OSC Annual Summary Report for Dealers, Advisers and Investment Fund Managers

The OSC released its annual report from the Compliance and Registrant Regulation branches on August 23. The annual report identifies key findings and trends noted by these branches throughout the year with respect to registrants directly overseen by the OSC (exempt market dealers, portfolio managers, scholarship plan dealers and investment fund managers). The report is a harbinger for issues of interest and concern for the Commission. Below are some key takeaways from the report.

• Protection from Reprisals: The OSC has focused on compliance with the new provisions that protect against reprisals for employees who provide information or evidence to Staff (section 121.5 of the Securities Act, which came into force in June 2016). The report identifies a number of employment and other contractual terms that Staff sees as inconsistent with section 121.5, including language that prohibits disclosure of information “except as required by law” or requires notification to the employer prior to disclosure. Registrants should consider reviewing their standard form employment contracts and related documents (i.e., termination agreements and releases) to ensure these terms are removed or revised in a manner consistent with the Act (page 35).
• Policies on Dealing with Seniors: The Report suggests that a failure to have policies and procedures in place for dealing with seniors and vulnerable investors would be considered a breach of the requirement that a firm have adequate compliance systems (part 11 of NI31-103). Registrants should consider clarifying policies that address dealing with seniors, how to handle suspected financial abuse or abuse of a power of attorney and interacting with clients who appear to have capacity issues (page 36).
• Expenses Charged to Investment Funds: Staff are of the view that where the management fee paid by a fund to its investment fund manager (IFM) includes an advisory fee paid to the portfolio manager, this fee will cover all aspects of portfolio management, including the costs of research and analysis, portfolio management software or due diligence. As a result, Staff suggest that IFMs should not be charging fees for these management services over and above the management fee. Staff’s focus in this regard is consistent with their now long-standing scrutiny of fees charged to retail investors, with a view to ensuring the primacy of client (as opposed to registrant) interests (page 43).
• Documenting Suitability Determinations: Staff expect that firms develop and maintain documentation to support their suitability determinations when recommending or implementing a trade or strategy, particularly in the case of vulnerable investors. Staff noted that dealers were often able to explain the suitability assessment, but documentation was absent. This suggests Staff’s expectation that notes be kept regarding suitability assessments for each trade or strategy. According to Staff, it is not enough for registrants to perform the analysis; they should be documenting it to evidence that they have done so. While onerous, keeping notes can be helpful for defending civil and regulatory claims against registrants (page 49).
• Sales Practices: The Report notes a number of deficiencies with mutual fund-sponsored conferences, including the payment of prohibited costs and/or unreasonable costs and the improper targeting of “top producers” to attend such conferences. Deficiencies were also noted with respect to the provision of promotional items and business promotion activities. IFMs should review and take steps to improve their sales practices and policies (Staff provides very specific guidance regarding non-compliant sales practices in its Report) (page 56).

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