2014 OSC Annual Summary Report for Dealers, Advisers and IFMs

Transcription

1 2014 OSC Annual Summary Report for Dealers, Advisers and IFMs Merzana Martinakis Trevor Walz Senior Accountants, CRR Branch PMAC Compliance Officer Network meeting February 24, 2015

2 Disclaimer The views expressed during today s presentation are those of the presenters and do not necessarily represent the views of the OSC or staff. The presentation is provided for general information purposes only and does not constitute legal or accounting advice. Information has been summarized and paraphrased for presentation purposes and the examples have been provided for illustration purposes only. Information in this presentation reflects securities legislation and other relevant standards that are in effect as of the date of the presentation. The contents of this presentation should not be modified without the express written permission of the presenter. 2

3 Agenda Introduction Online advice Pre-registration reviews PM IIROC dealer service arrangements Common PM deficiencies Common IFM deficiencies Registrant Outreach Program Questions 3

4 Introduction 2014 OSC Annual Summary Report for Dealers, Advisers and IFMs Key policy initiatives impacting registrants Registration of firms and individuals Info for registrants, including current trends in deficiencies from compliance reviews and acceptable practices Examples of registrant misconduct Published September 25, 2014 as OSC Staff Notice

5 Registered adviser firms in Canada * By principal regulator as of Feb 2, 2015 Province Portfolio Manager (PM)* Restricted PM* Ontario Quebec BC 84 2 Alberta Rest of Canada 31 0 Total

6 Online advice PMs offering managed accounts to retail clients at low cost using interactive website Same obligations as traditional PM (no exemptions) Meaningful KYC/suitability discussion with clients Active involvement of advising rep to review KYC and assess suitability (not entirely automated) To-date, only comfortable with portfolios of ETFs or mutual funds If plan to offer in Ontario, we expect to be notified in advance, and will be subject to due diligence review by staff 6

7 Pre-registration reviews Where OSC is principal regulator Applies to new firm applicants and also registered firms applying to add a key new category of registration Purpose is to assess fitness for registration and if firm will be in compliance with Ontario securities law upon registration Review business plans and activities, table of contents for P+P manual, and other information In some cases, review of agreements and client disclosure In most cases, interview the UDP and CCO, and others as appropriate Focus on proficiency of dealing/advising reps and CCO Focus on adequacy of compliance system Applicants must address all deficiencies before we approve registration 7

8 PM-IIROC dealer service arrangements Arrangements where IIROC dealer typically provides custody, trading and lending to a PM and its clients, but in some cases also recordkeeping and client account statement delivery Issues with agreements, disclosure to clients, and in some cases PM relying on dealer for clients records and account statement delivery without being responsible and accountable, and without adequate supervision CSA - IIROC working group reviewing the arrangements to assess if rules or guidance are needed Exploring alternatives to requirement for both PM and IIROC dealer to separately issue account statement to shared clients, such as a joint PMdealer statement Until this work is complete, PMs are to comply with the existing account statement requirements in s of NI and prepare for the future additional statement requirements in s of NI

9 Common PM deficiencies Delegating KYC and suitability obligations to referral agents Inadequate relationship disclosure information to clients No evidence that KYC information kept current No transaction information on client account statements Consolidated account statement delivered but not also statements for each account (see guidance in section of OSC Staff Notice ) 9

10 Common IFM deficiencies Common IFM deficiencies Sales practices under NI Expenses charged to funds Oversight of service providers Other IFM deficiencies IFM organizational structures: Payment of management fees to unregistered entities IFM registration issues Participation fees 10

11 NI Mutual Fund Sales Practices Two main challenges relating to mutual fund sales practices: Assessing primary purpose: Content provision of educational information permitted topics vs. non-permitted topics Time - % of time spent on permitted vs. non-permitted topics Reasonability of costs: Inadequate process to ensure that the provision of nonmonetary benefits were not extravagant and were consistent with the spirit of Part 5 of NI Payment of prohibited expenses 11

12 IFM Expenses vs. Fund Expenses IFM expenses Expenses related to the operations and conduct of an IFM should be borne by the IFM and should not be allocated to the funds. These include: maintaining proper registration for the firm, the UDP and the CCO developing a system of compliance and controls, along with on-going monitoring and supervision ensuring compliance with securities law and meeting regulatory obligations establishing the firm s infrastructure and hiring qualified personnel entering into agreements with service providers establishing a distribution network & providing dealers with required information promoting the investment funds Expenses of an investment fund Only expenses that are related to the daily operation of the investment funds should be allocated to the investment funds 12

13 Outsourcing of IFM functions to service providers Use of service providers Additional guidance under Part 11 of the Companion Policy to National Instrument Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI CP) Key aspects of the oversight process to ensure compliance with securities legislation Third party service providers vs. affiliated entities: An affiliate that is part of the same global conglomerate providing transfer agency, trust accounting and fund accounting services to investment fund What is the expectation regarding oversight of the affiliate by the IFM? 13

14 IFM Organizational Structures Payment of management fees to unregistered entities Registration implications: Who is the IFM? Who directs the business, operations or affairs of the fund? Participation fee implications: Participation fee does not capture all revenue attributed to registerable activities Parent company Company XYZ (unregistered entity) Registrant A Investment fund manager and portfolio manager Investment fund 14

15 CRR Initiatives Registrant outreach program Implementation of Client Relationship Model 2 April 2015 Elements of an effective compliance system June 2015 Registrant Advisory Committee 2 nd term Adviser representation through individuals representing registered advisers and through PMAC membership 15

16 Questions? 16