BCSC compliance reviews reveal deficiencies in managing or avoiding conflicts of interest with clients
Vancouver – The British Columbia Securities Commission (BCSC)’s latest Annual Compliance Report Card of portfolio managers, investment fund managers and exempt market dealers, released today, reflects the past year’s focus on conflicts of interest (COI).
The Report Card highlights several recurring deficiencies in how some B.C.-based portfolio managers (“advisers”), investment fund managers and exempt market dealers identify, assess, address, and/or disclose COIs, including:
- Failing to recognize common material COIs, such as personal trading, outside business activities, and fair allocation of investment opportunities to clients
- Incorrectly assessing COIs as immaterial and not putting controls in place
- Failing to provide updated disclosure to their clients immediately after June 30, 2021 about the potential impact on, and risk, that the COI could pose to the client; and how the conflict of interest has been, or will be, addressed
- Providing “boiler plate” COI disclosure to clients that included conflicts that did not exist at the firm or was not meaningful to clients.
- Failing to have policies and procedures for specific conflicts, such as gifting and referral arrangements.
Of the registrants reviewed, the top COI deficiencies were in the areas of referral arrangements, compensation practices and gifting.
The focus on conflicts of interest in 2022 was part of a national effort, coordinated by the Canadian Securities Administrators, of which the BCSC is a member. This focused review resulted in a significant increase in the identification of deficiencies related to COIs.
Registered firms must take reasonable steps to identify material COIs between the firm and the client, and between each individual acting on the firm’s behalf and the client. Material COIs between a client and the firm, including each individual acting on its behalf, must be addressed in the best interest of the client. If that isn’t done or is impossible to do, then the conflict must be avoided.
“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.”
In 2022, the BCSC conducted 27 compliance reviews and found 126 deficiencies, averaging 4.85 deficiencies per review – lower than prior years, in large part due to the narrower focus in 17 of the reviews on conflicts of interest.
Some deficiencies, either in managing conflicts of interest or other areas, could be significant enough for the BCSC to impose terms and conditions on registration, such as requiring the hiring of a compliance monitor or preventing new clients from being onboarded until the failures have been corrected. Serious or numerous deficiencies could also be referred to the BCSC’s Enforcement Division for further investigation, which could lead to public allegations of misconduct and possible sanctions. The BCSC took enforcement action in 2022 against an individual for conducting registerable activity prior to becoming registered; that action led to a settlement with the individual.
The BCSC is the principal regulator for about 160 adviser and dealer firms, and takes a risk-based approach in examining firms.
About the B.C. Securities Commission (www.bcsc.bc.ca)
The B.C. Securities Commission is the independent provincial government agency responsible for regulating capital markets in British Columbia through the administration of the Securities Act. Our mission is to protect and promote the public interest by fostering:
- A securities market that is fair and warrants public confidence
- A dynamic and competitive securities industry that provides investment opportunities and access to capital.
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