requirement would be for fraud insurance
on Alternative Mortgage Lenders’ trust
accounts. Furthermore, it is common for
Mortgage Lender’s capital raising activities
to also be registered under security
regulators like the Ontario Securities
Commission (“OSC”). Under the OSC’s
regime a registrant is also required to
maintain insurance resulting in a duplication of insurance costs for a similar activity.
Working capital requirements provide
another example. Mortgage administrators
are required to maintain and track
$25,000 of unimpaired working capital
whereas exempt market dealers must
maintain and track $50,000. Not only is
the cumulative amount difficult for smaller
businesses it is another example of where
harmonization could reduce regulatory
burden and costs on registrants.
A new regulatory category for Alternative
Mortgage Lenders should also include a
new designation/license that must be
obtained in order for someone to act as a
dealer of syndicated mortgages. Currently,
all that is required to distribute syndicated
mortgages is to be licensed as a Mortgage
Agent. The certification process does not
provide sufficient material or guidance to
properly prepare someone to distribute
syndicated mortgages to investors.
Furthermore, the relevant proficiencies are
practically non-existent and have no
correlation to capital raising activities nor
investor protection. Subsequently, it has
resulted in an inadequate investor protection regime. Having a separate licence for
brokering alternative mortgages with
targeted proficiencies and education
requirements would resolve this issue.
Furthermore, we contend that the licence:
• Should be an add on to a mortgage
agent/broker licence as most mortgage
agents/brokers do not participate in capital
raising;
• The requirements should mirror those
of security regulators to avoid regulatory
arbitrage and to create a level playing field
50 THE PRIVATE INVESTOR | FALL+WINTER 2019
between mortgage agents/brokers and
securities registrants; and
• Should be required of lawyers who wish
to distribute syndicated mortgages as they
are currently permitted to without any real
pertinent training.
Furthermore, there should be a carve out
for individuals who are already registered
with security regulators (“Registrants”) in
order to reduce regulatory burden and
costs. This exclusion accounts for the fact
that the pre-requisites to become a
Registrant and the regulatory regime
Registrants operate within under the OSC
is specifically designed to promote prudent
capital raising activities.
Tailored Regulations
Mortgage syndication is integral to the
mortgage industry as it promotes investor
protection by allowing investors to build
customized and diversified portfolios that
fit their specific needs, lending strategies
and risk tolerance. Furthermore, some
mortgage investment entities (“MIE’s”) use
mortgage syndications to mitigate risk by
reducing single loan or borrower exposure
and increasing liquidity in their pooled
funds. It is also important to note that the
investors of MIE’s have been onboarded
through Registrants and in many instances
the MIE’s are captive exempt market
dealers.
Given the importance of syndication, it is
paramount that regulations take a
pragmatic approach to balancing investor
protection while allowing MIE’s to manage
their liquidity and concentration risks and
without causing unnecessary regulatory
burden on both investors and registrants.
An avenue to achieve this is to tailor the
regulatory requirements based on the
sophistication of the participants. The
degree of know your client (“KYC”), know
your product (“KYP”) and suitability
obligations should be based on the
sophistication of the investor. The MBLAA
already has bifurcated investors between
sophisticated (Designated Class of Inves-
tors) and non-sophisticated (Non- Desig-
nated Class of Investors). We contend that
FSRA’s current KYC, disclosure and
suitability forms should not be required
when dealing with a Designated Class of
Investor and a principal-based system, akin
to the OSC’s, should be required for
investors who are categorized under a
Designated Class of Investors.
Furthermore, special consideration needs to
be taken for sophisticated lenders who
syndicate amongst themselves. The
following list of sophisticated lenders should
be precluded from KYP and suitability
requirements and a commonsense test
should be applied to determine KYC.
a. Regulated deposit taking institutions;
b. Mortgage brokers and agents (who are
licensed under the new class of lending
license);
c. Publicly listed reporting issuers and
entities; and
d. Operating entities like MIC’s, mutual
fund trusts and GP/LP that onboard their
investors through a Registrant, as well as
their officers and directors, that the
brokerage/administrator has a contract to
manage the operating entity.
Tailored regulations can balance investor
safeguards and business efficiencies.
However, the effectiveness of the regulations will ultimately be based on the quality
of the registrant. Subsequently, it is
important that the aforementioned
proposals are not dealt with in isolation as
we need to ensure that strong regulations
are being upheld by qualified market
participants.
Closing Remarks
Thank you for taking the time to consider
our concerns. We recognize that this letter
mainly outlines larger concepts to consider
and as such PCMA would be happy to work
with the Minister and the Provincial
regulators to apply these concepts to
actionable specifics that can be implemented in the MBLAA.
