Law Clerks' Review

What’s the “Hague Convention on Service”? And What’s It For?

by: Russell Alexander

In every family litigation proceeding, there are rules that must be followed around the service of documents – which gives the opposing party formal written notice of the proceeding, or a step in the proceeding.  (Think of those “you’ve been served!!” scenes in Hollywood movies).

Under Ontario legal procedure, the service of documents must be accomplished in accord with numerous rules governing both civil matters and Family Law proceedings specifically.   This means that for Family law disputes where both spouses live in the same province, then they are both bound by the same set of provincial rules relating to procedure, including how service of documents is validly achieved.

But what happens when one of the spouses lives permanently in another country?  What are the rules that govern the service of legal documents then?

The answer lies in the Hague Service Convention, the full title of which is the Convention of 15 November 1965 on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters.

It is an international convention, adopted by numerous countries around the world, and designed to “create appropriate means to ensure that judicial and extrajudicial documents to be served abroad shall be brought to the notice of the addressee in sufficient time.”

The Convention has been signed or ratified by more than 75 countries, including Canada.  This means that it conceivably applies to Family Law proceedings that are commenced in this country, including those in Ontario.

Specifically, the Convention addresses those situations where a person in Ontario wants to serve an originating process (meaning a court claim document, court application, or motion materials) on a person who lives outside of Canada in a country that has also signed onto or ratified the Convention.

The service of documents on the person in that other country must adhere to the Convention requirements, in order to be valid and recognized by the Ontario court.

Note:

• If the Hague Service Convention applies to a situation, then its terms are mandatory. It cannot be “opted out of.”
• A person also cannot avoid having to comply with the requirements of the Convention by obtaining a court order for substituted service, an order for validation of incomplete service, or an order that service can be dispensed with entirely.

There are also certain rules for proving that service has been achieved in that other country in a manner that satisfies the dictates of the Convention. Specifically:

• The party who is bringing the motion or proceeding bears the burden of proving that service was in compliance with the Convention’s requirements.
• An exception is where it can be proven that the document recipient’s address is unknown.
• In that case, the party must show that he or she has made reasonably diligent efforts to learn the recipient’s address.
• The party cannot be permitted to avoid the Convention’s application by being willfully oblivious to information about the recipient’s whereabouts.

In an upcoming blog, we will take a practical look at how these requirements “play out” in a typical Family law case in Ontario.

See the full text of the Hague Service Convention, here.

https://www.russellalexander.com

*Reprinted with permission

Québec’s Language Legislation: Be Ready for Important Changes Impacting Commercial Contracts, Trademark Usage and Government Filing Requirements

Authors: Romy Proulx, Rachel Zuroff

Our August 2022 post summarized the main business-related changes that Bill 96 made to the Québec Charter of the French Language (“Charter”). This post provides updates on several key issues, particularly the potential impact on commercial contract drafting of amendments to Bill 96 that took effect on June 1, 2023 and also notes (among other issues) the importance for many businesses of getting out in front of changes to the Charter that will affect trademark usage as of June 1, 2025.

The issues considered are:

• French-language requirements when contracting with the Québec civil administration: the rule and the exceptions
• Adhesion contracts and related documents: new rules
• Registration filings: a new requirement for small businesses
• Signage and inscriptions: narrowing the trademark exception
• Mandatory translation of court pleadings: an update

Note that, for the sake of simplicity, we refer in this post to certain impacts of the legislation and regulations on the use of English in commercial contexts, but the cited provisions generally apply in the same way to any “language other than French”.

Language of Contracts With Québec’s Civil Administration: New Rules in Force June 1, 2023

The basic rule remains the same after June 1, 2023: contracts with the Québec civil administration (the “Civil Administration”)^[1] must be in French, subject only to limited exceptions. However, as of June 1, 2023, the following additional exceptions apply:

First, certain types of contracts may have an English version attached to the French version. These include:

• Contracts between the Civil Administration and a party located outside of Québec (i.e., not residing (individuals) or required to be registered in Québec (enterprises));
• Certain international and intergovernmental agreements; and
• Agreements with First Nations (ss. 21 and 21.1)

Secondly, certain types of contracts may be drafted in English only, as listed in section 21.5 of the Charter and as prescribed by regulation:

• Contracts with clearing houses;
• Contracts entered into on a platform that makes it possible to trade in derivatives, securities or other movable property, provided, in the latter case, that the contract is not a consumer contract; and
• Insurance policies from outside Québec or uncommon in Québec where there is no French equivalent in Québec.

The Regulation respecting the language of the civil administration (the “RLCA”), in force as of June 1, 2023, sets out the situations in which the Administration will be permitted to include an English version of the contracts and related documents referred to in sections 21 and 21.3 with the French version.

Pursuant to section 14 of the RLCA, when the new rules in the Charter permit a contract with the Civil Administration to be in French and English or an English version to be attached to the French version, the parties may determine the legal value of each version. In the absence of an express determination by the parties, the French version will prevail.

Sanctions for non-compliance

The new sanctions for a non-compliant contract or act with the Civil Administration also come into force on June 1, 2023 (s. 204.18). An English-only contract that should have been drawn up in French may be held to be absolutely null, whether or not the contravention causes any prejudice, if the following three elements are all present:

• An agency of the Civil Administration is a party to the contract or act;
• The provisions of the contract or act contravene the rules on the language of contracts with the Civil Administration in sections 21 to 21.2 of the Charter; and
• The contract or act has no foreign element (see our August 2022 post for more details).

Contracts with the Civil Administration that have a foreign element should accordingly not be at risk of being declared absolutely null under s. 204.18 for contravening Charter language rules.

Even if a contract with the Civil Administration is compliant with the Charter, if the performance of the contract leads to a failure to comply the Government of Québec may apply to a court for the “resolution, resiliation [termination] or suspension” of the contract. The court shall grant the Government’s request if the Government is able to show that this would be in the interest of maintaining the status of the French language in Québec although the court will also take into account the public interest in maintaining the contract.

Language of Adhesion Contracts and Related Documents with Private Parties: New Rules in Force June 1, 2023

Adhesion contracts (which the legislation also refers to as “contracts pre-determined by one party) are contracts whose principal clauses have been drafted by one party (the “business”) and which cannot be negotiated by the other party (the “adhering party”). Standard examples include employment contracts, collective agreements, insurance contracts, leases, and co-ownership declarations. “Contracts containing standard clauses” is not defined in the Charter (or other Québec law) and may include contracts with boilerplate and other contracts with certain non-negotiable clauses drafted by one party.

As of June 1, 2023, new rules apply to contracts of adhesion. The rules that apply to a given contract of adhesion depend on whether or not it falls under an exemption (“exempted adhesion contract”). The new rules with respect to contracts containing standard clauses are the same as for an exempted adhesion contract and similar to the current rules.

New rules for adhesion contracts (where no exemption applies)

Businesses must have a French version of adhesion contracts and related documents to be used in Québec. An adhering party may choose to sign an adhesion contract in English only if the business has first remitted (provided) the French version to the adhering party. This means that a business cannot avoid the obligation to have French versions of its contracts of adhesion by agreeing with its customers to use English versions.

If the parties have chosen to enter into the contract exclusively in English, the related documents may be exclusively in English as well.

Businesses may wish to consider adding a clause to the English-language version of an adhesion contract noting that the French-language version was remitted first and that the parties subsequently chose to have the contract and related documents drawn up and concluded in English only.

New rules for exempted adhesion contracts and contracts with standard clauses

Exempted adhesion contracts include:

• Loan contracts, financial instruments, derivatives contracts, and certain special insurance policies; and
• Any contract used in relations with persons outside Québec.

The adhering party may sign exempted adhesion contracts and contracts with standard clauses in English only if that party has expressed the wish to do so. As we noted in our initial blog post, the last exemption may be of particular interest to foreign companies dealing with Québec businesses and consumers but its exact scope remains unclear.

Businesses may wish to consider adding a clause to the English-language version of these contracts stating that the parties wish to have the contract and related documents drawn up and concluded in English only.

New Filing Requirements Under the Legal Publicity Act: In Force June 1, 2023

Effective June 1, 2023, Bill 96 adds a new requirement relating to the registration declaration that enterprises must file with the Québec Enterprise Register (“REQ”) under the Québec Act respecting the legal publicity of enterprises (“Legal Publicity Act”). Specifically, the amended Legal Publicity Act will require that enterprises employing between 5 and 49 people state on their REQ declaration the proportion of their employees who are not capable of communicating in French. This new requirement will apply from June 1, 2023 until June 1, 2025, after which it will apply only to enterprises with between 5 and 24 employees. 

Enterprises registering for the first time will need to declare this information in their registration declaration or in their initial declaration. Enterprises that are already registered will be required to make the declaration in their annual update or by filing an updating declaration. The information will be publicly available.

Note that this new requirement under the Legal Publicity Act is separate from the amendments to the Charter introduced by Bill 96 in respect of francization which will, as of June 1, 2025, require companies employing between 25 and 49 employees in Québec to register with the Office québécois de la langue française as a first step to obtaining a francization certificate. 

Getting ready for the New Rules on the Trademark Exception for External Signs and Inscriptions: In Force June 1, 2025

The exception for “recognized” non-French trademarks for external signage and on inscriptions (labels on and documents supplied with, products) will be limited to marks that are “registered” under the Trademarks Act (Canada) as of June 1, 2025.

Businesses will wish to file any needed trademark applications as soon as possible since trademark application delays of three years or more are currently being experienced at the Canadian Intellectual Property Office.

For inscriptions, if a generic term or product description is included in the English language mark on the product, the term or description will have to appear in French on the product or on a medium permanently attached to it. The purpose of this new provision appears to be to prevent companies from including non-distinctive information in their trademarks to avoid providing this information on the inscription in French.

French must also be markedly predominant on public signs and posters visible from outside the premises of a business that include any of the following: (i) a trademark in a language other than French, or (ii) the name of a business that includes an expression from a language other than French.

Businesses will wish to begin to prepare new designs for labels and signage to ensure they will be able to comply with the new rules by June 1, 2025.

French Translations of Court Pleadings: Status Update

The Bill 96 amendments to the Charter required court pleadings in English filed by corporations in Québec courts to include a certified French translation by a licensed translator, prepared at the corporation’s expense, as of September 1, 2022. However, this requirement was suspended by a court decision on August 12, 2022 pending a decision on the merits which, as of the date of this post, has not yet been rendered.

[1] “Civil Administration” is defined in Schedule I of the Charter to include the Government of Québec, Québec government agencies, corporations fully owned by the Government, most municipalities, school bodies, and bodies in the health and social services network, among others.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

“This article was first published on Stikeman Elliott LLP’s Knowledge Hub and originally appeared at www.stikeman.com. All rights reserved."

*Reprinted with permission

OSC Publishes Annual Compliance Report for Dealers, Advisers and Investment Fund Managers for 2022-2023

Authors: Alix d'Anglejan-Chatillon, Darin R. Renton
Stikeman Elliott LLP

The Ontario Securities Commission (“OSC”) recently released its annual Summary Report for Dealers, Advisers and Investment Fund Managers (the “Report”), prepared by the Compliance and Registrant Regulation Branch, for the 2022-2023 fiscal year.

As in previous years, the Report provides an overview of the OSC’s compliance initiatives over the past year and is divided into four parts related to: (i) education and outreach; (ii) regulatory oversight activities and guidance for registrants (which may serve as a self-assessment tool to strengthen compliance); (iii) initiatives impacting registrants; and (iv) OSC Staff action taken in response to registrant misconduct.

The OSC reported that its activities over the past year focused on the following:

• compliance sweeps of high-impact firms, firms with limited compliance staff, registered firms that distribute mortgage investment entities (“MIEs”) and crypto asset trading platforms’ (“CTPs’”) custodial arrangements;
• reviews of the implementation of the client focused reforms (“CFRs”) in conjunction with the Canadian Securities Administrators and the Canadian Investment Regulatory Organization (“CIRO”), certain results of which were published in a report on registrants’ conflicts of interest practices, discussed in a recent post; and
• the formation of a new operational team to focus on specialized dealer business models such as derivatives and restricted dealers.

Report Highlights

MIEs

An ongoing desk review of registered firms that distribute MIEs was conducted using a questionnaire to gather information about issuers and MIE loan portfolio performance.

Registrants with limited compliance staff

The OSC continued its sweep of firms with a small number of compliance staff. Although most of these firms were found to have adequate resources and an effective compliance system, common deficiencies related to certain written policies and procedures, reporting to clients, the collection and documentation of know-your-client (“KYC”) information, portfolio manager (“PM”) investment management agreements, books and records, the oversight of service providers, the holding of client assets in trust and documentation to support reliance on the accredited investor exemption.

CTPs

Desk reviews of registered restricted dealer CTPs commenced in February 2023 to examine practices around custodial arrangements, corporate governance structures, insurance bonding policies and the management of conflicts of interest. CTPs already registered or seeking registration were found to have deficiencies with respect to custodial arrangements, compliance practices related to the Chief Compliance Officer’s annual assessment and reporting of compliance structure and business continuity plans and the oversight of marketing materials prepared by third-party service providers.

Investment fund manager (“IFM”) registration considerations

The OSC warns that any agreements with an unregistered market participant that restrict an IFM from exercising its standard of care, including restrictions on an IFM’s ability to change service providers such as PMs and sub-advisers or on its decision-making capacity related to the operation of a fund, are considered to be registrable activity.

Start-up funding portals

OSC Staff reviewed registered exempt market dealers (“EMDs”) with online portals where issuers offer securities by relying on prospectus exemptions such as the crowdfunding exemption. EMDs are advised to be mindful of how insurance requirements might be impacted by access to client assets held in trust during a crowdfunding campaign period. EMDs are also reminded of their obligation to make a suitability determination before accepting a transaction, by taking into account factors such as an investor’s concentration in exempt-market products after the transaction to ensure that they are not overconcentrated. Furthermore, any person entering the portal should acknowledge that they are aware that the portal is operated by a registered dealer who will provide suitability advice.

Custody

Custody-related deficiencies included inadequate reconciliation of client assets between a PM’s internal portfolio management system and custodians’ records and PMs’ failure to maintain their own independent client asset records in violation of their obligation to maintain books and records. In respect of dealers that distribute units of certain investment funds, it was also found that cash-in-transit was not being held in a manner that showed the beneficial ownership of those assets.

Recordkeeping obligations of foreign firms

Foreign-based registrants are required to establish, maintain and apply policies, procedures and controls to reasonably assure that they are able to respond promptly to any requests for information from the OSC. As a part of business risk assessment, any conflicts of laws issues that may impact such registrants’ ability to comply with Ontario securities law and requests from the OSC should be identified and planned for, including those related to confidentiality or privacy in local jurisdictions.

Initiatives Impacting Registrants

Registrants should take note of the following:

• The next Risk Assessment Questionnaire (“RAQ”) is anticipated to be sent to registrants in May 2024 by email.
• Total cost reporting (“TCR”) amendments, which were published on April 20, 2023, and discussed in a previous post, will expand the annual report on charges and other compensation to include information about the ongoing costs of owning prospectus-qualified investment funds. Firms will have until January 2026 to begin integrating these amendments for delivery to clients in January 2027, after which compliance will be monitored. A TCR Implementation Committee has been established to assist with the interpretation of the TCR requirements and resolution of operational issues.
• Amendments to the fee rules, which we also discussed in a previous post, became effective on April 3, 2023.
• Following the amalgamation of the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada, which resulted in the creation of CIRO, separate mutual fund and investment dealer businesses are now able to carry on as a single entity by becoming dually registered with the OSC. The OSC and CIRO are considering dual-registered firm applications together, with the first such applicant having become registered on March 24, 2023.
• Primary oversight of most syndicated mortgages was transferred from the Financial Services Regulatory Authority of Ontario (“FSRA”) to the OSC in July 2021, and the two regulators are jointly coordinating guidance and compliance approaches. A new registration exemption was introduced for exempt firms and individuals that distribute syndicated mortgages to qualified “permitted clients” and qualified syndicated mortgages, provided that they are FSRA-licensed mortgage brokers.
• Proposed amendments to National Instrument 24-101 Institutional Trade Matching and Settlement that would permanently eliminate the exception reporting requirement are expected to come into force on May 27, 2024. As we discussed in a previous post, the initial three-year moratorium on exception reporting expired on July 1, 2023, and was replaced by local blanket orders in the interim.

Looking Ahead

The OSC notes that next year’s compliance oversight activities will continue to consider the effectiveness of the implementation of the CFRs, with a focus on KYC, know-your-product and suitability determinations, compliance reviews of high-risk firms identified through the 2022 RAQ and compliance reviews of CTPs.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

This article was first published on Stikeman Elliott LLP’s Knowledge Hub and originally appeared at www.stikeman.com. All rights reserved.

*Reprinted with permission

New federal requirements for a corporate beneficial ownership registry on the horizon

Authors: Laura Thistle, Graeme A. Hamilton, Greg Rafter

In March 2023, Industry Minister Francois-Philippe Champagne tabled legislative amendments regarding the creation of a Canadian corporate beneficial ownership registry. The proposed amendments, which recently passed the second reading in the House of Commons,¹ apply to entities incorporated under the Canada Business Corporations Act (the CBCA).

Non-compliance with the proposed amendments will carry significant administrative sanctions or criminal penalties.

Background

A beneficial ownership registry publicizes information on individuals with significant control over a private corporation. “Significant control” includes individuals who own, control, or direct a significant number of shares, or those who have direct or indirect influence tantamount to control in fact over the corporation.² A “significant number” of shares is defined as:

• Any number of shares that carry 25 per cent or more of the voting rights; or
• Any number of shares equal to 25 per cent or more of all of the corporation’s outstanding shares measured by fair market value (regardless of voting rights).³

Beneficial ownership registries are touted as a key tool in combatting money laundering, terrorist financing, and tax evasion. In 2020, the federal government held consultations on beneficial ownership transparency and received input from a variety of stakeholders including law enforcement, tax agencies, and privacy commissioners.⁴ Nearly all participating parties supported the creation of a centralized registry for beneficial ownership data.⁵ A strong majority also supported tiered access whereby law enforcement, the Canadian Revenue Agency, and other competent authorities would have unrestricted access to beneficial ownership information.

Following the 2021 federal election, Prime Minister Justin Trudeau’s mandate letter to Minister Champagne included instructions to implement a beneficial ownership registry.⁶ The timeline to implement the registry was fast-tracked to 2023 following the signing of the supply-and-confidence agreement with the New Democratic Party last year.⁷

Proposed legislative changes

Bill C-42, An Act to amend the Canada Business Corporations Act and to make consequential and related amendments to other Acts, proposes a series of CBCA amendments, as well as amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, the Income Tax Act, and the Access to Information Act.

Bill C-42 follows an initial series of CBCA amendments which were part of last year’s Budget Implementation Act, 2022, No. 1.⁸ These amendments require most federally incorporated businesses to proactively report information on their beneficial owners to Corporations Canada on an annual basis, or when a change in control occurs. The Government of Canada’s news release regarding Bill C-42 states that Corporations Canada would leverage those intake/reporting mechanisms to ease the administrative burden on businesses in relation to the newly proposed corporate beneficial ownership registry.⁹

The proposed CBCA amendments create a registry under which the following information is available about each individual with significant control in a corporation:

1. Their name;
2. Their address (service and residential);
3. The day on which the individual became or ceased to be an individual with significant control;
4. A description of how the individual has significant control over the corporation (rights, interests, shares, etc.); and
5. Any other prescribed information.¹⁰

A director appointed under the CBCA (the Director) may provide all or part of the above information to a provincial corporate registry or agency that is responsible for corporate law in that province.¹¹ However, individuals or a corporation they control can apply to have any of the above information made unavailable to the public. The Director may choose to make information unavailable to the public if:

1. The Director reasonably believes that making the information available presents or would present a serious threat to the safety of the individual; or
2. The Director is satisfied that:
1. The individual is incapable,
2. The information is to be kept confidential under subsection 27(8) of the Conflict of Interest Act or a similar provision of an Act of the legislature of a province, or
3. Prescribed circumstances apply to the individual.¹²

Strengthening Canada’s anti-money laundering regime

Bill C-42 comes one year after the publication of the Final Report of the Commission of Inquiry into Money Laundering in British Columbia (referred to as the “Cullen Commission”). Despite its narrower focus on money laundering in British Columbia, the Final Report (reviewed in our June 2022 article “Cullen Commission Final Report makes sweeping recommendations for anti-money laundering regulation in B.C.”) included significant findings regarding the weaknesses of the federal anti-money laundering regime.¹³

The Final Report reflects a growing international consensus in support of beneficial ownership transparency. In 2003, the Financial Action Task Force (FATF) published an updated list of recommendations for combatting money laundering and terrorist financing. The updated recommendations emphasized that countries must ensure there is “adequate, accurate, and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities.”¹⁴Access to beneficial ownership continues to be a key FATF recommendation.¹⁵

We anticipate that provinces will take steps to implement similar provincial registries, with varying degrees of public access. Earlier this year, British Columbia amended its Business Corporations Act requiring every corporation to maintain a transparency register, which includes information on beneficial owners. Historically, this document was held within each company’s own records office. Under the new amendments, businesses will be required to submit the information in the company’s transparency register to the Registrar of Companies for inclusion in a new, publicly accessible transparency register.¹⁶

Next steps

Following its second reading, Bill C-42 has now been referred to the Standing Committee on Industry and Technology for consideration.¹⁷

When Bill C-42 receives royal assent, corporations will likely be granted a grace period to comply with the requirements under the new registry. Once that grace period has expired, non-compliance with the registry could result in administrative sanctions or criminal penalties of up to $200,000 and/or up to six months’ imprisonment.¹⁸

Footnotes

¹ See Parliament session updates for Bill C-42.

² Canadian Business Corporations Act, RSC 1985, c C-44, s 2.1(1).

³ Canadian Business Corporations Act, RSC 1985, c C-44, s 2.1(3).

⁴ Consultation on strengthening corporate beneficial ownership transparency in Canada (Innovation, Science and Economic Development Canada)

⁵ Public consultations on strengthening corporate beneficial ownership transparency in Canada: What we heard (Innovation, Science and Economic Development Canada)

⁶Minister of Innovation, Science and Industry Mandate Letter, Dec. 16, 2021

⁷ "Delivering for Canadians Now", New Democratic Party, March 22, 2022

⁸ SC 2022, c 10.

⁹ Government of Canada tables new legislation to create a beneficial ownership registry (Innovation, Science and Economic Development Canada)

¹⁰ Bill C-42, s 4 (s 21.303(1)), CBC s 21.1(1)(c-d).

¹¹ Bill C-42, s 4 (s 21.302).

¹² Bill C-42, s 4 (s 21.303(3)).

¹³ Note: One of the key recommendations from the Final Report was that the province of British Columbia work with its federal, provincial, and territorial partners to ensure that a publicly accessible pan-Canadian corporate beneficial ownership registry be established by the end of 2023.

¹⁴ FATF – The Forty Recommendations, 20 June 2003.

¹⁵ FATF – The Forty Recommendations, updated February 2023.

¹⁶ Bill 20 – 2023: Business Corporations Amendment Act, 2023

¹⁷ See Parliament session updates for Bill C-42.

¹⁸ Ibid., note 9.

*Reprinted with permission from BLG

CIRO outlines first steps in bulletin on priorities for FY2024

Authors: Lawrence E. Ritchie, Ankita Gupta, Hassan Shehata

Having closed the transaction which saw the amalgamation of Canada’s two self-regulatory organizations effective January 1, 2023, the Canadian Investment Regulatory Organization (CIRO) is open for business and moving to promptly establish a coherent post-amalgamation workplan and vision. In June 2023, the new organization published its Fiscal Year 2024 Annual Priorities. CIRO is the Canadian national self-regulatory organization that oversees all investment dealers, mutual fund dealers, and trading activity on Canada’s debt and equity marketplaces. CIRO’s annual priorities expand upon and integrate the priorities held by its two legacy organizations: the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA).

In the context of post-amalgamation, CIRO’s priorities are centered around integrated compliance and enforcement that will allow CIRO to achieve its core mandate of investor protection and market integrity.

Overview of CIRO’s annual priorities

CIRO is focused on eight priorities:

1. Determine mission, vision, values, and brand for CIRO, and develop three-year strategic plan.
2. Promote the investor perspective through the Office of the Investor and Investor Advisory Panel.
3. Harmonize regulatory approach.
4. Articulate the plan for an integrated fee model.
5. Maintain an engaged, empowered, and unified staff.
6. Continue to deliver on the regulatory mandate and support investors through industry and regulatory transformation.
7. Strengthen stakeholder relationships.
8. Demonstrate progress on the integration of corporate systems and processes.

Key Priorities

Priority 3: Harmonize regulatory approach

One of CIRO’s 2024 priorities is to align investment dealer and mutual fund dealer compliance processes by aligning its approach with the Canadian Securities Administrators’ (CSA) for the second phase of Client Focused Reforms (CFR) compliance exams. The CFRs were introduced in 2021 to enhance registrant conduct obligations, including reforming the know your client, know your product, suitability and relationship disclosure information requirements. CIRO has not announced how it will align the investment dealer and mutual fund dealer compliance processes with CFRs, but it has identified compliance alignment as a key priority.

CIRO has also stated that it plans to align its enforcement processes through establishing uniform sanction guidelines and a centralized complaint intake process for investors. Previously, to file a complaint, investors had to direct it to either IIROC or the MFDA. Each organization had its own complaint forms and complaint and inquiries teams. In the interim, CIRO’s complaint intake process is not yet centralized and requires complaints to be directed to their respective Investment Dealer (ID) or Mutual Fund Dealer (MFD) divisions. In 2024, CIRO has announced that it plans to introduce a uniform complaint intake process and enforcement guidelines to replace the existing bifurcated framework.

Most significantly, CIRO will begin consolidating investment dealer and mutual fund dealer rules. In 2024, CIRO will focus on the first phase of consolidation, which will consist of publishing proposed rules for public comment, and revising the rules accordingly. Subsequently, CIRO will announce the final proposed approach on directed commission/personal incorporation to be made available to an expanded group of registered individuals.

Priority 4: Finalize fee model

In 2024, CIRO also aims to finalize a fee model and ensure its compliance with the requirements set out in the Recognition Orders and Memorandum of Understanding. CIRO and its legacy organizations will bear the costs and expenses incurred relating to the amalgamation and start-up of CIRO. However, the balance of integration costs after the application of approved funds from these organizations will be recovered from dealer member firms through the Integration Cost Recovery Model. Fees will be charged quarterly as a percentage of the dealer member firm’s annual membership fees, subject to a 10% cap. The percentage will be set annually starting with fiscal year 2024, which will be set at an amount not to exceed 8% of annual membership fees. Integration cost recovery fees will be charged over three to five years until the balance of integration costs are recovered.

Priority 6: Deliver on regulatory mandate

Another one of CIRO’s key priorities in 2024 is to continue delivering on its regulatory mandate. CIRO will enhance its assessment of its members’ operations through strengthened business continuity testing. CIRO also aims to bolster compliance with the Continuing Education Program to ensure individuals approved to do retail business and give advice are current on industry and regulatory developments.

To deliver on its regulatory mandate unimpeded by malicious lawsuits targeted at CIRO’s enforcement efforts, CIRO seeks to pursue legislative authority for protection. Specifically, CIRO aims to obtain enforcement authority in Canadian provinces to exercise the ability to enforce fine collection against individuals who engage in misconduct and to collect and present evidence during investigations and disciplinary hearings.

CIRO is also working on updating key rules. The organization is finalizing an amendment to modernize dealer member rule requirements for derivatives that are materially harmonized with the implemented version of National Instrument 93-102 Derivatives: Business Conduct. One of the primary objectives of the Derivatives Rule Modernization project is to more clearly specify which of the core regulatory obligations apply to securities, listed derivatives and OTC derivatives. Moreover, CIRO seeks to extend the requirement to establish a risk limit (i.e., cumulative loss) to all types of derivatives accounting offering other than hedging accounts. Additionally, CIRO proposes revamping the consolidated derivatives risk disclosure statement. CIRO is also finalizing the implementation of rule amendments to support the industry’s move to T+1 trade settlement (Notice 23-0054).

Simultaneously, CIRO will be undertaking efforts to develop several new rules. CIRO plans to develop harmonized rule requirements to facilitate more timely transfers of an expanded group of account assets. Most significantly, CIRO has announced it is committed to working with the CSA to build a regulatory framework for the trading and offering of crypto assets to institutional and retail clients. The regulation of certain crypto assets, like tokens, has been a topic of discussion and deliberation for some time. In 2018, the CSA released a Staff Notice in June 2018 – CSA Staff Notice 46-308: Securities Law Implications for Offerings of Tokens – in which it acknowledged that tokens could be considered securities, but left it up to market participants and consumers to determine the risk of potential enforcement following token-related transactions. In December 2022, the CSA reaffirmed its position regarding stablecoins, stating that stablecoins or arrangements involving stablecoins could be considered securities and/or derivatives. However, no further guidance was provided on when stablecoins would be classified as securities. CIRO’s commitment to building a regulatory framework for the trading and offering of crypto assets is an important development that will bring much-needed clarity and consistency to the process of creating and distributing crypto assets.

Summary

The following trends are identified within CIRO’s 2024 priorities:

• Focus on increasing oversight in Québec: CIRO is pushing towards increased oversight by concerning fund dealers in Québec. They plan to do this by operationalizing authorities in Québec with respect to mutual fund dealer representative registration and compliance examinations. Moreover, they plan to smoothen the integration of new MFD members in Québec.
• Plans to create a regulatory framework for crypto: In Canada, the regulation of the trading and offering of crypto assets remains a “work in progress”. CIRO’s announcement that it plans to make proposals to address challenges of regulating crypto activity will hopefully inject a desired degree of certainty, but will no doubt demand coordination with others, including CSA members, as well as other financial regulators.
• Focus on strengthening compliance with CFRs: In 2024, CIRO will emphasize strengthening compliance with CFRs, as this is key to ensuring financial advisors and their firms provide a high standard of care to clients. CIRO is finalizing a joint report with the CSA on the results of a compliance sweep conducted last year. Moreover, CIRO is aligning its approach with the CSA for the second phase of CFR compliance exams.
• 2024 is mostly about planning, not executing: Many amendments, regulatory frameworks, rules, and policies are in the planning stages. CIRO is collaborating with the public and relevant stakeholders to form plans. These likely will be executed after CIRO is well-integrated and informed.

CIRO is welcoming comments from dealer members, investors, and the public on CIRO’s current and upcoming policy initiatives, particularly on their plan to consolidate investment dealer and mutual fund dealer rules. CIRO has also stated that it plans to continue industry engagement through discussions on modernizing rules around back-office arrangements and subordinated debt financing. To further reinforce industry engagement efforts, CIRO will be conducting a cybersecurity table-top exercise with dealer members to improve their cybersecurity resilience. Finally, CIRO has advised that it will be conducting an investor survey to help inform the future priorities of the Office of the Investor.

We will continue to monitor and provide updates regarding CIRO’s progress and regulatory approach. Please contact us if you have any questions regarding how the amalgamation of CIRO and the consolidation of IIROC and MFDA rules may impact your operations.

Canadian securities regulators publish results of review of conflicts of interest practices

Authors:   Lawrence E. Ritchie, Alexander Cobb, Clare Barrowman

The identification and management of conflicts of interest, whether actual, potential or perceived, is one of the great challenges facing investment professionals and firms. Registrants are subject to strict, specifically mandated requirements as well as the overarching principles articulated by the Canadian Securities Administrators (CSA) across the country.

On August 3, 2023, the CSA and the Canadian Investment Regulatory Organization (CIRO) released joint Staff Notice 31-363 (the Notice), which sets out the findings of their review of conflicts of interest practices at 172 firms across various registration categories. The Notice provides guidance to securities advisers, dealers and representatives (Registrants) on identifying and remedying non-compliance.

Brief history of Client Focused Reforms

In October 2019, the CSA and the Investment Industry Regulatory Organization of Canada (IIROC) (one of the predecessors to CIRO) published the Reforms to Enhance the Client-Registrant Relationship (Client Focused Reforms), which were implemented through amendments to National Instrument 31-103 and its companion policy. These reforms established heightened standards of conduct for Registrants and were set to be phased in over a two-year transition period (which was extended because of the COVID-19 pandemic).

The Client Focused Reforms included conflicts of interest requirements, which came into force on June 30, 2021. These requirements create an ongoing obligation for Registrants to take steps to identify existing and reasonably foreseeable material conflicts of interest and either address conflicts in the best interest of clients or avoid conflicts that cannot be addressed.

Key findings of the review

The Notice documents the results of a review conducted by the CSA and CIRO on Registrant compliance with the conflicts of interest requirements.

The review found that 135 of 172 firms reviewed had some deficiencies and required each firm to take corrective actions. The following deficiencies were identified:

• Failure to identify material conflicts of interest: The review found that 34% of Registrants failed to identify various conflicts, including in relation to internal and third-party compensation arrangements, referral arrangements and proprietary products. The Notice recommends that firms maintain compensation arrangements that do not differ by product or service, provide detailed disclosures on proprietary products and prohibit monetary or non-monetary benefits that could bias recommendations towards proprietary products.
• Missing or incomplete disclosure related to material conflicts of interest: Approximately 10% of firms reviewed did not provide any disclosure to clients about material conflicts of interest and approximately 43% of firms provided incomplete disclosures. The Notice recommends that disclosures expressly and concisely address (a) the nature and extent of the conflict of interest, (b) the potential impact/risk of the conflict and (c) how the conflict has been or will be addressed.
• Inadequate policies and procedures: Approximately 66% of firms had inadequate written policies and procedures. The Notice sets out specific requirements for compliance, including defining conflicts of interest, delineating individual responsibilities and setting processes for training employees and conducting periodic reviews.
• Lack of or inadequate training: The review determined that training was inadequate where it was too generic, did not give examples, did not include all relevant individuals or did not provide details of a reporting or escalation process for when a material conflict of interest was identified. 83% of firms failed to meet this standard. The Notice also cautioned that firms should maintain adequate documentation that training has occurred to demonstrate compliance.
• Inadequate record keeping: Firms generally complied with record keeping obligations, with less than 10% having deficient practices. To ensure continued compliance, the Notice advises that records should be increasingly detailed in proportion to the materiality of the conflict and that firms should conduct periodic reviews of all records.

Key takeaways

The publication of the Notice highlights the importance of advisors and firms ensuring they have robust compliance systems in place to meet the requirements of the Client Focused Reforms specifically, and the general, overarching obligation to identify and manage actual, potential or perceived conflicts. It is particularly striking that two-thirds of firms were found to have inadequate policies and procedures, and five out of six firms provided inadequate training. It is arguably understandable that there might be a failure to identify a conflict in a particular situation from time to time.

Training and policy-setting, on the other hand, are entirely within the control of member firms. While there is no one-size-fits-all approach to ensure compliance, the Notice demonstrates that there is a significant gap between what member firms are doing and what CIRO and the CSA expect. It is crucial for advisors and firms to familiarize themselves with the Client Focused Reforms, implement necessary changes and ensure ongoing compliance to meet the evolving regulatory landscape.

The CSA and CIRO’s review process is ongoing. They have indicated that their next review will target other Client Focused Reforms, including the know your client, know your products and suitability determination requirements, which came into force on December 31, 2021.

*Reprinted with permission

Canadian Intellectual Property Office (CIPO) Official Fees to Increase Substantially on January 1, 2024

Authors: Jonathan N. Auerbach, Jeilah Chan, Justine M. Whitehead

CIPO has recently announced that most of its official fees will increase by at least 25% in 2024. These adjustments will affect all pending applications for patents, trademarks, industrial designs and copyrights, as well as fees for administrative proceedings and renewals. Owners of Canadian intellectual property may wish to consider attending to certain matters (such as new filings or renewals) before the end of the year to minimize the effect of this increase.

Overview of Fee Increases

CIPO does not receive annual funding from the Government of Canada, and CIPO is expected to be fully funded from revenues it generates by service fees. These substantial increases are intended to address CIPO’s current structural deficit situation. 

An overview of the main fee increases effective January 1, 2024 is below, and a complete list of fee increases can be found on CIPO’s website here.

Trademarks

Patents

The 25% increase will not apply to Canadian small businesses that qualify as a small entity. The Patent Rules definition of “small entity” will expand to include entities that employ less than 100 employees instead of 50 or fewer employees. The fee increases shown below are for standard entities.

Industrial Designs

Copyrights

Key Takeaways

In view of these upcoming fee increases, owners of Canadian intellectual property may wish to consider attending to certain action items in 2023 to avoid paying the increased fees in 2024.

For trademarks:

• Applicants may wish to file new applications in the fall of 2023, if possible;
• Registrants may, where possible, take care of the Nice Classification and renewal of any trademark registration coming due for renewal. Renewal fees can only be filed up to six months before the expiry of the initial period of registration, but there is an exception to this rule for the first renewal after June 17, 2019 of registrations that existed prior to June 17, 2019. 

For patents:

• Owners of pending PCT international patent applications may wish to consider entering national phase in Canada in 2023 (as opposed to waiting for the full 30-month deadline).
• Owners of pending Canadian patent applications may wish to request examination in 2023, or pay annual maintenance fees in 2023.

If you would like to discuss your IP portfolio in detail to determine which actions can be taken prior to the fee increase, please reach out to anyone on our IP team.

The author would like to acknowledge the support and assistance of Amy Williams, student at law.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

“This article was first published on Stikeman Elliott LLP’s Knowledge Hub and originally appeared at www.stikeman.com. All rights reserved."

*Reprinted with permission