compliance puzzle

As regulators focus on compliance with the client-focused reforms, parts of the industry are still having problems complying with the client relationship model reforms, a report from the British Columbia Securities Commission (BCSC) says.

The regulator published a report card on Tuesday detailing the results of its most recent round of compliance reviews involving portfolio managers, investment fund managers and exempt market dealers.

The report described common deficiencies uncovered in the regulator’s reviews, and indicated that reviews in the coming year will look at compliance with the client-focused reforms (CFRs) that took effect last year.

The first review, which is underway, is a sweep of the CFRs’ conflict of interest requirements by the Canadian Securities Administrators (CSA), the report said, and may result in more firms being selected for review.

A second sweep will focus on elements of the CFRs implemented at the end of last year, the report said.

In the meantime, last year’s reviews indicate that some firms are still having trouble complying with requirements from the previous major reform effort, the client relationship model (CRM2) reforms.

“From our reviews of portfolio managers, we found deficient client account statements that were missing transaction information and disclosure required by [the CRM2 rules],” the report said.

Given that these requirements have been in effect since 2015, and that firms were provided with “additional flexibility for the preparation and delivery of account statements” in 2016, “it concerns us that there are still firms that do not understand their obligations to deliver compliant account statements,” the report said.

Alongside these failings, the regulators also found business structures that involved firms “renting out” their registration, or flowing compensation through unregistered entities.

“We consider this type of circumventing of the registration requirement to be a serious breach that will require compliance and/or enforcement actions,” the report said, adding that reps can’t use personal corporations to receive compensation for activity that requires registration.

“We remind the investment community that generally only registered firms should collect compensation for registrable activities, such as management and performance fees,” it said.

Additionally, the BCSC reported that “one of the most serious deficiencies” it uncovered last year involved a firm that was charging its clients a commission surcharge for placing trades through a preferred broker.

“Not only is this a failure to ensure best execution of trades, but it is also a significant conflict of interest in which the firm placed its interests ahead of its clients,” the report said. The charge represented a significant source of revenue to the firm and provided no benefit to clients, it added.

“The firm failed to treat its clients fairly, honestly and in good faith,” the report said.

The BCSC’s participation in a CSA sweep targeting firms’ marketing materials also found a variety of shortcomings, including overly promotional claims, misleading social media posts and failure to provide sources for third-party information.

“We expect registered firms to ensure their marketing is done responsibly,” said Peter Brady, executive director of the BCSC, in a release. “Our goal is to identify problems and make sure they get addressed before issues arise.”

The BCSC’s compliance reviews found an average of 6.77 deficiencies per review, which is down from 8.14 deficiencies per review in 2020.

The report noted that the decline in average deficiencies was largely due to the narrower focus on marketing in last year’s reviews.