The Ontario Securities Commission’s latest report on its compliance review of investment counsel and portfolio managers is a mix of good news and bad news.

The good news is that a new type of compliance problems has not emerged; the bad news is that the problems that exist now are more widespread.

“The issues we’ve uncovered indicate that there has been no change to the common deficiencies from those identified in the previous review period,” said Marrianne Bridge, manager of compliance at the OSC.
“This would be expected to some degree due to the scope of our compliance review program and the areas that are examined at each firm.”

“Unfortunately, it appears that the incidence of some of these deficiencies has increased from the previous year as indicated by the higher percentage of firms being deficient,” Bridge says.

The most common deficiencies identified involved: policies and procedures manual; policy for fairness in the allocation of investment opportunities; statement of policies; portfolio management; maintenance of books and records; capital calculations; registration issues; marketing; personal trading; and, know-your-client and suitability information.

The report indicates that no significant improvements were noted from the previous year. The most negative trend was noted in the area of portfolio management with 82% of firms experiencing issues in this area vs 59% in the prior year. During the reviews, the OSC found: client accounts were managed without an advisory agreement; clauses in the agreement contradicted the advisor’s fiduciary duty to the client; portfolio holdings were inconsistent with the investment restrictions; the advisory fee schedule was not included in the advisory agreement, nor was the timing and method of billing; the responsibility of voting client proxies was not addressed; and, client’s written consent to charge fees based on performance was not obtained.

It also noted a big increase in the number of deficiencies relating to proxy voting.

Although the issue was not included as one of the common deficiencies, 45% of firms reviewed had deficiencies related to proxy voting as compared to 17% in the previous year.

It says field reviews have shown that many advisers have inadequate written policies and procedures on proxy voting; that proxies were not always voted, and there was no process to deal with contentious matters; and, there was a lack of disclosure of the proxy voting responsibility in the investment management agreement with clients.

In terms of capital adequacy, it found situations where: monitoring of the firm’s capital was not performed; capital calculations were incorrect; and, managers were capital deficient and did not inform the commission; among other things.

It also found marketing materials that contained incorrect information; materials that had inadequate disclosure; performance data that incorrectly used return data; references to the Association for Investment Management and Research were used when the firm was not AIMR compliant; claims of “superior performance” were made that could not be substantiated; and, claims regarding the future value of investments.

On the subject of personal trading, the OSC found firms where: personal trading policies exist but were inconsistent with actual practice, or did not detect violations of the policy; individuals with access to investment making decisions were not subject to personal trading policies; personal trading policy did not include blackout periods; and, there were no punishments for violations of personal trading policies.

The report details the OSC’s compliance activities from April 1, 2003 to March 31. The first part describes various compliance initiatives and issues relating to market participants. The second part of the report deals with common deficiencies identified during compliance reviews. For each deficiency identified, it suggests guidelines to improve compliance.

It notes that it will also issue a report on its review of scholarship plan dealers in the near future.

The report will highlight the common deficiencies noted and some suggested guidelines in a format similar to this report.

It is also working on a policy project on referral arrangements in order to develop a staff position on this issue, as it did with fund dealers’ business arrangements.