The Ontario Securities Commission released OSC Staff Notice 33-749 – Annual Summary Report for Dealers, Advisers and Investment Fund Managers on August 23, 2018 (OSC Staff Notice).
In the OSC Staff Notice, OSC staff identified that some investment fund managers (IFMs) have outsourced fund administration functions (including fund accounting and transfer agency) to related parties. Under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, IFMs are required to establish a system of controls and supervision to ensure compliance with securities legislation and are responsible and accountable for all functions that they outsource to a service provider. Accordingly, IFMs should not rely solely on the related service provider and assume that all obligations under securities legislation are being met.
The OSC Staff Notice states that IFMs should:
- have a system of controls for monitoring service providers,
- implement and follow the same level of oversight for both related and unrelated service providers,
- where an IFM is part of a global conglomerate and using a related party service provider to allow for common compliance resources, at a minimum:
- maintain a service level agreement with the affiliate that clearly lists each party’s roles and responsibilities,
- implement a formal line of reporting between the affiliate and the registrant,
- have officers/directors of the affiliated service provider attend and report to committees of the registrant (e.g., the risk management committee and the valuation committee),
- tailor oversight procedures to the IFM’s business and the outsourcing arrangement to meet regulatory obligations, and
- compare the fees charged by a related service provider to those charged by a third party to confirm that the selection of service provider is in the best interests of the relevant investment funds, with the referral of the matter to the independent review committee of the funds, if applicable, for consideration.
For more information, please see Section 2.2.2(d) Compliance systems – Oversight of related party service providers (IFM) of the OSC Staff Notice or contact the author.