Canadian securities regulators, keeping a close eye on compliance issues, are ramping up their practice of arriving at registrants’ offices unannounced for onsite reviews.
At a recent conference held by the Canadian chapter of the National Society of Compliance Professionals in Toronto, Canadian regulators outlined their current priorities and some initiatives they are working on. Felicia Tedesco, manager of the Investment Fund Manager team at the Ontario Securities Commission (OSC), said that the OSC is planning a “suitability sweep” of firms. That sweep is still in the planning stages, she said, but is likely to begin this summer or in the autumn.
In previous sweeps, Tedesco said, the OSC has observed what she referred to as “a lot of significant deficiencies indicating that there was a lack of internal controls and inadequate compliance systems generally at certain registrants.” This trend caused the OSC to issue a notice in May dealing with concerns about inadequate compliance systems.
These issues extended to matters such as capital sufficiency, causing the OSC to inform some firms during sweeps that they did not have sufficient capital adequacy, an issue of which those firms were unaware. Other problems the OSC noticed were lack of processes for calculating proper insurance, poor oversight of service providers and incomplete books and records, among other issues. “There was quite a laundry list,” Tedesco said, which is a concern for chief compliance officers (CCOs).
Tedesco said these findings were typically in smaller firms with fewer resources, but they were not, unfortunately, restricted to one- or two-person shops. In some cases, CCOs were wearing multiple hats, or insufficient resources were dedicated to compliance issues.
Suitability issues are another priority for the OSC. “We have noted in our reviews a lot of deficiencies around [know your client (KYC), know your product] and suitability,” Tedesco said. KYC material is too often inadequate or out of date. There is insufficient product knowledge among registrants and insufficient disclosure of costs. And investments are not in accordance with client investment mandates, risk tolerance or time horizons.
As a result, the OSC will be making more onsite visits. “Consistent with our approach to conduct more targeted reviews focusing on high-risk areas, we are currently in the process of planning a suitability sweep,” Tedesco said. These will occur on both the dealer and portfolio manager sides. It also appears that the OSC will be adopting the U.S. practice of sometimes speaking directly with clients/investors when they are performing a review.
Karen McGuinness, vice president of compliance at the Mutual Fund Dealers Association of Canada (MFDA), noted that the MFDA is awaiting the release of the latest amendments to N1 31-103 from the Canadian Securities Administrators dealing with the new client relationship model. “We will be following that, in order to harmonize our requirements,” she noted. Those changes are expected some time this month, McGuinness said.
The MFDA will soon be releasing a bulletin for the industry, to advise of areas it views as high-risk. These include: exempt securities and related proficiency and due-diligence requirements; objective suitability criteria outlined in policies and procedures manuals for use in leveraging situations; and member supervisory systems, especially follow-up procedures when red flags are spotted.
An area of significant concern, McGuinness said, remains outside business activities. Monitoring this area requires clear policies and procedures for approval and reporting of such activities at multiple points in the review process. This includes the recruitment stage, as well as ongoing internal surveys.
“In your trade reviews,” McGuinness said by way of example, “if you see a volume of assets going outside the firm, do you consider where that business is going?”