According to a recent Investment Executive article, the OSC is “preparing to launch its largest ever suitability sweep, and will begin contacting clients directly to verify know your client (KYC) information as a routine part of its review process, representatives from the OSC said on Wednesday”.
This appears to be in response to certain omissions and errors at Trapeze (see below)where it appears clients were inaccurately placed in higher risk investments.
Between September 30, 2006 and August 31, 2010 (the “Relevant Time”), the Respondents inaccurately assessed the risk associated with many of the investments purchased on behalf of clients in managed accounts. The Respondents did not give adequate consideration to certain risks (as described in paragraph 24 below), resulting in purchased securities being assessed as medium risk, with the exception of authorized short-selling which was considered high risk. The Respondents acknowledge that adequate consideration of the risks described in this Settlement agreement would have resulted in higher than medium risk ratings being assigned to securities and client portfolios during the Relevant Time.
During the Relevant Time, Trapeze accounts were managed by the Respondents on a discretionary basis and were invested predominantly in securities of the same issuers in varying proportions depending on the investment mandate selected by clients (as described in paragraph 22 below).
As a result of the Respondents’ misclassifications of risk of securities and their investments on behalf of virtually all clients in securities of the same issuers (as described below), the Respondents failed to ensure that investments made during the Relevant Time were suitable for all of their clients, the vast majority of whom had a medium risk tolerance. Further, in some cases, the Respondents failed to adequately ascertain clients’ investment needs, experience, investment objectives and risk tolerance, prior to investing their assets.
But it transpires that the problems did not start with and certainly do not stop at Trapeze!
From the IE article: “Mary Condon, vice chairwoman of the OSC, said the regulator commonly observes suitability and KYC-related deficiencies in its compliance reviews. “Some of the onsite field reviews that we’ve done have found KYC information that is either not accurate, incomplete or not up to date,” Condon said. “In some cases, we’ve even found a failure to collect KYC information at all.”
Now, before you all get too carried away, what is the point of all this?
The section of the retail financial services market the OSC is responsible for, is the investment counsellor and portfolio manager section that falls outside the scope of IIROC and other SROs: these are the so called professionals. If these are truly professionals, why on earth do so many, it would appear, rely on basic KYC forms that are no better than “back of the envelope scraps of paper” to record important client information and communication? Or in truth, why is the OSC relying on “restaurant receipt” quality communication?
Please: implement higher standards in this section of the market, and make it mandatory that a more comprehensive IPS statement is provided to clients in receipt of investment management services. I know a great many firms in this area already do this.
So which is the worse omission?
Is it allowing firms a certain freedom in interpreting the KYC, or, is it allowing firms to provide investment management services under waif like regulatory standards and monitoring? There will be no prizes for guessing who I think should be receiving a visit from a consultant to review their suitability assessment practises.
Message to the OSC:
You should know that constructing an appropriate portfolio of investments is more involved than banging in three hooks to the back of the door!