A National Compliance Review of fund managers in November 2001 conducted by The Canadian Securities Administrators found widespread deficiencies in personal trading controls, investment allocation and the use of performance numbers.

The CSA reviewed 14 registrants as part of the review in Alberta, B.C., Manitoba, New Brunswick, Nova Scotia, Ontario and Quebec. The CSA say the purpose of the review was to assess compliance by selected advisors, to identify internal control weaknesses and to enhance information sharing among the provincial regulators. The review concentrated on the portfolio manager/investment counsel area of the industry. Each of the seven provinces participating selected registered advising firms, of their choice, for review.

The review found that, “insufficient attention is paid to the review of performance numbers for accuracy and adequate disclosure, particularly where parties independent of the registered firm prepare these figures on behalf of the firm.”

Five of the firms were deficient (seven of the fourteen firms reflected no irregularities and two firms did not make use of performance numbers). Findings also revealed that most firms are either not producing composites (a composite is an aggregation of a number of portfolios into a single group that represents a particular investment objective or strategy) at all, or only for very limited use.

In most cases firms appear to be allocating investment opportunities and prices fairly amongst clients and groups of clients. However, the review found irregularities at eight of the 14 firms reviewed. Although procedures exist, they have not been adequately formalised and disclosed to clients in most cases. In some cases, the policy for fairness in allocation of investment opportunities is too general and not specific in covering areas like distribution of hot issues or initial public offerings and allocation of prices and commissions in block trades.

The review found the worst level of compliance in the area of personal trading controls, where 10 of the 14 firms had irregularities. Although the report says that, “personal trading practices do not appear to have resulted in abuses or preferential treatment in any cases. Internal controls could be enhanced in certain instances and existing informal procedures should be formalised.”