Securities regulators are conducting a greater volume of compliance sweeps, and they’re finding an alarming number of deficiencies at many firms, regulators said on Wednesday.
Speaking at the Registrant Regulation Compliance Strategies Summit in Toronto, hosted by the Strategy Institute, Prema Thiele, partner at Borden Ladner Gervais, LLP said the Ontario Securities Commission, in particular, has been conducting a slew of compliance reviews in such areas as marketing, relationship disclosure and suitability.
“There has been, I would say from my own perspective, a record number of Ontario Securities Commission compliance sweeps,” said Thiele. “The need to focus on compliance continues.”
The results of these regulatory reviews have been “dismal”, according to Thiele. In fact, some firms have as many as 16 or 17 compliance deficiencies, or more, according to George Gunn, manager of registrant conduct and risk analysis team in the compliance and registrant regulation branch of the Ontario Securities Commission.
One of the most common compliance deficiencies is abuse of the accredited investor exemption, Gunn said. Many registrants rely on the exemption in situations where clients don’t qualify.
“That is the number one problem, for sure,” Gunn said.
“Exempt market products are only available under certain circumstances and under certain purchases,” said Michael Denyszyn, senior legal counsel with the registrant conduct and risk analysis team at the OSC. “Attempts to cut corners and distribute it to people who don’t qualify for a valid prospectus exemption, we consider that to be a significant deficiency.”
Thiele said many registrants simply aren’t aware of what falls within the accredited investor exemption. She expects that regulators may modify the definition of an accredited investor as audits continue to reveal problems in this area.
Other “significant” deficiencies that the OSC commonly finds include inadequate supervision of registered representatives by firms’ compliance departments, and inadequate compliance with Know Your Client and Know Your Product rules.
“If you’re not collecting and documenting know your client information, if you’re not getting the kind of information that 31-103 requires you to get from the client, that would be a significant deficiency,” Denyszyn said, adding that these kinds of deficiencies require immediate attention.
Suitability is another key area of focus for regulators conducting compliance reviews, according to Mark French, manager of regulation and compliance in the capital markets regulation division of the British Columbia Securities Commission.
“We at the BCSC certainly are seeing suitability assessments as an area of great concern,” French said. Nearly every examination conducted by the BCSC reveals problems with suitability, he said.
“I think it’s safe to say that you’ll see this as an area of consistent focus going ahead.”
Firms that have not been audited in recent months should expect to be contacted by regulators in the coming weeks, according to Thiele, and should ensure their compliance practices are up to standard.
“Make sure you’re paying attention to what’s coming out of the OSC on their compliance audit reports,” she said.