The Ontario Securities Commission’s (OSC) compliance and registrant regulation (CRR) branch is girding for the impact of forthcoming regulatory reforms, grappling with innovation in the investment industry and facing a series of continuing compliance issues.

The CRR branch released its latest annual report on Monday, detailing the results of its latest round of compliance reviews and looking ahead to possible future challenges amid shifts in both regulation and industry practices. For example, the report indicates that the CRR branch is “analyzing various approaches for creating a statutory best interest standard with a view to developing one or more proposals for consideration.”

The CCR branch is also “finalizing our analysis of advisor compensation practices with a view to publishing our review findings, including expectations for compliance and best practices, and developing and evaluating other targeted regulatory reforms and/or guidance … to improve the advisor/client relationship,” the report says.

At the same time, with the OSC slated to introduce several new prospectus exemptions in Ontario, including an offering memorandum (OM) exemption and a crowdfunding exemption, the branch indicates that it’s developing compliance programs to oversee the use of the planned new exemptions. It is also gearing up to begin reviewing compliance with new derivatives trade reporting requirements.

Furthermore, with client relationship model Phase 2 (CRM2) reforms due to be implemented fully in for 2016, the report says that most firms are expected to provide new annual reports on charges and investment performance on a calendar year basis. This means the first reports will cover the year beginning January 2016 and will be delivered to clients in January 2017.

The CRR branch also address technology driven issues, such as the emergence of portfolio managers operating online advisory businesses — often characterized as “robo-advisors” — and exempt-market dealers (EMDs) running online portals for accredited investors.

“We have identified concerns with [EMDs’] online portals performing an inadequate assessment of the issuers/products they are distributing,” the report says.

As for portfolio managers operating robo-advisors, the report stresses that although the CCR branch has not added any additional terms to the registration of firms running these businesses yet, it may do so in the future.

“We will consider whether terms and conditions are appropriate for different online operating models as they develop over time,” the report says.

The branch is also reviewing the existing custody requirements for non-self-regulatory organization registrants — along with the rest of the Canadian Securities Administrators (CSA) — to assess whether they still protect client assets adequately.

The report details the results of last year’s compliance reviews, which saw the number of firms required to enhance compliance significantly rising to 47% from 28% year-over-over. At the same time, the proportion of firms required to enhance compliance declined to 40% from 53%. Only 1% of cases resulted in suspension, down from 9% last year; about 10% had terms and conditions placed on their registration; and 3% were referred to enforcement.

Issues flagged in the report include inadequate referral arrangements. “We continue to be concerned about the practice of some registrants delegating their [know-your-client] and suitability obligations to referral agents, such as financial planners and mutual fund dealing representatives,” the report says.

The CRR branch also continued to find issues with EMDs that are not collecting and documenting adequate KYC information for each client and weaknesses in assessing suitability. In addition, the CRR branch also points out that EMDs are “renting out” their registration improperly.

“We are concerned that some EMDs are sponsoring dealing representatives solely for the purpose of distributing securities of the dealing representatives’ employing or affiliated issuers, and are therefore ‘renting out’ their firm’s registration,” the report says. “A dealing representative should not be acting as a stand-alone operation within a firm and they should not sell only the products of their employer or affiliated issuers.”

The CRR branch is also seeing a lack of rep supervision among EMDs; inadequate disclosure of underwriting conflicts; and concerns with firms that only sell products from affiliated issuers, among other issues.

Common deficiencies in individual registration filings also include individuals not disclosing all of the details surrounding their departure from a previous employer; and, that “individuals often do not make accurate and timely disclosures of … criminal, civil or financial [issues].”

Says Debra Foubert, director of the OSC’s CRR branch, in a statement: “Our notice summarizes new initiatives and their expected impact on registrants as well as current trends we identified in compliance reviews and registration. The notice will help keep registrants abreast of changes to their regulatory obligations; we encourage registrants to read our notice and use it as a self-assessment tool.”