By Prema K.R. Thiele, Laurie J. Cook, Ronald M. Kosonic and Julie Mansi
The Compliance team of the Ontario Securities Commission (the OSC) recently published its deficiency report, OSC Staff Notice 11-758, on the results of its year-long compliance review of limited market dealers (LMDs). This initiative is the second step in the OSC’s overall plan to enhance its oversight of LMDs, following on the heels of the LMD survey it conducted in 2005. OSC staff will be using the results of their reviews to inform the regulatory policies being developed as part of the CSA Registration Reform Project, where a national approach to LMDs is being considered.
The OSC conducted on-site reviews of 21 firms that are registered as LMDs – almost half were sole LMDs, almost as many were also investment counsel/portfolio managers and the remainder were also registered in other categories. Despite this variety, and the different business models employed by the firms, many of the deficiencies noted in staff’s report cut across the sample.
Not surprisingly, the number one deficiency, identified in almost 80 percent of the LMDs reviewed, was not collecting and documenting know-your-client (KYC) and suitability information. OSC staff emphasize the importance of KYC and suitability procedures, even where investors have signed a certificate identifying themselves as accredited investors. In OSC staff’s view: the fact that a client is an accredited investor does not mean that any investment product is suitable for him or her.
Other common deficiencies identified:
No or inadequate filing of regulatory forms and/or statement of policies
Misleading marketing materials/websites
Ineffective compliance officers
Inadequate disclosure and/or misleading statements in offering memoranda
Lack of written policies and procedures manual
Inadequate books and records
No written agreements with salespersons or third parties
No written referral agreements and inadequate disclosure to clients.
In most cases, the LMDs were able to resolve the outstanding deficiencies to the satisfaction of the Compliance team. In some cases, terms and conditions were added to the firm’s registration and some firms continue to be monitored by the OSC. Some of the more serious deficiencies were referred to the OSC’s Enforcement branch.
The OSC Staff Notice offers statutory and regulatory references identifying the source of the duties owed by limited market dealers. The Notice also suggests certain practices to discharge those duties.
The authors of this Registrant Regulation and Compliance Alert participated in the focus groups held by the OSC in its examination of LMDs and are leading experts in the issues relating to this registration category. BLG is the sponsor of, and the lawyers noted below will be key participants in the upcoming Limited Market Dealers’ Compliance Readiness Strategies conference organized by the Strategy Institute being held in July 2006. For more information about this important conference, please contact any one of the authors of this Alert.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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