 2009, the CSA published Staff Notice 51-328 Continuous Disclosure Considerations Related to Current Economic Conditions to assist public companies in preparing their financial statements and management’s discussion and analysis (MD&A) in the current market environment. The Notice also highlighted important areas of disclosure to help investors understand the risks and circumstances that companies are facing today.

The OSC is reviewing year-end filings by public companies to determine whether its expectations have been met. Staff will follow-up with public companies as appropriate.

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Reviews of investment funds

The OSC conducted compliance reviews of major segments of the investment funds market in Ontario. The OSC completed fact-finding reviews of investment fund managers who manage or administer money market funds and/or non-conventional funds. The objectives were to review and assess whether there were any risks relating to redemption, concentration, counterparty exposure and valuation of securities in these investment funds. These on-site visits were conducted by the Compliance & Registrant Regulation Branch and the Investment Funds Branch.

In September 2008, OSC staff sent a questionnaire to the 50 largest Ontario money market fund managers (see Responding to Market Developments chart below) covering a number of key areas including portfolio holdings, valuation of portfolio securities (with a focus on illiquid securities) and sales and redemption levels. Another questionnaire tailored to non-conventional funds listed on the Toronto Stock Exchange was also sent to 27 fund managers. These non-conventional funds, including closed-end funds and exchange-traded funds, usually invest in a broader array of asset classes and employ higher risk investment strategies than conventional mutual funds.

Responding to market developments in 2008–09: Reviews of investment funds

The OSC conducted compliance reviews of a number of investment fund managers who manage or administer money market funds and non-conventional investment funds in Ontario. The OSC used risk-based criteria to select fund managers in both categories for site visits. The chart below shows the approximate total assets under management, the share of the respective marketplace that was targeted in OSC reviews, and the share that was covered by OSC site visits to investment fund managers during the compliance reviews.

* Sources – Money market fund assets under management as at January 2009: Investment Funds Institute of Canada. Non-conventional fund assets under management as at March 2008: TMX Group.

Staff reviewed and risk-ranked the responses. They then conducted on-site visits to investment fund managers with money market assets under administration of approximately $63 billion, representing 90% of the money market fund assets of the 50 managers. In addition, staff also conducted CD reviews and on-site visits to managers of approximately 54% of the non-conventional assets under administration in Ontario. Staff carried out focused reviews to ensure that the investment fund managers were using appropriate valuation methodologies and monitoring counterparty exposure, concentration risks and the levels of redemptions.

Generally the OSC’s on-site visits to investment fund managers with money market assets under administration did not identify any material issues. The reviews of the non-conventional investment funds did not identify concerns about inappropriate public disclosures by the fund managers. Staff continue to monitor the required disclosure filings of investment funds as part of the OSC’s compliance oversight role and will follow up with individual fund managers as appropriate.

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Reviews of hedge funds

In February 2009, the Compliance & Registrant Regulation Branch commenced a focused review of Ontario-based hedge funds to assess whether there were any additional risks to investors, given market conditions.

The OSC asked 90 fund managers to provide information for each of their hedge funds on a range of broad topics. These topics included facts about the funds themselves (number of unit holders, total assets, legal structure), their service providers, type of portfolio securities and valuation of portfolio securities.

The OSC is assessing the responses it received. Staff risk-ranked the responses and made a determination as to which hedge fund managers warrant an on-site review. These reviews commenced in the spring of 2009.

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Regulatory proposals for the ABCP market

In October 2008, the Canadian Securities Administrators (CSA) released a consultation paper outlining securities regulatory proposals related to the frozen market for Canadian non-bank ABCP. The CSA’s proposals are intended to help prevent a similar liquidity crisis from happening again.

The OSC led the preparation of the CSA consultation paper, which includes proposals such as:

  • Measures to restrict the way, and the investors to whom, complex short-term debt products are distributed; and
  • The establishment of a framework to permit regulatory oversight of credit rating agencies

The proposed framework would require rating agencies to comply with a code of conduct prepared by the International Organization of Securities Commissions (IOSCO). The OSC provided substantive input into the development of IOSCO’s code of conduct for rating agencies.

The CSA’s paper invited public comments on whether more disclosure should be required for investments such as ABCP in order to make them more transparent to investors and market participants. The public comment period on the ABCP proposals ended in February 2009. The CSA is assessing those comments as part of the process of developing final proposals.

The OSC, Quebec’s Autorité des marchés financiers and the Investment Industry Regulatory Organization of Canada (IIROC) are reviewing complaints received in connection with the organization, sale or distribution of non-bank sponsored ABCP products. IIROC is the self-regulatory organization that oversees all investment dealers and trading activity on debt and equity marketplaces in Canada. The OSC is responsible for oversight of IIROC.

In 2008, IIROC conducted compliance reviews of dealer members involved in the third-party ABCP market. The reviews examined what controls and processes were in place and applied to the manufacture and sale of third-party ABCP. In October 2008, IIROC published its findings and recommendations.

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Ongoing compliance programs

On an ongoing basis, the OSC reviews the prospectus and continuous disclosure filings of public companies and Ontario-based investment funds (see Results of Continuous Disclosure Reviews charts below). Risk-based criteria are used to select public companies and investment funds for reviews of their disclosure documents. This approach allows staff to focus on the areas where the potential consequences of regulatory issues are perceived to be greatest.

The OSC is also responsible for compliance oversight of market participants that are not members of a self-regulatory organization (SRO), such as portfolio managers, limited market dealers, investment fund managers and scholarship plan dealers. Staff developed risk-assessment models to select market participants for compliance oversight reviews. The risk-assessment models enable staff to allocate resources more effectively and efficiently by targeting those market participants with higher risk rankings.

The OSC oversees IIROC and the Mutual Fund Dealers Association of Canada, two SROs that establish and enforce compliance with the rules governing the conduct of their members. The OSC also co-operates on compliance-related initiatives with other members of the CSA, who identify non-compliance by public companies and registrants based in other provinces.

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New registrant sweeps

Since 2008, the OSC has conducted compliance reviews of a sample of registrants that are newly registered with the OSC, including investment counsel portfolio managers and limited market dealers. The purpose of these new registrant sweeps is to:

  • Gain a better understanding of the new registrants’ business operations;
  • Assess their compliance with Ontario securities law;
  • Provide guidance and information to new registrants to assist them in complying with Ontario securities law; and
  • Confirm whether their current business activities are consistent with the activities described in their registration applications.

Reviews of new registrants now form part of the OSC’s compliance field review program.

Results of OSC continuous disclosure reviews of public companies in 2008–09

The OSC applies risk-based selection criteria, including market capitalization and trading activity, among others, to select the majority of public companies for continuous disclosure (CD) reviews. The OSC characterizes the outcome of each CD review based upon the nature and severity of the deficiencies identified, if any. More than one outcome can be associated with a particular file. Outcomes are monitored each year to assess overall compliance and to identify areas to focus on in future reviews.

In fiscal 2009, 37% of the CD reviews resulted in an outcome requiring a change by a public company or follow-up by the OSC. Another 43% of outcomes reflected staff guidance and commitments by public companies in connection with future disclosure, for example an undertaking to provide enhanced disclosure regarding financial instruments, going concerns and impairments in future financial statements and MD&A.

 

Results of OSC prospectus and continuous disclosure reviews of investment funds in 2008–09

Risk-based selection criteria, including fund type and complexity, are used to select investment fund filings for review.

A majority of the prospectus and continuous disclosure reviews resulted in changes to current fund disclosure or undertakings that future disclosure would be appropriately modified. In more than one-third of the 2008–09 reviews, staff comments and guidance led to improved compliance with the disclosure requirements of either the prospectus forms or the form outlining the contents of the management reports of fund performance.

Staff reviews also involved analysis of novel investment fund products or features, which included the identification and resolution of operational and disclosure issues before the new product could be sold to retail investors.


 

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