As you may know, many of the provincial regulators including staff at the Ontario Securities Commission (OSC), are currently conducting a wide sweep of registrant firms. This sweep is meant to review how the industry has adapted to and applied the conflict of interest requirements brought in by the 2021 client focused reforms.
The provincial regulators have indicated that they are looking to complete the review phase of these sweeps by the end of the summer, with a view to providing further guidance sometime later this year or early in 2023. This means that if you have not yet been selected for the sweep, it appears unlikely that you will be selected in this round of reviews. For those registrant firms who have not yet been subject to review, we thought it would be helpful to provide some of our observations on what regulators have been looking at during these sweeps.
- A Conflicts Inventory is Key: Regulators are drilling down on a registrant firm’s methodology in considering and determining materiality and mitigating or avoiding conflicts. This methodology is expected to be documented, and a detailed inventory of all conflicts considered has been a good tool to satisfy regulatory inquiries. If you haven’t created an internal conflicts inventory (separate and apart from your relationship disclosure information), this is an item that you should work towards having in the near future.
- Training and Policy Accuracy: Regulators appear to be taking a very detailed look at a registrant’s stated conflicts of interest policies to ensure that they address the revised conflict of interest obligations and that the stated policies are reflective of actual practice. Staff also appear to be testing that employees have received training on the new conflicts requirements.
- Relationship Disclosure Accuracy: By June 2021, registrant firms were required to provide each of their clients with conflict of interest disclosure, detailing how the firm mitigates all material conflicts. Similar to the above note on policy accuracy, regulators are taking a close look at this disclosure to ensure that the stated disclosure is reflective of actual practice.
- Proprietary Funds: Where a registrant firm has a proprietary fund, it appears that regulators are approaching this conflict review differently depending on the firm’s business model. Where the registrant firm only sells proprietary products, regulators appear to be expecting clear disclosure about the firm’s business model (e.g. that the shop only sells proprietary products). However, where a registrant firm sells both proprietary products as well as third party products, regulators are expecting that firms have done a comparative analysis of competitor products to their proprietary products.
- Compensation and Incentives: Regulators expect registered firms to have carefully considered their compensation arrangements and incentive practices, both at the firm-level and in respect to their staff, to determine whether they may present any material conflicts of interest and, if so, how such conflicts have been addressed. For example, the regulators are interested in whether firms employed bonuses, tiered compensation, sales contests, sales targets or revenue quotas, and/or whether the firm or its individuals may receive incentives such as embedded commissions, shelf fees, due diligence fees, shares, options, warrants, performance fees, production bonuses, gifts or other monetary or non-monetary benefits.
Disclaimer Time! The summary above is just some observations we have seen while assisting clients with this regulatory sweep. While addressing the above would be a very good idea (where you believe you might have existing deficiencies), we will have to wait for either the written general guidance or formal deficiency letters to know what regulators will officially expect. This summary is meant to provide early indicators of regulatory expectations so that holes can be plugged as soon as possible. If you have any questions, please contact your usual lawyer at AUM Law.
June 30, 2022