PMAC 2016Montreal Compliance Forum

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Moderator:

David D. Kilburn, National Director, CIBC Private Investment Counsel

Speakers:Sophie Jean, Director, Supervision of Intermediaries,

Autorité des marchés financiers (AMF)

Kat Szybiak, Senior Legal Counsel, Compliance and Registrant Regulation, Commission des valeurs mobilières de L’Ontario (CVMO)

Sophie Jean Directrice de l’encadrement des intermédiaires

Autorité des marchés financiers

Kat Szybiak Senior Legal Counsel

Compliance & Registrant Regulation Branch Ontario Securities Commission

June 8, 2016

Montreal Compliance ForumRegulatory Update

Disclaimer

The views expressed in this presentation are the personal views of the presenting staff and do not necessarily represent the views of the Commission or other Commission staff.

The presentation is provided for general information purposes only and does not constitute legal or accounting advice.

Information has been summarized and paraphrased for presentation purposes and the examples have been provided for illustration purposes only.

Information in this presentation reflects securities legislation and other relevant standards that are in effect as of the date of the presentation.

The contents of this presentation should not be modified without the express written permission of the presenters.

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Outline

� Common Deficiencies from the Past Year

� Compliance Reviews

� Key Policy Initiatives

• PM-IIROC Dealer Service Arrangements

• CSA Consultation Paper 33-404 (Proposals to enhance the obligations of advisers, dealers and representatives towards their clients)

• Ongoing initiatives (social media, seniors)

Common Deficiencies

from the Past Year

Policies and procedures

OSC findings:

� Ineffective policies and procedures manual

� Inadequate written policies and procedures on

• Portfolio management

• Cybersecurity

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Know-your-client (KYC) and suitability

OSC findings

� Delegating KYC and suitability obligations to referral agents or unregistered employees

� Inadequate update of clients’ KYC and suitability information

� No collection of client’s insider status

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KYC and suitability

� Not following firm’s own KYC policies and procedures

� Not documenting KYC update and suitability assessment

� Repeat failure to address KYC and suitability issues leading to compliance actions

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Compliance outcomes

� Significant, repeat, or large number of deficiencies signal a poor overall compliance system and compliance officer function

� Example of compliance actions

• Imposing registration conditions

• Suspending registration

• Enforcement actions

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Compliance Reviews

Compliance Reviews – Areas of Focus

� One-person firms

� Online advisers

� Large-impact firms (Ontario)

� New PM firms

� CRM 2

� Risk Assessment Questionnaire (Ontario)

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Desk Reviews - Ontario

� Mutual fund sponsored conferences

• 63 conferences were assessed for compliance with

parameters in s. 5.2 of NI 81-105

� Adviser discount fee serving

• Reviewing possible non-monetary benefits to

advisers when management fee rebates are issued

to investors

� Cybersecurity

• Brief survey to gather information about

registrants’ current policies and practices

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Key Policy Initiatives

PM-IIROC Dealer Service Arrangements

� CSA and IIROC staff continue to discuss

� PM must maintain own books and records of client holdings and trades

� Discussing agreement between PM and IIROC dealer, and disclosure to clients

� Exploring alternatives to requirement for both PM and IIROC dealer to separately issue client statements to shared client

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PM-IIROC Dealer Service Arrangements

(continued)

� CSA plans to issue staff notice on this issue

� Until this work is complete:

• PMs are to comply with the account statement

requirements in s. 14.14 of NI 31-103 and the new

additional statement requirements in s. 14.14.1 of

NI 31-103

• PMs may consider interim guidance in s. 4.3.3 of

OSCN 33-742 for when it may be acceptable for a

PM to not send a client statement when an IIROC

dealer does

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CSA Consultation Paper 33-404

� The CSA published its second consultation paper on April 28, 2016, following Consultation Paper 33-403 in 2012 and CSA SN 33-316 in 2013

� Key concerns, supported by research and consultation work, among which:

• Persistent problems with our current suitability regime

• Expectation gap (clients currently assume that their

registrants must always advise in the best interests of

their clients)

• Ineffectiveness of disclosure to mitigate conflicts

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CSA Consultation Paper 33-404 (continued)

� Consultation on a set of potential targeted reforms to NI 31-103 and on the adoption of an over-arching statutory best interest standard

� The potential targeted reforms outline a regime where enhanced KYC and KYP (which includes identifying whether the firm has a proprietary or mixed/non-proprietary product list) lead to improved suitability and more effective, client-centered conflicts management

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CSA Consultation Paper 33-404 (continued)

Conflicts of interest

� Will also apply to representatives (currently applies only

to firms)

� Response to conflicts required in a manner that prioritizes

the interests of the client ahead of the interests of the firm

or representative

� Disclosure given to clients about conflicts must be

meaningful such that the client fully understands the

conflict (including implications and consequences)

� Firms and representatives must have a reasonable basis

for concluding that a client fully understands the

implications of the conflict that is disclosed

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CSA Consultation Paper 33-404

KYC

Enhancements designed to ensure that the KYC process results in a thorough understanding of the client, by requiring more information on the key elements:

• investment needs and objectives: time horizon, degree of required liquidity and investment constraints

• financial circumstances: amount and nature of all assets and debts, employment and tax status and spousal and dependents’ status and needs

• risk profile: attitude, capacity and loss aversion

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CSA Consultation Paper 33-404

KYP

• Firms required to identify whether they have a proprietary (which includes only proprietary products) or mixed/non-proprietary product list (which includes both proprietary and non-proprietary products, or only non-proprietary products) – this informs various other requirements

• Requirements for mixed/non-proprietary firms include selecting products following a fair and unbiased market investigation of a reasonable universe of products, a product comparison and an optimization process – in order to achieve a shelf that is most likely to meet the investment needs and objectives of its clients

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CSA Consultation Paper 33-404

Suitability

• Three components: basic financial / investment strategy / product

• The asset allocation strategy for the client and any other proposed investment strategy must 1) be suitable and 2) be the one that is most likely to achieve the client’s investment needs and objectives

• Suitability analysis of the portfolio of securities in the client’s account will be required upon certain triggering events

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CSA Consultation Paper 33-404 (continued)

� Consultation paper includes

• a discussion on the potential adoption of a best

interest standard

• a description of potential guidance

• a series of alternative proposals on of the use of titles

and designations by representatives

� Consultation open until August 26

� AMF outreach session on June 17 and CSA roundtable in September in Toronto as well as in Montréal: we need your participation and comments

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Ongoing initiatives

� Social media

� Seniors

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Questions