Report highlights concerns over referral agreements, compensation practices, and gifts
The most recent Annual Compliance Report Card of portfolio managers, investment fund managers, and exempt market dealers, which was published by the British Columbia Securities Commission (BCSC), highlights the year's focus on conflicts of interest (COI).
According to the Report Card, some portfolio managers, investment fund managers, and exempt market dealers in British Columbia frequently fail to recognize, evaluate, deal with, or report conflicts of interest (COIs).
These include failing to recognize frequently occurring material conflicts of interest (COIs), incorrectly classifying COIs as immaterial, providing clients with updated disclosure after June 30, 2021, providing clients with "boiler plate" COI disclosure that included conflicts that did not exist at the firm or were not relevant to clients, and failing to have policies and procedures for conflicts, such as gifting and referral arrangements.
Of the registrants examined, the areas of referral agreements, pay practices, and gifts had the most COI problems. In 2022, the Canadian Securities Administrators, of which the BCSC is a member, organized a nationwide campaign that had a focus on conflicts of interest. A considerable rise in the detection of COI-related problems was seen as a result of this concentrated evaluation.
The identification of substantial conflicts of interest (COIs) between a registered business and a client, as well as between the client and any person working on the business' behalf, must be done with due diligence. Any significant conflicts of interest (COIs) between a client and the firm, including any person operating on its behalf, must be resolved in the client's best interest. Conflict must be avoided if that can't be done or isn't practicable.
Averaging 4.85 problems per inspection, the BCSC detected 126 violations in 2022 while conducting 27 compliance reviews. Some shortcomings could be substantial enough for the BCSC to impose terms and conditions on registration, such as mandating the engagement of a compliance monitor or prohibiting the onboarding of new clients until the shortcomings have been fixed.
Serious or many flaws might also be reported to the BCSC's Enforcement Division for additional examination, resulting in accusations of wrongdoing and potential penalties. A settlement was reached with the person who was the target of enforcement action by the BCSC for engaging in registerable activity before registering.
"We expect registered firms to ensure they are living up to the requirements of Canadian securities regulators when it comes to managing and avoiding conflicts of interest," said Peter Brady, the BCSC's Executive Director. "We want to identify problems and make sure they get addressed before investors get hurt."