Latest compliance report card identifies client statements and promotional statements as most problematic areas
The British Columbia Securities Commission (BCSC) has been uncovering more and more compliance deficiencies in its reviews of investment advisor and dealer firms, the regulator reported on Tuesday.
As reported in its latest Compliance Report Card, BCSC examiners unearthed 285 deficiencies through 35 compliance reviews conducted from April 1, 2019 to December 31, 2020. In the previous period covering April 1, 2018 until March 31, 2019, examiners conducted 27 compliance reviews and found 241 deficiencies.
All in all, the regulator found 8.93 deficiencies per review in the fiscal year 2019, and 8.14 deficiencies per review for the 2020 period. It said the deficiency rate from reviews have mostly been rising since 2016, when examiners uncovered 4.29 deficiencies per review.
BCSC staff provided several possible factors explaining the increasing deficiencies-per-review rate, including the regulator’s adoption of a risk-based approach to selecting firms for review, tailoring questions and probing deeper into certain areas for each firm, and firms’ ongoing adjustment to new rules, particularly involving client account statements and reporting, that were fully instituted across Canada in 2016.
“The vast majority of registrants work hard to comply with all their obligations,” said BCSC Executive Director Peter Brady. “Our reviews seek to fix problems before investors get harmed, and to reinforce the need for firms to be responsible stewards for their customers’ investments and financial well-being.”
Over the past two years, the regulator said the most frequent type of deficiency was in client account statements and reporting, with a combined 67 reported cases during the 2019 and 2020 review periods. The offences that fall under the category include failure to provide clients with transaction information on account statements, trade confirmations, and annual reports on charges and other compensation or investment performance.
“Some firms’ client account statements included disclaimers that the client was responsible to ensure the accuracy of the information in trade confirmations and client accounts, and that the firm would not be responsible for any accounting errors,” the BCSC said in its report. “Firms bear the obligation to ensure accurate reporting to clients.”
The second-most common area of non-compliance over the past two years, meanwhile, was deficiencies in advertising, marketing, and other promotional activity. These compliance shortfalls included unsubstantiated claims that a firm or its products were the first of their kind in the market, highlighting the benefits of an investment without disclosing risks, and presenting hypothetical performance results without labelling them as such.
“As firms seek to attract or retain clients, marketing seems to have become bolder,” said BCSC Director of Capital Markets Regulation Mark Wang. “We want to make sure it’s done responsibly.”
As a result of its 2019 and 2020 compliance reviews, the BCSC imposed restrictions on the registrations of two advisor firms and four dealer firms. Several egregious cases that began as compliance reviews were also referred to enforcement actions that could lead to public allegations, hearings, and possible penalties.
With the implementation of Client Focused Reforms across Canada this year, the BCSC said, advisor firms and dealer firms must ensure material conflicts are resolved in clients’ favour, and that investment recommendations put clients’ interest first, notably with respect to cost.
“These new rules will result in a higher standard of conduct for firms and the individuals that work for them,” Wang said.