On November 28, the British Columbia Securities Commission (BCSC) published its Compliance Report Card (Report) covering staff reviews of BC-based exempt market dealers (EMDs), investment fund managers (IFMs) and portfolio managers (PMs) for the fiscal year ended March 31, 2018. We think that the Report is relevant even for firms that are not based in BC because, of course, BCSC staff are interpreting and applying many of the same regulatory requirements that apply elsewhere in Canada.
Below, we have highlighted several themes in the Report that we found interesting.
Conflicts of Interest
Staff observed situations where:
- Some captive dealer firms were unable to recognize that severe conflicts of interest existed in their business structures because of their shared mind and management with the issuer for whom they were distributing securities.
- Some captive dealer firms confused prospectus exemptions with their client-facing obligations under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), believing that they did not have to comply with know-your-client (KYC) or suitability requirements.
- Some adviser firms engaged in transactions that breached Section 13.5 of NI 31-103 (Restrictions on certain managed accounts) by, e.g.
- Purchasing securities where the firms’ directors were also directors of the issuers, on behalf of client accounts, without disclosing their purchase and the relationships to clients and obtaining consent prior to the transactions occurring; or
- Engaging in prohibited cross-trades between two non-prospectus investment funds that the firm managed.
Compliance Officer Function
The Report highlights a number of situations where Chief Compliance Officers (CCOs) did not adequately meet their obligations, including the following:
- In some smaller, captive EMDs, some CCOs assumed that they knew their firm’s products because they were instrumental in creating them. However, they could not demonstrate this knowledge because they did not keep any information to show that they had considered the investments’ timeline to maturity, redemption ability or inherent risks.
- Record-keeping continues to be an area of weakness for some firms examined by BCSC staff. In particular, staff noted failures by CCOs to document their supervision (and approval) of personal trading and their supervision of staff.
- Some CCOs did not keep up to date with changes in securities regulatory requirements, as reflected in policies and procedures that referred to outdated requirements.
Some Positive Findings
The Report calls out a number of good practices that BCSC staff saw at firms during their reviews, including the following:
- Some adviser firms demonstrated that before the firm made changes or expanded the scope of its business, they had assessed the impact of such changes on their compliance programs and taken steps, such as adding compliance resources, before implementing changes in the business lines.
- Some adviser firms pro-actively reached out to their relationship manager (RM) at the BCSC to update them and discuss the compliance implications of new developments at the firm, e.g. where they were considering a new product or service.
- Most adviser firms understood the importance of suitability and keeping current KYC information.
- Generally, most adviser firms ensured that their client statements met Client Relationship Model 2 (CRM2) requirements, especially with respect to market-weighted return performance and firm compensation information.
- There were fewer repeat deficiencies related to suitability and some firms had improved their systems and records to track their documentation of the suitability process.
As we mentioned above, even firms that are not based in BC can learn from the Report’s discussion of good practices and compliance deficiencies.