2014 PMAC Compliance Benchmarking Survey Summary of Report & - - PowerPoint PPT Presentation

2014 PMAC Compliance Benchmarking Survey Summary of Report & Findings

September 16, 2014

Presentation Outline

• Introductory Remarks & Survey Background
• Discussion of Survey Topics, Findings and Regulatory Requirements
• Questions

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• Core Demographics
• Compliance Program
• KYC, KYP and Suitability
• Anti-Money Laundering (AML)
• Oversight of Third Parties
• Client Statement Account

Reporting Practices

• Books and Records
• Trading Errors
• Trade Order Management
• Trading and Client Commissions

(Soft Dollars)

• Trade Review
• Best Execution
• Pricing & Valuation
• Personal Trading
• Marketing Practices
• Social Media
• Cyber Security
• Business Continuity Plans and

Disaster Recovery

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Survey Background

Focus: Compliance policies and testing techniques in the investment management industry in

Canada

Goals:

• Allow firms to benchmark their compliance testing practices against those of other firms
• Collect ideas for new testing techniques that can be used by firms in future testing efforts
• Assess compliance trends over time within a variety of specific areas
• Provide firms with an education tool on compliance requirements
• Identify practices that appear to have become (or may become) prevalent industry

practices

• Assess the impact of current and proposed regulations

Participants:

CCOs and compliance professionals at CSA registered investment firms, with a focus on compliance practices at firms whose registration and primary mandate as of January 1st , 2014 was Portfolio Manager. 127 firms participated in 2014 survey.

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Compliance Program

• 61% of firms indicated that since January 1, 2013 internal testing or a regulatory audit has revealed

either no issues (18%) or only minor issues (43%). This is down from 73% in 2012

• 36% of firms indicated that no internal testing or regulatory audit has occurred since January 1, 2013
• Only 3% indicated some significant compliance issues were revealed

 Other Highlights

• Most CCOs (76%) are performing additional non-CCO functions; slightly down from 2012
• Almost half of the firms indicated that only one employee spends a significant portion of their time

engaged in a compliance function

• Over half of the firms rely on a third party for compliance support
• Almost all firms provide an annual CCO report to the board which represents a significant

improvement from 2012 (29% did not provide a report)

• 31% of firms limit the outside business activities of their registered individuals

 Has internal testing or a regulatory audit revealed any compliance deficiencies?

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More than 93% of firms reported having policies in the following areas:  Anti-money laundering (AML),  Personal trading,  Conflict of interest,  Code of ethics / conduct,  Business continuity plan / disaster recovery  KYC, KYP and Suitability

Compliance Program

How do you monitor your policies and procedures? 98% use Regulatory Notices 91% use Law Notices 71% use PMAC Compliance Officers’ Network 67% rely on PMAC E-bulletins 63% on PMAC Committees

 What substantive legal areas will likely require your compliance program’s attention in the next 12 months?

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Compliance Program

 FATCA (70%)  Cost Disclosure and Performance Reporting (CRM II) (52%)  Canada’s Anti-Spam Legislation (CASL) (49%)  Know-Your-Client (KYC), Know-Your-Product (KYP) & Suitability (40%)  Cybersecurity (22%)  Anti-money Laundering (20%)  Employee Compliance Training (19%) Some firms indicated the following additional areas:  Marketing  Dispute resolution  Social Media  Cross Border Clients  Derivatives Reporting

• 87% of firms surveyed conduct face to face meetings with clients and 72% rely on a

comprehensive KYC questionnaire

• 71% of firms surveyed periodically contact the client to assess if their circumstances have

changed and 65% schedule annual meetings with clients

• 59% of surveyed firms have written policies and procedures for the investment product

review process

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KYC, KYP & Suitability

Anti-Money Laundering (AML)

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• 22% of firms have not conducted a two year review as required by AML legislation
• Almost two thirds of firms have tested their client identification procedure for compliance with

AML legislation

• 17% of firms have no formal risk assessment method to analyze the firm's vulnerability to money-

laundering and terrorist financing (down from 33% in 2012)

• Only 54% of firms have revised their AML policies to reflect recent amendments to AML

legislation that came into force on February 1, 2014

• 97% of firms have not reported a suspicious or an attempted transaction related to money-

laundering in the last 12 months

Oversight of Third Parties

 Over half of firms engage third parties for IT, payroll and other support services  The majority of firms have written, legally binding contracts with each service provider that includes the expectations of the parties to the outsourcing arrangement

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 How are firms overseeing the functions that they outsource to service providers?

 Almost ¾ are in continuous communication with the service provider (73%)  Have regular meetings with the key personnel of the service provider (65%)  Have regular reporting ( e.g. weekly, monthly, quarterly ) (62%)  Only 85 indicated spot audits of services  Selection of Third Party Service Providers  Most firms gather references from others known to have used the provider (66%)

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Client Account Statement Reporting Practices

Frequency and Type of Reporting

 81% of firms provide client accounting statement reporting on a quarterly basis

Method of Reporting

 Most common method of statement delivery was by mail (56%)  18% of firms sending a password protected electronic copy of the statement  42% of firms used both paper and electronic methods  12% of firms used methods such as courier, electronic without password protection and online account access  78% of firms used time weighted rate of return reporting (TWRR) to report performance to clients  16% of firms have not yet decided whether they will continue to provide TWRR once the CRM 2 changes with respect to reporting come into effect (mandated use of money weighted rate of return reporting)

Trading Errors

• Most firms (82%) aim to resolve any trading errors in internally an appropriate and timely

manner or have policies and procedures in place to address this issue (82%)

• 81% of firms reimburse clients for losses resulting from trading errors
• Almost all firms surveyed (97%) monitor client portfolios for compliance with investment

guidelines and applicable regulations

• 41% of firms maintain automatic monitors for compliance with investment guidelines and

applicable regulations

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Trade Order Management

• Slightly more than half of firms have an automated trade order management system with

almost half of these indicating that the system has built in compliance capabilities.

• 68% of respondents indicated that they monitor clients with client investment objectives and

restrictions with a periodic review of client holdings with rebalancing.

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Trading and Client Commissions

 36% pay only execution rates and thus do not use soft dollars  13% of firms do not test soft dollar arrangements compared to 22% in 2012  Only 6% of firms use a consolidator for their soft dollar program compared to 8% in 2012  Of the firms that do use soft dollars, only 11% allocate 5-10% of their total commissions towards obtaining third party soft dollar products and services  Most firms pay 2-3 cents in Canada and the U.S. for execution-only rates while 43% pay 5 BPS or less internationally

Canada U.S. Internationally

26% 35% 29% 4%5%1% 1 cent 2 cents 3 cents 23% 29% 29% 8% 7% 3% 1 cent 2 cents 3 cents 43% 28% 8% 13% 5% 3%

5 BPS

• r less

6 to 10 BPS

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Trade Review

 Trending analysis  52% of firms do not currently undertake trade monitoring with trending analysis and do not plan to do so in the future.  37% of firms indicated that they do undertake trade allocation monitoring with trending analysis. This compares to 22% of firms in 2012.  11% plan to start conducting such reviews  The most commonly chosen trade allocation testing processes:  56% of firms review all trades, with nearly half (41%) monitoring for trade errors  22% of respondents use automated systems to conduct monitoring

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Best Execution

• The frequency of best execution committee meetings varied almost proportionately

between annually, quarterly and monthly, while 24% responded that such committee meets as needed

• 39% of firms do not test for best execution for equity trades compared to 34% for

fixed income

• The most commonly used method for testing best execution for equity trades

include having an approved brokers list and attempting to negotiate commission rates with brokers

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Pricing & Valuation

• 57% of firms rely exclusively on independent third parties for valuation (compared

to 70% in 2012)

• Only 17% of firms rely solely on internal investment professionals for valuation

 Most commonly cited testing methods:

 32% compare valuations with recent sales prices obtained in the market by others for the same or similar investments  32% compare current values to previous carrying values to identify significant

• changes. If price of an investment has moved more than a certain amount during

the period under review, examine further, such as by determining whether the price change is consistent with market actions  31% review valuations reported to clients on client statements against valuations used on our internal systems (e.g., to determine performance or calculate fees), to ensure that consistent valuations are being used  28% conduct an analysis of investments where price has not changed for a certain period of time (i.e. run a “stale price report”)

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Personal Trading

 The most common personal trading controls:

 84% require pre-clearance for personal trades  74% duplicate personal trading account statements/transactions sent to Compliance  72% require personal brokerage accounts of persons living in the same household as the firm’s employee to be subject to the Policy requirements

 The most common methods to test personal trading:

 76% compare information on employees’ confirms and account statements with employees’ pre-clearance requests  53% seek compliance certifications for adherence to policy

 The most common Blackout periods:

 1 day (30%)  5 days (39%)

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Marketing Practices

 Interesting Observations

 Only 29% of firms indicated they would not be significantly impacted by CASL  The majority of firms (86%) use internal policies and procedures for guidance in preparing their marketing material  Similar to 2012, most firms do not use hypothetical data and some only use it rarely  80% of firms indicated that performance data is reviewed by management or Compliance (up from 75% in 2012)  47% of firms are GIPS compliant (up from 38% in 2012), however, firms measure and communicate performance to clients in a variety of different ways

Social Media

 42% of firms do not currently use social media to market their services and/or products  18% of firms plan to explore option of using social media  Of the firms who use social media  the most popular website used is LinkedIn (Consistent with 2012 results)  43% of firms using social media have adopted written policies and procedures to govern use  Are records maintained of corporate or employee postings on social media websites?  44% do not retain postings  24% track compliance reviews of postings.  21% manually download postings for retention

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Cyber Security

• Less than half of firms surveyed have controls in place to address cyber security

risks

• 73% of firms educate staff on the importance of, and their role in, ensuring the

security of their firm’s and client information and computer security

CSA Staff Notice 11-326 Cyber Security

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Business Continuity Plans

• 85% of firms have planned for facility wide outages (e.g. electrical)
• 88% of firms have planned for a temporary interruption of discrete services (e.g.

phone, internet)

• 68% have planned for natural disasters
• 46% have succession plans in the event of death or disability of key personnel

Most popular component of a BCP:  Access system from remote locations (89%) (consistent with 2012 results) Testing  53% conduct a full test of the entire plan on an annual basis  19% do not conduct testing of their disaster recovery plan  16% test every two years 35% activated their plan in the last 12 months!

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A special thanks to all survey participants.

Questions?