The Ontario Securities Commission (OSC) is likely to release additional guidance in two key areas — complying with the mutual fund sales practices rule and dealing with senior investors — following last year’s compliance review.
The OSC published a report Tuesday setting out the work of its compliance and registrant regulation (CRR) branch over the past year. The report details compliance reviews of firms that the OSC regulates directly. The report also reviews ongoing policy issues in these sectors of the industry, including: fund managers’ compliance with the sales practices rules; firms handling of senior investors; and the use of some new prospectus exemptions.
On a positive note, the OSC found fewer significant deficiencies at the firms it reviewed in the past year compared with the previous year. The proportion of firms required to enhance compliance significantly is down to 34% this year from 49% last year.
“We are encouraged that firms are more aware of compliance issues and are responding to them more effectively,” the OSC’s report says.
However, ongoing deficiencies have prompted the provincial regulator to consider whether added guidance is required in these areas. One significant concern is seniors.
“Once our compliance work is completed, we will draft and publish guidance on our work and provide best practices for registrants who are dealing with senior investors to address the particular needs and issues unique to them,” the OSC’s report says.
The mutual fund sales practices rule is also flagged, particularly professional conferences sponsored by fund managers. This includes the process for selecting advisors to attend conferences; the payment of prohibited costs; and whether conference costs are reasonable.
“As a result of these focused compliance reviews, we are considering publishing additional guidance on the issues … raised through the focused compliance reviews,” the OSC’s report says.
“Advisor discount fee arrangements” are also flagged. These are arrangements in which firms discount fund management fees for certain advisors and clients.
The OSC indicates in the report that these arrangements are not in compliance with the sales practices rule as they create competitive advantages for certain reps, which may influence reps’ investment recommendations and establish improper asset quotas.
Overcharging clients is also highlighted. This issue was recently the subject of no-contest settlements between the OSC and large financial services firms. Examples include clients who are charged embedded fees in fee-based accounts and clients that are put in higher-fee versions of certain funds. “We are also scrutinizing other types of fee arrangements which may be unfair to clients,” the regulator notes.
The OSC is also examining the industry’s compliance with its new whistleblower program. Specifically, the regulator is looking for restrictive provisions in employment contracts, severance agreements and confidentiality agreements that are designed to prevent employees from reporting possible violations to the OSC, or other enforcement agency.
So-called “robo-advisors” also come in for scrutiny. The OSC’s report notes that compliance reviews of these firms found deficiencies that are also common among traditional portfolio managers, such as inadequate written policies and procedures, inadequate client statements and incorrect calculation of excess working capital.
Issues unique to these firms include inadequate online know-your-client (KYC) questionnaires; ensuring that the suitability of model portfolios is properly reviewed; and insufficient discussions with clients as part of the KYC process.
Some of the more mundane ongoing compliance violations include exempt-market dealers (EMDs) that are not adequately documenting their product due diligence efforts; disclosure shortcomings; and individuals who are trading without proper registration.
The report also highlights individuals who are not yet registered, but are using titles on social media, implying that they are registered, such as referring to themselves as “portfolio managers” online when they aren’t yet registered.
Says Debra Foubert, director of the OSC’s CRR branch, in a statement: “We encourage registrants to read our notice and use it as a self-assessment tool as it is a great way to keep informed of the changes to the regulatory landscape.”
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