OSC review flags personal corporation concerns

The long-standing issue of industry reps using personal corporations isn’t limited to the world of investment dealers and fund dealers. A new report from the Ontario Securities Commission’s (OSC) compliance division highlights the problem among firms that are directly regulated, such as portfolio managers and exempt market dealers (EMDs).

The OSC’s new Registration, Inspections and Examinations Division published its annual report for the latest fiscal year (to March 31), which outlines its work across an array of industry segments — including the regulators’ recent review of sales practices at the bank-owned fund dealers.

Among other things, the report also details the division’s findings during inspections of the firms that are directly supervised by the provincial regulator, detailing an array of compliance deficiencies, such as poor handling of conflicts of interests, non-compliant referral arrangements, misusing exemptions and failing to comply with the disclosure requirements set out in the Client Relationship Model (CRM2) reforms.

The report also flags the regulators’ concerns with compensation arrangements that involve unregistered corporations and individuals receiving compensation for activities that require registration.

“During compliance examinations and reviews of registration filings, we have identified situations where compensation for registerable trading or advising activity was paid to (or proposed to be paid to) an unregistered entity,” the report said.

For instance, it found portfolio managers flowing compensation to their advising reps through unregistered corporations in exchange for portfolio management services.

“In some cases, the unregistered entity was the representative’s personal holding company, and in others it was an active company providing services such as financial planning,” the report noted.

These kinds of arrangements “do not comply with registration requirements,” the report said.

Additionally, the regulator said it found instances of unregistered people receiving compensation for activities that require registration — such as providing client relationship management services for managed account clients.

“Engaging in registerable activity without registration will warrant investigation and potentially significant regulatory action,” the report warned.

Additionally, the report detailed instances of firms failing to properly identify, deal with and disclose material conflicts of interest.

“If the registrant is unable to address the material conflicts of interest identified in the best interest of clients using controls, those conflicts must be avoided,” it noted.

Paid referral arrangements are almost always a material conflict, it said, yet the regulator continued to find firms that don’t have adequate controls to deal with these conflicts.

Additionally, the regulator reported that some firms are still falling short of the disclosure required by the CRM2 reforms, which have now been in effect for more than 10 years.

Among other things, the regulator found compliance failings with account statements and the annual cost reporting that investors are supposed to receive — including “insufficient disclosure” to clients with multiple accounts (such as TFSA and RRSP accounts), inadequate disclosure involving benchmarks and reports that were missing required information.