Half of large fund managers reviewed by regulators are improperly paying reps’ travel expenses for industry conferences, according to a compliance review carried out by the Ontario Securities Commission (OSC).
The OSC released a staff notice Thursday that, among other things, details the results of its review of fund manager compliance with securities rules in key operational areas; and provides further guidance to firms in a number of areas where it found deficiencies, particularly when it comes to compliance with sales practices rules.
For example, the report indicates that the co-operative marketing practices at 25% of firms did not meet the eligibility rules; it also found inadequate disclosure of co-op marketing at 25% of firms; 50% paid for sales rep expenses to attend conferences, such as travel and accommodation, that are not permitted; also, 25% provided benefits, such as meals and entertainment, that were considered excessive; and, 25% provided support for dealer conferences that exceed the limits set in the rules.
“We found the costs of these meals and entertainment to be extravagant in some cases,” it says, noting that the cost per day for dinner and entertainment that in its sample of conferences and seminars ranged from less than $100 to well over $700 per person.
There are no hard and fast rules setting specific limits in many of these areas, and the report allows that these judgment calls can be tricky in certain cases. Considering the wide range of dinner and entertainment costs for example, it says, “While the latter seems completely extravagant and the former seems reasonable, we acknowledge that finding a balance is challenging.”
Still, the review also found that 38% of firms did not have adequate policies and procedures regarding sales practices, and 25% did not follow their own policies and procedures.
The OSC says that none of these violations resulted in further regulatory action, beyond the issuance of deficiency reports, but that it determined that firms need further guidance in certain areas, including assessing the primary purpose of co-op marketing efforts, and determining what sort of expenses are reasonable.
In addition to the detailed guidance on complying with the sales practices rules, the notice also provides guidance on properly allocating expenses to funds, mutual fund borrowing, cross trading and inter-fund trading practices, and outsourcing and the oversight of service providers.
The issues uncovered in these areas were not as significant as with the sales practices rules, although the report suggests that the regulator did observe some prohibited trading activity and violations of borrowing limits. Nevertheless, it’s primarily providing additional guidance in these areas to help firms with compliance.
For example, the report notes that the review of fund expense allocations “did not indicate any significant issues in this area.” However, it says that some fund managers indicated that additional guidance in this area would be helpful to assist them in enhancing their fund expense allocation methodology.
The OSC recommends that firms use the notice to improve their compliance with the rules, and to enhance their internal controls and supervisory arrangements.
The findings follow on-site reviews of a sample of large fund managers that was carried out in May 2013 to assess their compliance with securities law. The firms examined collectively had over $500 billion in assets under management at the time and manage a wide range of investment funds, including traditional mutual funds, pooled funds, exchange traded funds and closed end funds.