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 • Core Demographics • Trade Review • Compliance Program • Best Execution • KYC, KYP and Suitability • Pricing & Valuation • Anti-Money Laundering (AML) • Personal Trading • Oversight of Third Parties • Marketing Practices • Client Statement Account • Social Media Reporting Practices • Cyber Security • Books and Records • Business Continuity Plans and • Trading Errors Disaster Recovery • Trade Order Management • Trading and Client Commissions (Soft Dollars) • Questions 2
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 1 st , 2014 was Portfolio Manager. 127 firms participated in 2014 survey. 3
Compliance Program Has internal testing or a regulatory audit revealed any compliance deficiencies? 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 4
Compliance Program More than 93% of firms reported having How do you monitor your policies policies in the following areas: and procedures? Anti-money laundering (AML), 98% use Regulatory Notices Personal trading, 91% use Law Notices Conflict of interest, 71% use PMAC Compliance Officers’ Code of ethics / conduct, Network Business continuity plan / disaster 67% rely on PMAC E-bulletins recovery 63% on PMAC Committees KYC, KYP and Suitability 5
Compliance Program What substantive legal areas will likely require your compliance program’s attention in the next 12 months? 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 6
KYC, KYP & Suitability 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 7
Anti-Money Laundering (AML) 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 8
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 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%) 9
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) 10
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 11
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. 12
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 2 Canada U.S. Internationally 5% 3% 5 BPS 7% 3% 4%5%1% or less 13% 23% 1 cent 26% 8% 1 cent 43% 2 cents 6 to 10 8% 2 cents BPS 29% 3 cents 3 cents 29% 28% 29% 35% 13
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 14
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 15
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