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

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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 BPSor less

6 to 10BPS

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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 (comparedto 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/orproducts

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?