Similar to other regulators such as IIROC, the OSC will use the
risk ranking as a tool to allocate their staff resources effectively
by focusing compliance activities on higher risk firms. The
OSC indicated that in 2012 it has started conducting on-site
compliance reviews of firms that are higher risk based on their
responses to the RAQ.
The OSC has also indicated that it will no longer provide
reminders with respect to the deadline for filings, believe that it is the
responsibility of the firm to have a sufficient compliance structure
in place that enables it to comply with all regulatory requirements.
If a filing deadline is not met, it may affect a firm’s continued
suitability for registration and may result in terms and conditions
being imposed on the firm’s registration or even suspension of
registration. In addition, firms will incur late filing fees of $100 for
each business day that the filing is late, to a maximum of $5,000
IFRS and Financial Reporting
Part 12, Division 4 of NI 31-103 sets out the financial reporting
obligations for registered firms. It requires Ontario-based
registrants to deliver their annual audited financial statements
(and related calculation of excess working capital- the NI31-
103F1) to the OSC within 90 days after their financial year end.
For financial years beginning on or after January 1, 2011, Ontario-based registrants are required to deliver to the OSC their annual
audited financial statements that are prepared using IFRS. IFRS
also applies to certain Ontario-based registrants that are required
to prepare and deliver interim financial information to the OSC.
An exemption is available to registrants from the requirement
to provide comparative information in financial statements and
interim financial information for the financial year beginning in
2011; however, in my experience, for many EMDs the cure is
worse than the disease. It is oftentimes more work to address
the reasons for not providing comparative information than just
getting it done.
Calculating Excess Working Capital
The OSC noted that some firms are not accurately
calculating their excess working capital on Form 31-103F1
Calculation of Excess Working Capital (Form 31-103F1).
When calculating excess working capital, registered firms should
exclude any current assets that are not readily convertible into
cash, such as prepaid expenses and security deposits with service
providers. The OSC also have concerns with firms that include
accounts receivables, especially from related parties, that are not
readily convertible to cash. Any receivables that are not able to
be converted to cash in a prompt and timely manner should be
excluded from the excess working capital calculation.
The OSC noted some instances of inadequate insurance
coverage where the amount of insurance required is based on
calculations which include the firm’s total assets as well as clients’
assets under management. Registered firms should account for
the expected growth in their business in determining the amount
of insurance coverage to ensure that their coverage is adequate.
Registered firms should also ensure that their bonding
or insurance provides for a “double aggregate limit” or “full
reinstatement” of coverage. To ensure adequate insurance
coverage, registered firms should: (1) factor in any expected
increase in the firm’s assets or their clients’ assets under
management for the next year when determining the amount of
their insurance coverage, and, (2) regularly review the adequacy
of their insurance coverage, especially when there is a material
change in their business or circumstances.
A Reminder for Chief Compliance Officers
The OSC notes that there is often no evidence that a
registered firm’s Chief Compliance Officer (CCO) has submitted
an annual report to the firm’s board of directors (or its equivalent)
that assesses the firm’s, and its registered individuals’,
compliance with securities law. Section 5.2 of NO 31-103 outlines
the responsibilities of the firm’s CCO and thus firms and CCO’s
are reminded to prepare a written annual report. In my experience,
the report should be appended to the director minutes
In summary, I always find it useful to learn from the
experiences of others. I recommend you review the OSC‘s
comments to see what may be applicable to your firm.
The EMDA provides an in-depth forum to look at financial regulatory
requirements at the EMDA’s CFO Education Series: Regulatory
Financial Reporting Certificate Program that was held in Calgary,
Vancouver and Toronto in November this year. In future articles, I will
continue to discuss other emerging developments of interest to EMDs.
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