In June 2018, we reported on Ontario Securities Commission (OSC) staff’s allegations that Caldwell Investment Management Ltd (CIM) had failed to provide its clients with best execution of their orders. As you might recall, CIM had acted as a fund manager and portfolio manager for a number of Caldwell-related mutual funds and also provided portfolio management services for clients under separately managed discretionary accounts. During the relevant period, it had placed most of its trades for execution through a related investment dealer, Caldwell Securities Ltd. (CSL).
Earlier this month, the OSC issued reasons approving a settlement between staff and CIM (Settlement). This is first time the OSC has considered the best execution obligation in an enforcement context, and so this case is something of a landmark. Since the agreed facts in the settlement aren’t materially different from the allegations we summarized in our bulletin last year, we won’t repeat that information here. Instead, we’d like to draw readers’ attention to some aspects of CIM’s compliance practices that were considered especially problematic. The Settlement notes, for example, that:
- CIM’s written policies and procedures lacked detail;
- There were conflicting descriptions of CIM’s best execution obligation in its compliance manuals;
- CIM provided conflicting information to OSC staff about its processes for executing bond trades;
- CIM’s inaccurate representations to the mutual funds’ investment review committee (IRC) prevented it from carrying out its responsibilities; and
- CIM couldn’t produce evidence of reviews of trading conducted to support its representations to clients and the IRC regarding trade execution.
Mitigating factors include CIM’s cooperation with OSC staff during a 2015 compliance audit, when concerns were first raised about CIM’s compliance with best execution obligations, as well as CIM’s pro¬ active actions to improve its best execution policies and procedures after that review took place.
Under the Settlement, CIM agreed to pay an administrative penalty of $1.8 million and investigation costs of $250,000.It also agreed to a reprimand and to retain an independent consultant to review, test and report to the OSC on CIM’s new best execution policies and procedures. Vice-Chair Moseley accepted staff’s submission that in cases that are the first of their kind (like this one regarding best execution), sanctions may be less severe than they might otherwise be.
In addition to showing how OSC staff interpret best execution, the Settlement reinforces how important it is for a firm's high-level policies, detailed procedures, internal control mechanisms, and communications inside and outside of the firm to be consistent. For example, compliance policies or representations to investors or board members that aren’t backed up by evidence showing that the firm has tested whether its policies are being followed and understood are likely to be red flags in a compliance audit. In essence, do what you say and be able to prove it.