The Ontario Securities Commission (OSC) is preparing to launch its largest ever suitability sweep, and will begin contacting clients directly to verify know your client (KYC) information as a routine part of its review process, representatives from the OSC said on Wednesday.
Speaking at a compliance conference hosted by the Strategy Institute in Toronto on Wednesday, Mary Condon, vice chairwoman of the OSC, said the regulator commonly observes suitability and KYC-related deficiencies in its compliance reviews.
“Some of the onsite field reviews that we’ve done have found KYC information that is either not accurate, incomplete or not up to date,” Condon said. “In some cases, we’ve even found a failure to collect KYC information at all.”
To measure the scope of the problem, the OSC is kicking off a sweep that will include a review of approximately 80 firms and their registrants, in which it will assess their compliance with suitability, KYC and know your product (KYP) obligations.
In conducting the sweep, Condon said the OSC would make two enhancements to the field review process: it will expand the number of client files that it reviews for KYC, KYP and suitability compliance; and it will contact some clients directly to ask about their experience with the firm and the advisor, and to confirm some of the KYC information on file.
In the past, the OSC has only contacted clients in exceptional cases; not as part of the standard compliance review process. But the regulator has found it to be a valuable method of assessing firms’ compliance with securities laws, and has therefore decided to implement the practice more regularly.
“The idea is that will inform our understanding of the extent to which registrants are indeed completing and living up to the requirements that the regulations impose on them,” Condon said.
Only a small sample of randomly selected clients will be contacted directly, according to Condon, and their participation in the review will be voluntary.
Depending on what the OSC finds in its suitability review, Condon said it will consider issuing more guidance to registrants on complying with these regulations. “The ultimate outcomes of the sweep will depend on the findings of the review and our assessment of those findings,” she said.
Elizabeth King, manager of the portfolio manager team in the compliance and registrant regulation branch at the OSC, pointed to Trapeze Asset Management Inc. as an example of a recent “groundbreaking” case in which the OSC found non-compliance with suitability obligations. The OSC found that the firm made investment recommendations that were unsuitable for clients and inaccurately assessed the risks associated with many of its investments, among other compliance failures.
“In some cases, they failed to adequately ascertain clients’ investment needs, experience, investment objectives and risk tolerance, prior to investing those client assets,” said King, speaking at the conference.
The firm was ordered to pay a penalty of $1 million, to retain a consultant to review its KYC and suitability-related practices and procedures, and to review all client accounts, among other sanctions.
King reminded the compliance officers at the conference that in cases where a client has been referred to a registrant, that registrant must conduct his/her own KYC and suitability assessment of the client, rather than relying on information they’ve received from the referrer. “It’s their obligation to do that,” she said.