The British Columbia Securities Commission (BCSC) has uncovered more deficiencies among portfolio managers, investment fund managers, and exempt market dealers, it said in its 2018 Annual Compliance Report Card.
For the 2018 annual period, which ended on March 31, the BCSC conducted 23 compliance reviews and found 151 deficiencies. That equates to an average of 6.57 deficiencies per review, compared to 6.58 per review in 2017, 4.29 in 2016, and 4.64 in 2015.
According to the regulator, it uses a predictive risk model in selecting firms to review. Adopted in 2013, the formula identifies the firms with the highest risk for compliance problems by taking data from previous compliance reviews as well as answers to a risk questionnaire submitted every two years. The likelihood of compliance problems is one of several criteria that the BCSC uses to decide where it should focus its energies.
“We are getting better each year in picking our spots," said BCSC Director of Capital Markets Regulation Mark Wang. “Our predictive risk model gives us a good starting point. Then we use real-time knowledge of firms to fine-tune our examination decisions.”
The highest number of deficiencies fell under the category of inadequate policies and procedures, making up 12% of all observed compliance shortfalls. The regulator said some firms had failed to consider and create policies to manage risks associated with their businesses. Other issues included policies and procedures manuals “that were so brief as to be meaningless,” PPMs that cited repealed securities legislation, and inadequate cybersecurity policies.
Weaknesses in disclosures, particularly in connection with relationship disclosure information (RDI) requirements, made up 9% of deficiencies. The BCSC also found know-your-client (KYC) and suitability failures, including mortgage investment corporations (MICs) that did not understand their client-facing obligations as an exempt-market dealer (EMD), firms with outdated or incomplete KYC forms, and poor client records.
Other major deficiency types reported were:
- Compliance officer function/UDP function (7%);
- Client statements and reporting (7%);
- Administrative filings (6%);
- Advertising, marketing, and holding out (6%); and
- Conflict of interest and personal trading (4%)
The compliance exams resulted in the BCSC imposing extra restrictions on two firms, one of which decided to surrender its registration. Two other firms elected to give up their registrations during their respective examinations. The BCSC is also increasingly referring the most egregious non-compliance cases to its enforcement team for further investigation and possible penalties.
“When we find lapses that are systemic or particularly harmful to investors, we won't hesitate to use our powers of enforcement,” said BCSC Executive Director Peter Brady. “When warranted, we want to make such lapses a matter of public record, to deter such behaviour by other firms.”
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