OSC to review compensation, sales practices

The report outlines the activities of the OSC’s compliance and registrant regulation branch (CRRB) over the past year, and its plans for the current fiscal year.

Compliance reviews in the year ahead “will focus on high-risk firms, conflicts of interest relating to sales incentives and compensation practices, and compliance with new regulatory requirements,” the report says.

In particular, the OSC is focusing on how firms address conflicts of interests, and it is working with the self-regulatory organizations to coordinate their efforts on common issues, such as sales incentives and related conflicts. “It is recommended that registrants review their practices and, if necessary, align their sales incentives and compensation practices with their obligations owed to their clients,” the report adds.

The reviews of high-risk firms will start in the fall, the report notes, once the commission has analyzed the data from the latest risk assessment questionnaires that it uses to rank firms.

Looking back over the past year, the rise of robo-advisors, the emergence of equity crowdfunding, and the growth of peer-to-peer (P2P) lending platforms are all posing new challenges for regulators, the report notes.

“We are seeing an increase in the number of firms seeking registration to operate online portals and trading platforms,” the report says. “Firms should consider submitting a pre-file application where the portal/platform has a unique or complex business model or will require discretionary relief from registration requirements … We may also request a demonstration of the online portal/platform as part of the pre-registration interview.”

The report stresses that regulatory requirements apply to all business models, including online advisors, crowdfunding portals and lending platforms. It also sets out areas where it is seeing deficiencies in firms seeking registration to operate these sorts of businesses, including: failing to have policies in place to identify and address conflicts; not meeting proficiency requirements; and not having procedures in place to meet KYC and KYP obligations.

The OSC is also receiving registration applications for equity crowdfunding portals from both new firms and existing dealers, the report notes, and the commission is also continuing to see unregistered P2P lending websites.

“In recognition of increased interest in crowdfunding portals and peer-to-peer lending platforms, this year’s report specifically addresses the OSC’s expectations in these areas,” says Debra Foubert, director of the CRR branch, in a statement. “We encourage firms seeking to operate online portals and trading platforms to review the registration considerations outlined in our report.”

As for individuals seeking registration the OSC is also continuing to see deficiencies in people disclosing relevant financial, criminal and regulatory information to the regulator. “The failure to make required disclosures of criminal and solvency matters has been a longstanding problem…” the report says, noting that this may impugn an individual’s integrity and can lead to the OSC denying registration.

“…this year we identified a number of situations where applicants and registrants did not make the required disclosure of criminal and solvency matters, either in a timely manner or at all,” the report adds, which resulted in regulatory action being
taken against several individuals.

Indeed, over the past fiscal year, the OSC’s CRRB took action in 90 cases against either firms or individuals engaged in misconduct or serious non-compliance with securities law, the report says. Among other things, the results of these actions include 43 instances of terms and conditions being imposed, 19 instances where registration was denied or suspended, and 11 referrals to enforcement.

Photo copyright: convisum/123RF