The Ontario Securities Commission has released the results of its review of the limited market dealers, noting widespread deficiencies.

In a notice published today, the OSC reports on its first compliance review of LMDs, conducted in 2005. “We identified a significant number of deficiencies as a result of our review,” it says, noting that the 10 most frequent deficiencies were identified in at least 25% of the sample.

The most significant deficiency–not collecting and documenting know your client (KYC) and suitability information–was identified in almost 80% of the LMDs reviewed.

Along with KYC, the other most common deficiencies were: inadequate filing of regulatory forms and/or statement of policies (over 60% of the LMDs reviewed were deficient); misleading marketing materials/websites (over 40% were deficient); ineffective compliance officer (over 35% deficient); registration issues (over 35% were deficient); inadequate disclosure and/or misleading statements in offering memoranda (over 35% of the LMDs reviewed were deficient); lack of written policies and procedures manual (also over 35% were deficient); inadequate books and records (over 30% were deficient); no written agreements with salespersons or third parties (over 30% of LMDs did not have written agreements with salespersons or promoters); and, no written referral agreement and inadequate disclosure to clients (over 25% of the LMDs reviewed were deficient in this area).

The majority of the deficiencies were identified in firms registered as sole LMDs. Very few deficiencies were identified in LMDs that are registered as ICPMs, or provide mergers and acquisitions services, it notes.

It reports that as of January 31, there were approximately 550 LMDs registered with the OSC. Approximately 46% of these were solely LMDs, 40% were also registered as ICPMs, 13% were also mutual fund dealers and 1% were also registered in other categories.

“Historically, the OSC’s Compliance team monitored LMDs to a limited extent as part of its reviews of ICPMs that are also registered as LMDs. We initiated this review as a result of an increase in the number of firms registered as LMDs, and also to address specific areas of concern, including suitability, trade supervision and sales practices,” it explains.

“We found that LMDs may have roles outside the scope of their LMD registration. For example, an LMD may also be the issuer, ICPM or fund manager of non-prospectus qualified investment funds. We identified a number of deficiencies stemming from these other roles,” it adds.

For LMDs with significant deficiencies, the OSC says that it has taken further action including referring the matter to enforcement, and closely monitoring the dealer. Approximately two thirds of the LMDs with deficiencies have resolved their issues to its satisfaction, the OSC says.

“We will continue to follow up with the remaining LMDs to ensure that all deficiencies are dealt with appropriately and within a reasonable time frame,” it adds. “If deficiencies cannot be resolved within a reasonable time frame, further action may be taken such as imposing terms and conditions on registration, or referring the matter to enforcement. The OSC also notes that it intends to conduct regular compliance field reviews of LMDs to review their compliance with securities law.

The goals of the first review were to better understand their business operations, review their compliance with securities law and identify any regulatory gaps. “This was a first step in enhancing compliance oversight and helping LMDs develop stronger compliance and internal controls. The results of this review will also assist the CSA Registration Reform Steering Committee in harmonizing registration requirements by identifying any specific risks this category poses to investor protection,” it notes.