OSC Reports on 2012 Compliance Experience

The OSC has released its 2012 compliance report (OSC Staff Notice 33-738) on dealers, advisers and investment fund managers. This report reflects the increasing importance ascribed by the OSC to registrant practices and registration issues. The report also allows licensed securities businesses to benchmark their practices against regulatory expectations.

Directly and through self-regulatory organizations, the OSC oversees 1,300 firms and 66,000 individuals. The OSC follows a risk-based approach to compliance assessments (p. 35). For the last two years, over 80% of compliance reviews have resulted in requirements for enhanced or significantly enhanced compliance by registrants (p. 36).

Main points arising this year are:

  1. Securities regulators are working steadily to increase the obligations of registered securities businesses especially as regards ongoing knowledge of clients and their investment objectives.
  2. More emphasis is being put on meaningful ongoing disclosure of conflicts by registrants and on disclosure of portfolio performance and costs (p. 7).
  3. Exempt market dealers (EMDs) which carry on trading activities with more sophisticated purchasers to whom securities are marketed on a prospectus-exempt basis came in for special attention during 2012. In particular:
    1. the OSC is concerned that EMD registrants are doing insufficient due diligence on whether their clients satisfy the statutory requirements applicable to "private placees" and other categories of private placee (p. 14);
    2. the OSC believes that for EMD registrants, qualifications for prospectus exemptions are an integral part of the "know your client" process (p. 14);
    3. the OSC has reported on inadequate disclosure of conflicts by EMDs and on a failure by EMDs to invest funds as represented by the EMD to investors (p.22);
    4. the OSC has commenced a number of enforcement and registration suspension proceedings against EMDs for a multitude of infractions including inadequate capitalization, deficient recordkeeping, conflicts of interest and inappropriate sales practices (p.22);
    5. the OSC reported on examples of inadequately documented offerings and a tendency on the part of EMDs to engage in non-arm’s length related party transactions;
    6. the OSC has also questioned private placements of securities to clients by the EMDs themselves as a means of overcoming capital deficiencies (p.45-6)
  4. The OSC Report contains a number of observations about the duties of chief compliance officers including that:
    1. registrant compliance systems are very often found to be inadequate;
    2. chief compliance officers do not always spend enough time implementing compliance systems because they perform their jobs on a part-time basis along with other duties either within a registered firm or for an entirely different employer;
    3. there is a tendency on the part of CCO’s not to properly document compliance procedures or to perform ongoing self-assessments (p.40).
  5. The OSC reported on the following persistent trends observable over several years:
    1. improper overstatement of working capital (p.43);
    2. underpayment and late payment of capital markets participation fees;
    3. excessive reliance of investment fund managers on outsourced recordkeeping and valuation services (p. 79);
    4. inappropriate expense recovery by investment fund managers for expenses that should be absorbed by managers;
    5. unfair allocation of investment opportunities.

accredited investor Compliance experience conflict of interest due diligence expense recovery investment objective outsourced recordkeeping outsourced valuation service overstatement participation fee portfolio cost portfolio performance private placee registration issues risk sophisticated purchaser unfair allocation



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