The Canadian Securities Administrators (CSA) issued new guidance on Thursday that aims to address its concerns about the growing popularity of arrangements in which an investment dealer holds a client’s assets and a portfolio manager trades those assets on a discretionary basis for the client.
The CSA’s staff notice indicates that provincial regulators’ compliance reviews have uncovered several concerns with these custody and trading arrangements, including: insufficient disclosure to clients; inadequate agreements between the firms that cover these arrangements; and portfolio managers relying on dealers’ records instead of maintaining their own as well as relying on dealers’ account statements without ensuring those statements are accurate.
The CSA indicates in its guidance that it doesn’t oppose these arrangements and that they can continue to be used, but that both dealers and portfolio managers must satisfy their regulatory obligations in these situations.
“Since the [portfolio manager] and the [dealer] have different roles and responsibilities to the shared client, they have different regulatory obligations to the client,” the CSA’s guidance notes. “However, each has a regulatory obligation to deliver statements of investment positions and trades to the shared client as well as to maintain their own records of each client’s investment positions and trades.”
The guidance stresses, among other things, that portfolio managers must maintain their own trading and account records; that the firms must have a written agreement setting out their respective roles and responsibilities; and that the key terms of these agreements must be disclosed to clients in writing.
The CSA’s guidance also sets out the steps a portfolio manager must take to ensure that dealers’ account statements are accurate in situations in which they rely on the dealer to provide those statements to clients.
“The notice will help portfolio managers understand and comply with their regulatory obligations when they have these service arrangements,” says Louis Morisset, chairman of the CSA and president and CEO of the Autorité des marchés financiers, in a statement. “We encourage portfolio managers to use the information and guidance in this notice as a self-assessment tool to strengthen their compliance.”
The notice indicates that CSA staff will continue to review these arrangements in its ongoing compliance reviews.
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