Sales practices, suitability remain concerns for OSC

Compliance activity by the Ontario Securities Commission’s (OSC) Compliance and Registrant Regulation (CRR) branch generated a notable increase in enforcement referrals last year, the unit reports.


The CRR branch issued its annual report today, Aug. 8, detailing its oversight efforts involving firms the provincial regulator supervises directly, such as fund managers and exempt market dealers (EMDs).


Referrals to the regulator’s enforcement division from its compliance reviews more than doubled from just four in fiscal 2018 to 10 in fiscal 2019 (ending March 31). The increase represents a return to normal levels after a drop-off in 2018.


The report also detailed where compliance reviews uncovered deficiencies, including concerns about sales practices and suitability.


A review of fund firms’ compliance with the mutual fund sales practices rule found a variety of issues, such as firms engaging in excessive promotional activities, providing reps with too much in non-monetary incentives, and inadequate controls and oversight of these activities.


“We noted instances where [fund managers] were providing monetary support solicited by participating dealers and dealing representatives for dealer events that did not comply with the available exemptions under [the sales practices rule],” the report said.

The OSC’s reviews of EMDs and scholarship plan dealers also found deficiencies with firms’ know your client, know your product and suitability practices.


In particular, the regulator found instances where dealers “did not adequately assess clients’ concentration risk as part of their suitability assessment.”


It also found EMDs using “client-directed-trade instructions as a tool to circumvent their suitability obligations” by routinely assessing trades as unsuitable but allowing them to go ahead anyway, relying on clients’ instructions.


“This raises concerns that firms are not appropriately discharging their obligation to assess the suitability of the transaction, and are routinely documenting trades as being unsuitable and using client-directed trade instructions as an alternative to engaging in a meaningful suitability conversation with the client,” the report said.


Industry referral arrangements also continued to raise concerns with regulators.


“We continue to be concerned that referral agents are conducting activities that require registration under securities law or are representing themselves as being able to perform registerable activities,” the OSC said in the report.


Among fund managers, the OSC found firms engaging in prohibited inter-fund trades and shortcomings in their valuation of illiquid assets, among other things.


Additionally, the report highlighted concerns with issuers raising capital directly, improperly relying on prospectus exemptions and seeking investors through social media and other online channels.


“In some cases we identified regulatory concerns as there appeared to be significant capital-raising activity conducted by these issuers and transactions processed directly by these issuers without the involvement of a registered dealer or reliance on an appropriate registration exemption,” the report said.


On the upside, the review of compensation and incentive practices review didn’t uncover serious compliance issues, “as registrants appeared to have adequate controls to address compensation-related conflicts.”


Looking ahead, the OSC indicated that its compliance reviews for fiscal 2020 will focus on suitability issues, high-impact and high-risk firms, and examining compliance structures at firms that have recently acquired rivals.


“This year, we will focus our reviews on suitability assessments, the compliance structures of newly integrated firms, high-risk firms, and those whose operations have a significant impact on our capital markets,” said Debra Foubert, director of the OSC’s CRR branch.

© 2018 by Enoch Wealth Inc.