OSC starts limited market dealer sweep

If you’re a limited market dealer (LMD) that’s a bit weak on the compliance side, it’s time to hustle, Laurie Clark, a partner at Borden Ladner Gervais, told a recent Strategy Institute conference in Toronto.

For a long time, she noted, the OSC largely ignored LMDs aside from requiring them to fill in their forms. She, and other conference presenters, likened the LMD registration to a “fishing licence” that allowed firms to go about their business unhindered.

But in the post-Portus environment, all distribution channels are getting a look-see and OSC has since surveyed LMDs, classified them into risk categories (high, medium and low), and last week began conducting sweeps to determine just how they operate.

“It’s a giant fact-finding mission,” said Morley Salmon, chairman of the Limited Market Dealers Association of Canada. “OSC knows what a lot of multi-registered firms do, but they’re less clear about what firms do that are only registered as LMDs.”

In the face of scrutiny, Cook advised LMDs to get moving on compliance issues including establishing written procedures, designating a compliance officer, and registering branches. Know your client (KYC) and suitability issues are also at the forefront and some LMDs need to catch up on which documents should be kept in their files. Going forward, the status quo isn’t going to fly.

“You ask a group of LMDs for their KYC forms and they look at you like you have horns,” she said.

Cook noted firms that are dually registered as investment counselor/portfolio managers (ICPMs) have less of a problem because those operations already have KYC requirements in place, adding it’s the stand alone LMDs and smaller ICPMs with an LMD component that are being audited right now.

Rob Maxwell, managing director for risk management at Arrow Hedge Partners in Toronto, says his firm uses the LMD channel (as well as sub advisors that use LMD and/or ICPM channels) to distribute its products.

Arrow has a comprehensive compliance manual that covers LMD practices, as well as a code of ethics. Maxwell expects the OSC to tweak its requirements for LMDs and adds his firm favours some changes so long as they don’t limit the ability to distribute funds. He notes his firm uses its own LMD channels to family and friends so they really know the customer, and that sub-advisors have their own KYC and suitability requirements in place.

Cook advised firms that do get audited not to take an adversarial stance. OSC teams are averaging four people, one of whom is from enforcement. In all, the commission has more than 20 people on the project, most of whom are senior staffers on the compliance and accounting side.

Maxwell, whose firm volunteered to meet with the OSC prior to the start of the sweep, said examiners also are looking at websites and other marketing tools — with an eye toward seeing what kinds of disclosure information and performance measures they employ. Cook added the OSC is looking at business cards to see how LMDs are holding themselves out. She noted LMDs are not permitted to put the words “registered with the OSC” on business cards.

“The OSC is going to hold all registrations to a higher standard, not just LMDs,” says Cook. “OSC wants to see firms go beyond the law and showing they’re fit for registration.”

Filed by Philip Porado, Advisor’s Edge, philip.porado@advisor.rogers.com