compliance basics part 2: the firm (cont’d) · code of ethics (cont’d) in addition to the more...

Compliance Basics – Part 2: The Firm (cont’d)

Julie Blais Senior Director, ICPM Compliance, CIBC Wealth Management September 11, 2012

Presented by:

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Compliance basics – Part 2: The Firm

NI 31-103, s.11.1

A registered firm must establish, maintain and apply policies and procedures that establish a system of controls and supervision sufficient to

(a) provide reasonable assurance that the firm and each individual acting on its behalf complies with securities legislation, and

(b) manage the risks associated with its business in accordance with prudent business practices.

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Basic Compliance Framework

Securities laws and legislation

Compliance

Policy

Operational

Procedures

Controls

Monitoring/

Testing

Weaknesses/

Gaps Assessment

Correction/

Optimization

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CCO’s Report to the Board of Directors

The CCO must submit an annual report to the Board of Directors assessing compliance by the firm, and individuals acting on its behalf, with securities legislation :

– Background and Certificate

– Key Indicators

– Control Deficiencies

– Risks

– Examinations and Reviews

– Regulatory Investigations and Enforcement Actions

– Compliance Monitoring and Internal Investigations

– Regulatory Policy Developments

– Customer Complaints, Complaint Trends and Settlements

– Other Noteworthy Items

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Trading Practices

Firms must ensure that the implementation of investment decisions in clients’ portfolios is carried out fairly, in the best interest of clients and in accordance with applicable legislation and best practices.

As trading is a core component of a Portfolio Manager’s business, it is imperative that firms put in place the policies and procedures necessary to adequately ensure compliance.

Since the trading practices can be diverse and complex, an efficient Trading Practices Policy may comprise several underlying policies that set out the requirements in order to better reflect that reality.

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Trading Practices (cont’d)

For example, the content of a firm’s Trading Practices Policy may include underlying policies with regards to:

–Order Creation

–Order Handling, Order Bunching

–Trading Records

–Trade Allocation

–Cross Trading

–Trade Error and Settlement Discrepancy

–Short Sales Declaration

–Private Placement

–Manipulative and Prohibitive Trading Practices

–Etc.

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Code of Ethics (cont’d)

A Code of Ethics usually represents the minimal standards of conduct for employees of the firm (individuals within the firm may also be licensed by professional bodies requiring they abide to additional standards of conduct).

A Code of Ethics is also a useful tool that helps define the role of employees as well as managers in upholding the vision and values of the firm.

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Code of Ethics (cont’d)

In addition to the more general objectives of integrity, honesty, respect and compliance with securities laws and regulations in the conduct of business, Code of Ethics may include specific provisions with regards to:

– Use and safeguard of information

– Safety in the workplace

– Conflicts of interest

– Outside activities

– Protection of the Firm’s reputation

– Environmental issues

– etc.

Firms may consider implementing an annual training and/or attestation to familiarity with and adherence to the principles of the Code of Ethics.

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Personal Trading

Though the Code of Ethics sets out the principles and standards for ethical and professional behaviour, individuals within the firm still may have access to information about trading and holdings in client accounts which present an actual or perceived conflict of interest.

To address potential conflicts, firms may consider adopting policies with regards to personal trading.

Such policies set out the duties and obligations of all covered persons with respect to trading in their personal accounts.

The purpose is always to provide for the fair treatment of clients through the highest standard of integrity and ethical business conduct.

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Personal Trading (cont’d)

For example, the content of a firm’s Personal Trading Policy may include provisions with regards to:

– Identification of individuals covered

– Prohibited trading activities

– Trading in securities of related/connected issuers

– Material non-public information

– Approvals required for personal trades

– Short-term trading and minimum holding periods

– Reporting requirements

Questions

Supplementary Materials

Example of a Portfolio Manager’s Compliance Manual

Table of Contents

1. Introduction

1.2 Definitions of terms used in the Compliance Manual

1.3 Code of Ethics

1.4 Escalation Procedures

2. Personal Trading Policy

3. Registration

3.1 Ultimate Designated Person (“UDP”)

3.2 Chief Compliance Officer (“CCO”)

3.3 Advising Representative (“AR”) and Associate Advising Representative (“AAR”)

3.4 Corporate Registration

3.5 Provincial Securities Registration

3.6 Information about Registrant

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4. Supervision of Associate Advising Representatives

5. Account Opening

5.1 Know Your Client

5.2 Discretionary and Non Discretionary Mandate

5.3 Relationship Disclosure Information

5.4 Additional Documents, Disclosure and Information

5.5 Referrals

5.6 Verification of Identity

5.7 Account Maintenance

5.8 Non-Resident Requirements

5.9 In-Kind Transfers

6. Anti-Money Laundering & Anti-Terrorist Financing

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7. Portfolio Management

7.1 Mutual Funds

7.2 Conflicts of Interest

7.3 Functions of the Independent Review Committee in Conflict-of-Interest Matters

7.4 Mutual Fund Conflicts of Interest

7.5 Insider Positions

7.6 Pooled Funds

7.7 Discretionary Mandates

7.8 Related and Connected Issuers

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8. Trading Practices and Records Policy

8.1 Order Creation and Competitive Basket Trading Policy

8.2 Order Handling, Order Bunching and Trading Records Policy

8.3 Trade Allocation Policy

8.4 Principal Trades Policy

8.5 Cross-Trading Policy

8.6 Trade Error and Settlement Discrepancy Policy

8.7 Short Sale Declaration Policy

8.8 Trade Matching Policy

8.9 Private Placement Policy

8.10 Manipulative & Prohibitive Trading Practices Policy

9. Derivatives

9.1 Public Mutual Funds

9.2 Pooled Funds

9.3 Segregated Accounts

9.4 Registration and Supervision

9.5 Required Records

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10. Broker and Counterparty Selection and Best Execution

10.1 Best Execution

10.2 Broker/Counterparty Selection

10.3 Master Brokerage Allocation Budget (“MBAB”)

10.4 Soft Dollar Arrangements

10.5 Client Directed Brokerage Arrangements

10.6 Commission Recapture Programs

11. Portfolio Valuation

12. Performance Measurement

13. Marketing Materials, Investment Communications and Web site

13.1 Marketing Material, Advertisements and Service Level Investment Communication

13.2 Web Site

13.3 Performance

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14. Proxy Voting Policy

15. Securities Disaggregation and Alternative Monthly Reporting System

15.1 Securities Disaggregation

15.2 Conditions for Disaggregation

15.3 Effect on Directors and Senior Officers

15.4 Control Block Distributions

15.5 Conditions for Alternative Monthly Reporting System

16. Complaints

16.1 Handling of Complaints

16.2 Dispute Resolution Service and/or Mediation Service

16.3 Complaints Threatening Legal Action and/or Legal Action Notification

16.4 Release

16.5 Complaint Log

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17. Account Closing

18. Record Management

19. US Regulatory Filings

20. Business Continuity Management Policy

21. Regulatory Filings

22. Sub-Advisers Oversight

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2012 PMAC First Annual Compliance Forum:

Compliance Basics

Kevin Cohen

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Guiding Principals

The Companion Policy to National Instrument 31-103 explains that registered firms are required to “establish, maintain and apply policies and procedures that establish a system of controls and supervision (a compliance system) that:

• Provides assurance that the firm and individuals acting on its behalf comply with securities legislation; and

• Manages the risks associated with the firm’s business in accordance with prudent business practices.”

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Guiding Principals (Continued)

“The firm should have detailed written polices and procedures that: • identify the internal controls the firm will use to ensure compliance

with legislation and manage risk • set out the firm’s standards of conduct for compliance with

securities and other applicable legislation and the systems for monitoring and enforcing compliance with those standards

• clearly outline who is expected to do what, when and how • are readily accessible by everyone who is expected to know and

follow them • are updated when regulatory requirements and the firm’s business

practices change, and • take into consideration the firm’s obligation under securities

legislation to deal fairly, honestly and in good faith with its clients”

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Portfolio Manager Polices and Procedures

Previously discussed today:

• Marketing to prospective clients

• New Clients - KYC, Suitability, Books & Records, AML

• Ongoing Clients – Reporting, Fees, Updating KYC and Suitability

• Departed Clients - Termination, mobility and deceased clients

• Trading practices

• Code of Ethics (e.g. Conflicts of Interest and Personal Trading)

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Portfolio Manager Policies and Procedures (Continued)

• Fiduciary Obligations of a Portfolio

Manager

• Conflicts of Interest

–How will the adviser avoid, control and

disclose conflicts of interest?

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The Role of the Board of Directors • What will the Board of Director’s role be in

compliance?

The Role of the Chief Compliance Officer and Ultimate Designated Person • Sections 5.1 and 5.2 of NI 31-103 and Sections

5.1 and 5.2 of 31-103CP • What will the CCO and UDP’s roles be in

compliance?

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Advertising and Marketing CSA Staff Notice 31-325 – Marketing Practices of Portfolio Managers summarizes the CSA’s findings from their review of the marketing practices of registered portfolio managers. • Approximately 33% of the portfolio managers reviewed had

deficiencies relating to at least one of the following areas: – no or inadequate written policies and procedures governing the

preparation, use and approval of marketing activities – lack of review of marketing materials by compliance or

independent personnel – no or inadequate books and records to properly record

marketing activities conducted

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Complaint Handling • Sections 13.15 and 13.16 of NI 31-103 and sections 13.15 and 13.16

of 31-103CP • Who is responsible for handling complaints? • Even if your relationship managers maintain direct and ongoing

contact with substantially all of your clients, you must have policies in place to ensure all complaints received by clients are appropriately escalated to your CCO.

Privacy Obligations • What are the firm’s obligations under the Personal Information

Protection and Electronic Documents Act (“PIPEDA”)? • How is the firm meeting these obligations?

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Custody of Client Assets

• Sections 14.6 -14.9 of NI 31-103 and section 14.6 of 31-103CP

• Does the firm have custody of client assets?

• If not, who has custody of client assets?

Portfolio Management

• What are the firm’s policies on issues such as security selection and idle cash?

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Service Provider Oversight • Part 11 of 31-103CP states that a registrant:

– Is responsible and accountable for all functions that it outsources to service providers;

– needs to establish procedures for monitoring its service providers to ensure they are fulfilling their duties and responsibilities and complying with securities legislation;

– will formalize how it will conduct oversight as part of its agreement with the service provider.

• Be sure to regularly review your service provider

agreements to ensure that they accurately reflect the services provided as often relationships evolve over time.

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Relationship Disclosure • Sections 14.2 to 14.5 of NI 31-103 and sections 14.2 and 14.4 of 31-103CP • How is the firm meeting its relationship disclosure obligations? Account Activity Reporting • How is the firm meeting its account activity reporting obligations? • Sections 14.14(4) and (5) of 31-103CP require that you deliver statements to

clients which must contain certain information of each transaction conducted since the date of the last statement, such as the price and number of securities purchased or sold.

• Additionally the following must be included about the client’s account: – The name and quantity of each security in the account – The market value of each security in the account – The total market value of each security position in the account – Any cash balance in the account – The total market value of all cash and securities in the account

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Legal and Reporting Requirements • What are the firm’s policies and procedures on the following legal and

reporting requirements? – Keeping firm and individual registration information up to date. – Maintaining firm registration. – Financial reporting to the OSC (sections 12.10 - 12.14 of NI 31-103 and

sections 12.10 and 12.14 of 31-103CP) – Insurance and capital requirements (sections 12.1 – 12.7 of NI 31-103 and

sections 12.1, 12.2, 12.4 and 12.6 of 31-103CP) – Certain business transactions (sections 11.7 – 11.10 of NI 31-103 and sections

11.8 – 11.10 of 31-103CP) – Loans and margin (sections 13.12 – 13.13 of NI 31-103 and section 13.12 of

31-103CP)

• Early warning reporting, insider reporting and take-over bids (NI 55-104 Insider Reporting Requirements and Exemptions, NI 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues, NI 62-104 Take-Over Bids and Issuer Bid).

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Proxy Voting • What are the firm’s proxy voting policies? • Disclosure in investment management agreement.

Business Continuity Plan • In the event of a significant business disruption, could the

firm’s business operations be maintained at a level that will ensure adherence to all regulatory requirements?

External Communication • How will the firm respond to regulatory inquiries? The

media?

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Referral Arrangements • How will the firm manage its referral arrangements? • Section 13.8 of NI 31-103 prevents you from participating in a referral

arrangement with another party unless you have set out the terms of the referral arrangement in a written agreement and provided disclosure of the agreement to the client.

• Section 13.10 of NI 31-103 sets out the items which must be included in the disclosure statement to the client: – The name of each party to the referral agreement; – The purpose and material terms of the referral agreement; – Any conflicts of interest resulting from the referral agreement; – The method of the referral fee’s calculation and, to the extent possible, the amount of the fee; – Each parties category of registration, as applicable and a description of the activities permitted

by that category; and – A statement that all activity requiring registration resulting from the referral agreement will be

provided by the registrant receiving the referral.

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Compliance Report to the Board of Directors

• Paragraph 5.2(d) of NI 31-103 states that the CCO of a registered firm must submit an annual report to the firm’s board of directors for the purpose of assessing compliance by the firm, and individuals acting on its behalf, with securities legislation.

(see handout included with these materials. For a Word version of a sample Compliance Report, contact Adam Braun: [email protected])

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Compliance Report to the Board of Directors (Continued)

• At a minimum, the report should outline: – The CCO’s assessment of the firm and registered individual’s

compliance; – How the assessment was performed; – Results of the assessment; and – Actions taken or to be taken to address any instances of non-

compliance.

• If the CCO is the sole director or the CCO is part of a small

firm with limited business lines and no significant instances of non-compliance, the CCO may consider making a verbal report and documenting the information provided in the minutes of the board meeting.

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Compliance Report to the Board of Directors (Continued)

• A more robust report to the board of directors is recommended as it will also keep the directors appraised of internal and external changes in compliance over the past year.

• External changes may include: – New or amended regulations; – Focused reviews by regulators; and – Policy developments.

• Internal changes may include:

– New employees; – New procedures; and – Changes to the compliance manual.

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Questions?

• Contact Information for our team: – Kevin Cohen: [email protected] – Helen Martin: [email protected] – Stacey Long: [email protected] – Meaghan Einav: [email protected] – Andrea Maggisano: [email protected] – Adam Braun: [email protected] – Richard Roskies: [email protected] – Jess Dichter: [email protected]

Disclaimer Materials have been abridged from legislation and administrative rulings and should not be considered as legal opinions on specific facts or as a substitute for legal counsel. This presentation is provided by AUM Law Professional Corporation as general information only.

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