What does the OSC´s Compliance team do?

What are the benefits of an effective compliance function?

Do market participants need to comply with industry best practices?

How are market participants selected for compliance reviews?

What can I expect when the OSC does a compliance field review at my firm?

What are the responsibilities of the compliance officer at an adviser?

What does the OSC examine in a review of trading and brokerage at an adviser?

What does the OSC examine in a review of portfolio management at an adviser?

What are some of the other areas that are examined during a compliance review of an adviser?

What are the responsibilities of the compliance officer at a fund manager?

What does the OSC examine in a review of fund accounting at a fund manager?

What does the OSC examine for review of the the transfer agency function at a fund manager?

What does the OSC examine when it reviews trust accounting at a fund manager?

What does the OSC´s Compliance team do?

The OSC´s Compliance team conducts field reviews of market participants that are not members of a recognised self-regulatory organization to detect non-compliance with Ontario securities law. The team´s primary focus in recent years was advisers and fund managers, however the team also conducts field reviews of other market participants (such as scholarship plan dealers and limited market dealers) and focused reviews of problematic registrants. The Compliance team also participates in national compliance reviews of market participants or issues with other members of the Canadian Securities Administrators (CSA). The main purpose of these reviews is to get a national perspective on a market participant or issue of concern, and to promote information sharing and cross training among jurisdictions.

To provide guidance to market participants, Compliance staff participates in speaking engagements, organizes ICPM roundtable meetings, and publishes material. The team is also involved in policy formulation for compliance-related activities.

What are the benefits of an effective compliance function?

An effective compliance function assists market participants in meeting their duties and obligations under Ontario securities law. Compliance also protects and preserves the reputation of the market participant, and of the securities industry as a whole. This contributes to greater investor confidence and participation in the capital markets, which in turn may result in more business. Creating an environment of effective compliance and good ethics can help protect investment firms from losses caused by unethical behaviour of employees.

Do market participants need to comply with industry best practices?

Under Ontario securities law, an adviser is required to develop and enforce written policies and procedures for dealing with clients that conform with prudent business practice. A fund manager is required to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances. Market participants are encouraged to meet or exceed industry best practices to assist them in complying with Ontario securities law. Market participants must consider their scope of operations, size, risks and compensating controls when developing their compliance policies and procedures. The Compliance team's recommendations of best practices for advisers and fund managers are published annually in the compliance Annual Report.

How are market participants selected for compliance reviews?

Market participants are selected for review based on the Compliance team´s assessment of their relative risk. For some categories of market participants, we have developed risk assessment tools. For others, our risk assessment tools are less developed.

In 2002, the Compliance team developed a risk based model for the selection of advisers and fund managers that has continually developed. The objective of the model is to ensure that compliance field reviews are focused on high risk market participants and their high risk business activities, resulting in more effective and efficient reviews.

The risk model begins with an analysis of major risk factors affecting the business operations of both advisers and fund managers based on their responses to the Risk Assessment Questionnaire. In determining the risk score of a market participant, the model takes into account both the risk factors affecting a market participant's business operations and its ability to identify and mitigate these risks by establishing appropriate internal control procedures.

Advisers and fund managers are risk ranked according to four defined categories: high, medium-high, medium-low, and low. This assessment determines the frequency and extent of compliance field reviews. For example, an adviser or fund manager that receives a low risk ranking may be subject to less frequent field reviews than a market participant with a high risk ranking.

An adviser or fund manager may also be selected if complaints have been received by the OSC or if a referral has been made from another branch at the OSC, or another regulator. We also select market participants for review on a purely random basis.

What can I expect when the OSC does a compliance field review at my firm?

The Compliance team at the OSC currently performs on-site compliance reviews primarily of advisers, fund managers, and Limited market dealers. The reviews are carried out by two or more compliance staff and usually last from two to four weeks, depending on the size and scope of the market participant´s operations.

The team reviews all the major functional areas of a market participant's business. The major functional areas of an adviser that are reviewed include: portfolio management, trading and brokerage, financial condition, contracts, conflicts of interest, custody of assets, administrative functions and marketing. The major functional areas of a fund manager that are reviewed include: the transfer agency function, trust accounting, fund accounting and marketing.

During a review of a market participant, the Compliance team:

• interview senior management and other key personnel
  
• examine books and records for the business and financial transactions
  
• select samples of trades and clients to perform specific testing
  
• assess internal controls for items such as segregation of duties, safekeeping of client assets and the execution of trades
  
• review written policies and procedures, and disclosure to clients
  

At the completion of a compliance field review, an exit interview is held with senior management to discuss preliminary findings. A report is issued listing the deficiencies that indicate non-compliance with Ontario securities law and our observations of internal control weaknesses. A written response to all deficiencies identified in the report is required from the market participant within 30 days of the report date.

What are the responsibilities of the compliance officer at an adviser?

An adviser is required to designate a proficient compliance officer who is responsible for discharging the duties and obligations of the adviser under Ontario securities law. The compliance officer is responsible for the opening of each new account, supervising trades made for or with each client and supervising advice provided to each client. An adviser´s organizational structure should allow for the adequate supervision of portfolio managers, traders and other employees. To ensure effectiveness, the number of compliance staff must be sufficient for the size of the firm. They must also have the right knowledge and experience, be independent and have adequate authority to effectively perform their duties.

What does the OSC examine in a review of trading and brokerage at an adviser?

The Compliance team ensures that:

• written policies and procedures are in place regarding trading and brokerage
  
• investment opportunities are fairly allocated among clients
  
• the disclosure in the fairness policy required by subsection 115(1) of the Regulation is adequate, and is being adhered to
  
• clients are receiving best price and best execution for their trades
  
• client trades are executed in a timely manner
  
• procedures exist to identify and resolve failed trades and trading errors on a timely basis
  
• there is adequate supervision of the trading function to ensure trades are executed in accordance with the portfolio managers´ instructions
  
• personal trading policies are in place and are being monitored by the compliance officer
  
• trade orders and trade blotters are being maintained
  
• soft dollar arrangements with dealers are to the benefit of the adviser´s clients and cover order execution or investment decision-making services only
  
• cross trades are executed through a dealer and that the pricing methodology and costs are reasonable
  
  

What does the OSC examine in a review of portfolio management at an adviser?

The Compliance team ensures that:

• written policies and procedures are in place to govern portfolio management activities
  
• sufficient and appropriate know-your-client and suitability information for clients is collected, documented and updated on a regular basis
  
• procedures exist to ensure that investments and trades are suitable for clients
  
• client investment instructions and restrictions are adhered to
  
• a code of conduct exists and addresses potential conflicts of interest
  
• portfolio managers and sub-advisers are adequately monitored
  
• procedures exist to ensure compliance with securities legislation such as Part 2 of National Instrument 81-102 for mutual funds
  
  

What are some of the other areas that are examined during a compliance review of an adviser?

The Compliance team ensures that:

• monthly financial statements and capital calculations are prepared and reviewed on a timely basis
  
• the Statement of Policies and Related Registrant disclosure is adequate and provided to clients
  
• reconciliations of client security positions and trust accounts are being performed on a timely basis
  
• marketing materials are not misleading
  
• performance data and performance composites are adequate
  
• the compliance function is effective
  
• the client complaint handling process is effective
  
• the preparation of client statements of portfolio is adequate
  
  

What are the responsibilities of the compliance officer at a fund manager?

Although not strictly mandated by law, we recommend fund managers designate a compliance officer or a person who is responsible for discharging the duties and obligations of the firm and the mutual funds it manages under Ontario securities law. A fund manager´s organizational structure should allow for the adequate supervision of all employees and service providers for the mutual funds. The compliance officer must have the right knowledge and experience, be independent and have adequate authority to effectively carry out compliance duties.

What does the OSC examine in a review of fund accounting at a fund manager?

The Compliance team ensures that:

• written policies and procedures are in place to govern the fund accounting function
  
• the fund accounting function, if outsourced, is adequately being monitored
  
• securities are properly valued
  
• adequate procedures are in place for securities valuation
  
• the process for handling corporate actions is adequate
  
• net asset value (NAV) calculations are properly calculated and reviewed
  
• there is an effective procedure for the correction of NAV errors and NAV differentials
  
• security positions are being reconciled to custodial records
  
  

What does the OSC examine for review of the the transfer agency function at a fund manager?

The Compliance team ensures that:

• written policies and procedures are in place for the transfer agency function
  
• the transfer agency function, if out-sourced, is adequately being monitored
  
• trades are processed in accordance with the requirements of Parts 9 and 10 of NI 81-102
  
• non-financial changes are properly handled
  
• an effective unit-holder communication process is in place
  
  

What does the OSC examine when it reviews trust accounting at a fund manager?

The Compliance team ensures that:

• written policies and procedures are in place to govern the trust accounting function
  
• the trust accounting function, if out-sourced, is adequately being monitored
  
• trust accounts are properly reconciled
  
• trust accounts are operated in accordance with requirements of Part 11 of NI 81-102