Notices

CSA Staff Notice 25-311 2023 Annual Activities Report on the Oversight of the Self-Regulatory Organization and Investor Protection Fund

March 28, 2024

www.securities-administrators.ca

csa-acvm-secretariat@acvm-csa.ca

TABLE OF CONTENTS

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2023 Highlights

Executive Summary

Who We Are

What We Do

Post-Close Initiatives

Who We Regulate (A) Canadian Investment Regulatory Organization (B) Canadian Investor Protection Fund

Composition of Oversight Committees

Rule/By-law/Policy and Procedures Amendments

Questions

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2023 HIGHLIGHTS

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EXECUTIVE SUMMARY

We are pleased to share Canadian Securities Administrators (CSA) Staff Notice 25-311 2023 Annual Activities Report on the Oversight of the Self-Regulatory Organization and Investor Protection Fund (Report), our Report which summarizes the key activities through which we conduct oversight of the self-regulatory organization responsible for investment dealers and mutual fund dealers (SRO), and the investor protection fund (IPF). This Report covers the period of January 1 – December 31, 2023 (the Reporting Period).

The CSA is the council of Canada’s provincial and territorial securities regulators. Its objective is to improve, coordinate and harmonize regulation of the Canadian capital markets to ensure the smooth operation of Canada’s securities industry and protect investors.

Applicable legislation in each province and territory provides a securities regulator with the power to recognize a self-regulatory organization through a Recognition Order. There is currently one recognized SRO, the Canadian Investment Regulatory Organization (CIRO), which operates as a successor to the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA). IIROC and the MFDA amalgamated to continue as the New Self-Regulatory Organization of Canada (New SRO), effective January 1, 2023, which subsequently changed its name to CIRO on June 1, 2023.

There is currently one approved/accepted IPF, the Canadian Investor Protection Fund (CIPF) formed through the amalgamation of two protection funds, the former Canadian Investor Protection Fund and the MFDA Investor Protection Corporation, on January 1, 2023. Analogous to the recognition of CIRO, CIPF has been approved/accepted 1 through Approval Orders.

The amalgamations are the result of the CSA’s in-depth review of the SRO framework, started in 2019. After extensive stakeholder consultations and the publication of a consultation paper, which sought public input on key issues identified, CSA Position Paper 25-404 New Self-Regulatory Organization Framework was published on August 3, 2021 (Position Paper). The CSA took the position that the establishment of a new single enhanced SRO and, separately, the consolidation of the two IPFs into a single protection fund, independent from the SRO, is the best solution to address the issues that had been identified and to provide a framework for efficient and effective regulation in the public interest at this point and, as the capital markets continue to evolve, into the foreseeable future.

Much of our focus during the Reporting Period has been to work on various solutions outlined in the Position Paper to be implemented after the close of the amalgamation transactions. The nine post-close initiatives are being conducted alongside of our continuing regular oversight, which includes our review of amendments to CIRO rules and CIPF policies and by-laws; review of required filings from CIRO and CIPF; and the CSA’s 2023 Oversight Review of specific processes in three functional areas of CIRO. Post-close initiatives will continue to be an area of focus in 2024.

This Report is an important tool for engaging with our stakeholders. We hope that the Report in its new format will serve to: (i) improve transparency; (ii) foster public confidence in the regulatory framework; and (iii) explain our role in overseeing CIRO’s and CIPF’s compliance with securities regulation requirements. We welcome any questions or feedback that you may have.

1 In Québec, CIPF is an accepted contingency fund. In all other provinces and territories, CIPF is an approved compensation fund through individual Approval Orders.

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WHO WE ARE

CIRO is recognized and CIPF is approved/accepted by the securities regulatory authorities in all thirteen provinces and territories (the Recognizing Regulators or RRs).

Acronym BCSC ASC FCAA MSC OSC AMF FCNB NSSC PEI NL

YK NT NU

CSA Staff Notice 25-311

Name of Recognizing Regulator British Columbia Securities Commission Alberta Securities Commission Financial and Consumer Affairs Authority of Saskatchewan Manitoba Securities Commission Ontario Securities Commission Autorité des marchés financiers Financial and Consumer Services Commission of New Brunswick Nova Scotia Securities Commission Prince Edward Island Office of the Superintendent of Securities Office of the Superintendent of Securities, Digital Government and Service Newfoundland and Labrador

Office of the Yukon Superintendent of Securities Office of the Superintendent of Securities, Northwest Territories Office of the Superintendent of Securities, Nunavut Office

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WHAT WE DO

The oversight of CIRO is coordinated through a Memorandum of Understanding (MOU) among the RRs. The MOU describes the oversight program used by the RRs to: (i) oversee CIRO’s performance of its self-regulatory activities and services; and (ii) ensure that CIRO is acting in the public interest and complying with the terms and conditions of its Recognition Orders.

A similar MOU exists for the oversight of CIPF. Coordinators Each MOU sets out that two RRs are designated as coordinators, tasked with the role of coordinating, communicating and scheduling activities of the oversight program between the RRs, and between the RRs and CIRO or CIPF (Coordinators).

The Coordinators serve for four years on a staggered rotation basis among the two designated RRs. During the Reporting Period, BCSC and OSC were designated as the inaugural Coordinators by consensus of all the RRs. One of two Coordinators will be replaced and thereafter each Coordinator will have a four-year term.

Oversight Committees As required by each MOU the following oversight committees have been established: • The CSA Market Regulation Steering Committee (MRSC) is the forum for coordination and providing updates where issues relate to both CIRO and CIPF. • Oversight committees for CIRO and CIPF (Oversight Committees) are operational committees under the oversight of MRSC. Each Oversight Committee acts as forum to discuss issues, concerns and proposals related to the oversight of their respective entities. The committees included representatives from RRs, with the Coordinators serving as the leads.

CSA Oversight Program Components of the SRO and IPF oversight program are outlined below.

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Oversight Function

Annual Risk Assessment

Activities During the Reporting Period

• Evaluation of each entity’s potential inherent risks and mitigating controls in each functional area of the entity.

• Evaluation can become the basis of future oversight activities.

Review of Proposed Rules

• CIRO is required to seek approval from the RRs for proposed new rules, policies, and constating documents (collectively, the rules) and by-laws, and any changes to existing rules and by-laws. • CIPF is required to seek approval or non-objection of any changes to certain policies (e.g., coverage policy) and its by-laws. • A “housekeeping” rule change is one that has no material impact on investors, issuers, registrants, CIRO, CIPF, or the Canadian capital markets generally (e.g., changes of an editorial nature; changes necessary to conform to applicable securities legislation, statutory or legal requirements, accounting or auditing standards). • If a rule change is not classified as housekeeping, it is published for public comment.

Review of Materials • CIRO and CIPF are responsible for filing certain information (other than proposed Filed rules or by-laws) with each RR.

• This information includes, but is not limited to, reports on financial condition, regulatory self-assessment, risk management, systems integrity, market surveillance, internal audit, progress on compliance examination results, and enforcement matters. • During the Reporting Period, 72 filings were reviewed. • Staff of the RRs (Staff) reviewed issues and the materials filed, which informed the annual risk assessment.

Meetings

• During the Reporting Period, quarterly meetings were scheduled with CIRO and semi-annual meetings with CIPF to discuss the oversight process and to share information about emerging and/or ongoing regulatory issues and trends. • In addition to regularly scheduled bi-weekly meetings with CIRO and CIPF, numerous ad hoc meetings were held throughout the Reporting Period as part of the oversight of specific issues – primarily relating to the integration of the predecessor SROs and, separately, the predecessor IPFs, as well as proposed rule amendments and filing requirements.

Oversight Reviews • A more in-depth process for Staff to make an independent assessment of whether and how CIRO or CIPF have met their regulatory obligations. • The scope of an oversight review is determined by the results of the annual risk assessment and/or specific issues that arise on a periodic basis. • As part of an oversight review, Staff may interview CIRO or CIPF staff, review written policies and procedures to understand the systems and processes in place, and examine files on a sample basis. • During the Reporting Period, the RRs jointly completed a risk-based oversight review of CIRO that targeted specific processes within the areas of: (i) corporate governance; (ii) trading review and analysis; and (iii) financial compliance of investment dealers and mutual fund dealers. The results of the oversight review have been published in a separate report also on March 28, 2024.

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POST-CLOSE INITIATIVES

After the amalgamation of the predecessor SROs and IPFs, during the Reporting Period, the Oversight Committees continued to work on various solutions outlined in the Position Paper, published on August 3, 2021, to be implemented after the closing of the transactions. The Oversight Committees’ work included monitoring post-close transition and implementation initiatives of varying priorities, as set out below.

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Post-close Initiative

Dual registration policy matters and exemptions

Dual registration applications

Directed commissions

SRO rulebook consolidation

CIRO/CIPF New Co- operative Operating Agreement

Coordination and exchange of information

Name change

National Registration Database (NRD) development

Information processor orders

Priority / Status

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High

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Scope

• CSA is considering dual registration matters and whether there are any potential challenges associated with these applications. Staff and CIRO staff are discussing novel issues related to the dual registration of investment dealers and mutual fund dealers.

• CSA and CIRO are working to complete an internal guide for reviewing dual registration applications. As policy issues are identified, they are being discussed among Staff working on Initiative #1 (dual registration policy matters and exemptions) and #2 (dual registration applications).

• CSA is monitoring steps that CIRO is proposing relating to the compensation of investment dealing representatives and mutual fund dealing representatives, including the publication on January 25, 2024 of a position paper requesting public comments on CIRO’s proposed approaches.

• Staff to review and recommend for approval CIRO proposals to consolidate and harmonize the rulebooks for investment dealers and mutual fund dealers over five phases, which commenced in late 2023.

• In 2022, the predecessor SROs and IPFs entered into a Transitional Agreement, that came into effect on January 1, 2023, designed to ensure that existing arrangements between the predecessor entities would continue to govern the relationship between CIRO and CIPF. • CSA is monitoring the negotiation of the new Co-operative Operating Agreement, which will establish the respective responsibilities of CIPF and CIRO.

Medium • CSA continues to engage CIRO on the coordination and exchange of information, regarding the supervision of market related data and other information.

Complete • The name change to CIRO was completed in July 2023, with changes made to the Recognition Orders, MOU, and SEDAR+. 2

Complete • NRD development to automate the dual registration process and enhancements to improve clarity with regard to dual-registered dealer firms.

Complete • Variation and restatement of the information processor’s Designation Order, effective June 1, 2023, to reflect the SRO amalgamation.

2 Similarly, CIPF’s name change in French from “Fonds canadien de protection des épargnants” to “Fonds canadien de protection des investisseurs” came into effect on January 1, 2023.

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WHO WE REGULATE (A) CIRO (i) Regulatory Status The RRs have given CIRO, as an SRO, the responsibility to govern the operations and business conduct of investment dealers and mutual fund dealers and their representatives, and the trading activity on members of CIRO that are marketplaces. The authority of CIRO to carry out certain regulatory functions is set out in the Recognition Orders, along with the terms and conditions that CIRO is to comply with in carrying out its regulatory functions.

(ii)

Member Firm Statistics

As of December 31 Assets Under Management Approved Persons

Firms Investment Dealer Mutual Fund Dealer Dually Registered Total

2023 $4.5 Trillion 109,777

169 82 4 255

2022 $4.1 Trillion 108,987

173 83 0 256

% Change 9.8% 0.7%

- 0.4%

The increase in CIRO’s assets under management was mainly attributable to an increase in equity markets during the Reporting Period.

(iii) Member Firms by Head Office Location The following diagram represents the distribution of member firms by head office location.

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(iv) Rule Reviews During the Reporting Period, seven CIRO rule amendments were approved or not objected to by the RRs. Five rule amendments continue to be under review as of December 31, 2023.

(v) Materials Filed CIRO was responsible for filing certain information with Staff on a regular or ad hoc basis. During the Reporting Period, 60 filings were received from CIRO and reviewed by Staff.

(vi) Meetings and Other Discussions During regular meetings held with CIRO, among other varied topics, the following key subjects were discussed and followed up by Staff.

Topic SRO Transition Plan

CSA Staff Notice 25-311

Activities During the Reporting Period • Focus on core integration priorities including: branding initiatives; building of new Toronto office; Toronto and Calgary office moves; and migration of the mutual fund dealer information technology environment (e.g., networks, servers at data centres) to the existing investment dealer environment. • Completion of a revised Risk Management Framework, which incorporates the risks of both the investment dealer and mutual fund dealer environments. The Risk Management Framework was reviewed by Staff. • Completion of an integrated budget for CIRO’s 2024 fiscal year (Fiscal 2024), which was reviewed by Staff. • Completion of a statement of priorities for Fiscal 2024, and commencement of: (i) a strategic plan for 2025 – 2027 and (ii) changes to Board of Directors mandate and Board Committee mandates. Staff’s input continues to be provided before these documents are finalized.

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Topic Short Selling

Crypto Assets

Crypto Insolvency Simulation

Arbitration Program Review

Continuing Education

CSA Staff Notice 25-311

Activities During the Reporting Period • Joint CSA/IIROC Staff Notice 23-329 Short Selling in Canada was published on December 8, 2022. The consultation resulted from: (i) concerns raised by the Capital Markets Modernization Taskforce; and (ii) issues identified during the CSA’s work on CSA Staff Notice 25-306 Activist Short Selling Update. The consultation provided an overview of the existing regulatory landscape surrounding short selling and requested public feedback on areas for regulatory consideration. • CSA/CIRO’s responses to the public comment letters were published in Joint CSA/CIRO Staff Notice 23-332 Summary of Comments and Responses to CSA/IIROC Staff Notice 23-329 Short Selling in Canada on November 16, 2023. CSA and CIRO have formed a working group to more broadly examine short selling issues in the Canadian market context. • CIRO also published on January 11, 2024 a rule proposal to support and clarify the short selling framework by adding a new positive requirement in UMIR to have, prior to order entry, a reasonable expectation to settle a short sale. Proposed guidance was published for comment on the same date to clarify various current and proposed requirements related to short sales and failed trades.

• CIRO’s Membership Intake Team continued to review applications for: (i) new membership from crypto-asset trading platforms; and (ii) business change from existing CIRO investment dealers planning on expanding into the distribution of crypto asset products. • Future new rules and guidance, as well as standardized compliance procedures, relating to crypto assets are expected to be developed by CIRO in collaboration with Staff.

• CIRO conducted a crypto asset simulation on April 19, 2023, in which 14 firms participated. The focus of the simulation was to identify and understand the risks and issues associated with the suspension of a CIRO-registered crypto­asset trading platform. Knowledge gained from the simulation will be used to develop a crisis response plan.

• On February 1, 2023, CIRO published a consultation paper Proposal on Distributing Funds Disgorged and Collected through New SRO Disciplinary Proceedings to Harmed Investors. The comment period closed on May 1, 2023 and CIRO staff are still in the process of reviewing the comments.

• CIRO staff continued discussions regarding the harmonization of the mutual fund dealer and investment dealer continuing education (CE) programs – at the earliest at the end of the next CE reporting cycle, end of 2025. • First reporting cycle of the mutual fund dealer member CE program ended on November 30, 2023. In the last quarter of 2023, over 850 CE activities and 318,000 attendance records have been added to the CE reporting and tracking system (CERTS), and approximately 90 third-party (non-member) education providers have been added to CERTS since the commencement of the CE program. • In the last quarter of 2023, the investment dealer member CE accreditation program approved 579 distinct courses, and 2,807 distinct courses since the inception of in-house accreditation. This exceeds application volumes for the same period in previous years made through the former third-party provider of CE course accreditation services to IIROC.

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Topic Proficiency Regime

Activities During the Reporting Period • CIRO has undertaken a multi-year initiative to enhance its proficiency regime with the intention of launching new standards in 2026. • High proficiency standards play a key role in investor protection, and the integrity and efficiency of capital markets. • Consultation paper Proposed Proficiency Model was published on July 7, 2023 to seek feedback on a proficiency model for individuals at investment dealers, approved under the Investment Dealer and Partially Consolidated (IDPC) Rules. CIRO is proposing a shift from the existing course-centric model (i.e., exams tied to courses) to an assessment-centric model (i.e., exams based on competency profiles). The comment period ended on September 20, 2023 and CIRO staff are in the process of reviewing the comments. • CIRO Notice 23-0096 Proposed Clarifying Amendments to Registration and Proficiency Requirements was published on August 31, 2023 to refine and clarify certain registration and proficiency requirements in the IDPC Rules. The comment period ended on October 2, 2023. • CIRO updated competency profiles for Approved Person categories at an investment dealer, in response to public comments where appropriate. The updated competency profiles were published on September 25, 2023. • CIRO issued request for proposals aimed at selecting a vendor, or vendors, in 2024 to develop and maintain examinations, and deliver examinations for individuals at investment dealers.

Client Focused Reforms • With the implementation of CFRs conflict of interest requirements on June 30, (CFRs) 2021 and the remaining CFRs requirements, including know your client, know your products and suitability requirements, on December 31, 2021, the CSA, IIROC and the MFDA continued to harmonize their compliance modules specific to the CFRs. • Findings from the coordinated reviews by the CSA, IIROC and the MFDA during 2022 on the enhanced conflict of interest requirements under the CFRs were published in Joint CSA / CIRO Staff Notice 31-363 Client Focused Reforms: Review of Registrants' Conflict of Interest Practices and Additional Guidance on August 3, 2023. • The CSA and CIRO are continuing to conduct reviews in 2024 to assess registrants’ compliance with other CFRs obligations, including the know your client, know your product, and suitability determination requirements that came into force on December 31, 2021. Together, the CSA and CIRO are discussing the findings and plan to publish additional guidance, which will include suggested practices for industry on compliance with these reform areas.

Cybersecurity

Modernizing Back- Office Arrangements / Subloans

CSA Staff Notice 25-311

• Cybersecurity table top exercises were conducted for small and medium-sized investment dealer and mutual fund dealer firms in Toronto on October 26, 2023 and in Calgary on November 1, 2023. These were informal, discussion-based sessions to improve cybersecurity resilience, in which almost 200 individuals participated from 128 dealer members, four law firms, and three insurance companies. Participants discussed responses to a cybersecurity incident, walking through different scenarios.

• CIRO is engaging with industry to discuss the modernization of rules around back-office arrangements and subordinated debt financing. • GN-4300-23-001 Direct Registration System Guidance was published on October 12, 2023 and sets out the IDPC Rules requirements as they relate to the dematerialization of physical certificates and the recording of securities held with issuers in Direct Registration Systems.

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Topic

Total Cost Reporting

Other Initiatives

CSA Staff Notice 25-311

Activities During the Reporting Period • Future topics for consultation include account transfers and arrangement between introducing and carrying brokers.

• CSA and Canadian Council of Insurance Regulators (CCIR) published changes on April 20, 2023 to enhance total cost reporting (TCR) disclosure for investment funds and segregated funds. The TCR enhancements (Enhancements) will improve transparency and require annual reporting to clients to show the ongoing costs of owning mutual funds, exchange-traded funds, scholarship plans, and segregated funds. • Enhancements were jointly developed by the CSA, CCIR, the Canadian Insurance Services Regulatory Organizations and CIRO. • Enhancements will take effect on January 1, 2026.

• Staff engaged CIRO staff on other matters of regulatory concern, such as: o CIRO staffing matters; o CIRO’s ongoing role in the surveillance of equity markets in real time, along with its monitoring of debt trading, cross asset trading between derivatives listed on the Montréal Exchange and the underlying securities, and Canadian crypto asset trading platform activity; o Establishment of Office of the Investor to enhance investor education, perform investor research, and support CIRO’s Investor Advisory Panel; o Examination of order execution only dealers and their business continuity plans; and o Proposed delegation to CIRO of the AMF’s responsibility for examining the compliance of mutual fund dealers’ activities in Québec.

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