PORTFOLIO MANAGEMENT ASSOCIATION OF CANADA

Transcription

1 PORTFOLIO MANAGEMENT ASSOCIATION OF CANADA REFERENCE GUIDE TO POLICIES AND PROCEDURES FOR PORTFOLIO MANAGERS December 2010

2 Introduction Compliance Systems for Portfolio Managers Regulatory Expectations National Instrument Registration Requirements and Exemptions (NI ) requires registrants, including firms registered as advisers (portfolio managers) to establish, maintain and apply policies and procedures that establish a system of controls and supervision sufficient to (a) provide reasonable assurance that the firm and individuals acting on behalf of the firm comply with securities legislation and (b) manage the risks associated with its business in accordance with prudent business practices. The Canadian Securities Administrators emphasize that firms must have detailed written policies and procedures that: Identify the internal controls the firm will use to ensure compliance with legislation and manage risk Set out the firm s standards of conduct for compliance with securities and other applicable legislation and the systems for monitoring and enforcing compliance with those standards Clearly outline who is expected to do what, when and how Are readily accessible by everyone who is expected to know and follow them Are updated when regulatory requirements and the firm s business practices change and Take into consideration the firm s obligations under securities legislation to deal fairly, honestly and in good faith with its clients. The above-noted requirements are set out in section 11.1 of NI and its Companion Policy and are supplemented by the requirements in NI for registrants to designate (a) An Ultimate Designated Person who must supervise the activities of the firm that are directed towards ensuring compliance with securities legislation by the firm and each individual acting on the firm s behalf and promote compliance by the firm and individuals acting on its behalf with securities legislation. The UDP must be the chief executive officer of the firm (or equivalent). See sections 5.1 and 11.2 of NI (b) A Chief Compliance Officer who must establish and maintain policies and procedures for assessing compliance by the firm and individuals acting on its behalf, and monitor and assess compliance by the firm and individuals acting on its behalf. The CCO must also report non-compliance to the UDP and report annually on compliance to the firm s board of directors. See sections 5.2 and 11.3 of NI

3 The Ontario Securities Commission (OSC) and the British Columbia Securities Commission (BCSC) publish annual compliance reports, as well as more focused reports on specific issues, all of which outline various matters of interest to the registrant community. Several compliance reports have focused specifically on issues related to portfolio managers, including the OSC s 2008 report on the 10 Most Common Deficiencies Among Portfolio Managers. The various compliance reports outline specific topics that the regulators expect to be covered in compliance policies and procedures manuals, although no Canadian regulator publishes a comprehensive list of topics for these manuals. The OSC and BCSC websites contain useful information about compliance and the regulators expectations about the need for tone at the top and their expectations that the executive and management of registrants will focus on compliance and ensure that adequate resources are placed towards a robust compliance regime. Failing to comply with the CSA s expectations and the specific requirements for a compliance regime would bring in question the fitness for registration of the particular registrant and may jeopardize its continued registration and accordingly its ability to continue to act as a portfolio manager. The members of the CSA, most notably the OSC and the BCSC, conduct periodic compliance reviews to determine how well registrants are complying with the various securities regulatory requirements, including those related to a robust compliance system. Significant deficiencies may give rise to an enforcement action against the registrant, which may result in suspension of registration. Using this Reference Guide This Reference Guide has been prepared by the Investment and Corporate Governance Committee of the Portfolio Management Association of Canada to assist members of PMAC in developing compliance regimes that comply with current regulatory expectations. PMAC members may use this Reference Guide as a checklist to assess their compliance with regulatory requirements and expectations. Where applicable, this Reference Guide notes the regulatory requirement that governs the particular aspect of a portfolio manager s business. This Reference Guide outlines policies and procedures that are commonly in place at firms registered as portfolio managers and assumes that the firm also manages investment funds (pooled funds) that are made available to its clients. Additional policies and procedures will likely be necessary if the firm also manages publicly offered investment funds and/or distributes securities to accredited investors as an exempt market dealer. This Reference Guide focuses principally on the portfolio management functions of a portfolio manager. Members may wish to provide an introduction to the compliance manual that sets out a context for the policies and procedures for example, describing the nature and operations of the firm s business, as well as its client focus. 3

4 Each PMAC member firm will need to determine the nature and extent of policies and procedures that suit its business. This Reference Guide is provided as a reference tool only. It is not intended as a one size fits all recommended or mandatory approach. Not all firms will require all of the policies and procedures suggested in this Reference Guide. Some firms will require additional policies and procedures depending on the nature of their business. The Investment and Corporate Governance Committee of PMAC plan for this Reference Guide to be a living document in that it will be regularly reviewed and updated. PMAC members are encouraged to provide feedback to the President of PMAC - Katie Walmsley at kwalmsley@portfoliomanagement.org on the content of the Reference Guide. 4

5 Content Regulatory References Page/Section References To 1. Corporate Governance and Compliance Structures Describe how the firm is structured and outline the broad principles the firm follows to manage its day-to-day business. Possible topics for policies and procedures include: Organization chart, showing key personnel, including structure of compliance Board s responsibilities for oversight Designation of Ultimate Designated Person and Chief Compliance Officer under NI and responsibilities of both individuals s NI and CP s. 5.1 and NI s and 11.3 NI Outline objectives of compliance department/staff, including nature of compliance staff (in addition to the CCO), as applicable Report on compliance by the CCO to the Board and explain how UDP and CCO have access to the Board at any time Framework for monitoring policies and procedures and updating them as required and disseminating information about the updates and policies and procedures to employees of firm Handling media and press inquiries Employee Code of Conduct, with annual acknowledgement of firm's policies, code of ethics, etc., CFA code of ethics, PMAC statement of function and principles of the profession, confidentiality Business Continuity/Disaster Recovery Plan 5

6 Risk assessment/identification and risk management policy Handling litigation Framework for internal controls 6

7 2. Regulatory Registration and Reporting All firms and each of its individual directors and advising representatives must be registered with the provincial regulator in the province/territory in which the firm and individuals operate. Notification of any changes, including address or status, must be delivered to the applicable regulators within specified time limits. Possible topics for policies and procedures include: Responsibilities for making electronic filings on the National Registration Database Procedures for complying with registration requirements, including payment of annual fees Proficiency of representatives, including supervision of associate advising representatives Reliance on client mobility exemption and compliance with conditions Carrying out periodic working capital calculations and considering subordinated debt Monitoring insurance coverage for firm Ensuring financial reporting to regulators carried out when required MI Passport System NP Process for Registration in Multiple Jurisdictions NI National Registration Database NI Registration Requirements and Exemptions NI Registration Information Giving notice of any acquisition of securities or assets of another registrant and/or acquisition of securities of the firm Due diligence on hiring and terminating registered individuals OSC Rule Ontario Prospectus and Registration Exemptions 7

8 Identifying permitted individuals under NI and keeping their regulatory information up to date Reporting NAV errors, if manager of investment funds NI Investment Fund Continuous Disclosure Responsibilities of unregistered staff Extra-provincial corporate filing requirements to reflect requirements in various provinces where firm carries on business to maintain extra-provincial corporate registrations Filing offering memoranda, where applicable, for pooled funds, as well as reports of distribution of securities to clients and, as applicable, financial statements for the pooled funds Monitoring compliance with regulatory exemptions and/or terms and conditions against registrant 8

9 3. Conflicts of Interest Registrants, including portfolio managers, must identify and manage conflicts of interest and, where applicable, disclose those conflicts to clients. Each firm must consider its corporate / business relationships in determining real and potential conflicts. Registrants must also provide any new client with certain specified information about the account to be established by the new client with the firm. Possible topics for policies and procedures include: Identification and management of conflicts of interest Disclosure of conflicts of interest Relationship disclosure information and keeping this current and disclosing material changes to clients Allocation of investment opportunities and fairness policies Use of brokerage commissions and disclosure to clients Referral fees and disclosures of additional compensation Investments in related issuers and relationships with related registrants Restrictions on self-dealing with clients, including pooled funds (conflicts of interest) NI and CP (relationship disclosure) NI and CP Part XXI of the Securities Act (Ontario) and comparable legislation in other provinces Part 4 Disclosure Obligations - NI Use of Client Brokerage Commissions 9

10 4. Personal Trading and Code of Ethics Registrants are required to establish and enforce written procedures for dealing with clients that conform to prudent business practice. The establishment and enforcement of a detailed policy on the personal trading of responsible persons is a prudent business practice. It will ensure that conflicts and abusive practices are avoided. An adviser must define who in the firm is a responsible or access person and subject to the personal trading policy. The personal trading policy should designate a compliance officer and procedures for monitoring personal transactions, maintenance of records, insider trading, restricted securities, etc. It should outline any restrictions on personal trading. An independent person should review personal trades of the compliance officer. Policy should be accessible for review by all staff. Possible topics for policies and procedures include: Pre-approval documentation and record keeping Identification of responsible or access persons Delivery of brokerage account statements and trade confirmations for responsible or access persons Monitoring and reconciliation of brokerage statements and trade confirmations with the personal trading pre-clearance authorizations Process for handling violations of the personal trading policy Consequences of violations Annual written acknowledgement, by all employees, of the firm s personal trading and agreement to abide by it Annual written acknowledgement and confirmation of personal trading accounts by all responsible or access persons 10

11 subject to the personal trading policy Outside directorships or business activities Insider trading 11

12 5. Trading All aspects of discretionary trading on behalf of client portfolios should be documented and monitored. Possible topics for policies and procedures include: Trading rules and procedures for client accounts, including supervision of trading NI Trading Rules Ensuring and monitoring suitability of trades for client accounts Trading desk procedures, including order entry and input procedures Internal cross trades and principal v. agency (cross) transactions Monitoring and resolving trading errors and failed trades Restricted lists NI Use of Client Brokerage Commissions NI Institutional Trade Matching and Settlements IIROC Universal Market Integrity Rules (UMIR) Prohibited transactions ERISA matters - as applicable Telephone monitoring Exchange rates - as applicable Use of alternative trading systems Trade allocation policy Block trade orders and allocation of partial fills for block trades Allocation of hot issues and IPOs 12

13 Trading matching Best execution and timely execution of trades in accordance with instructions Use of client brokerage commissions (soft dollars) Selection of brokers Client directed brokerage Trade cost analysis Trade blotter maintenance 13

14 6. Investment/Portfolio Management Acknowledge firm's duty to clients and provide guidelines as to how the firm will handle all aspects of the investment decision-making process. Periodic comparison of securities held in client accounts against clients stated investment objectives should be done to ensure clients portfolios are suitable and are being managed in accordance with the client s stated objective and restrictions; and periodic price testing and variance analysis for a sample of client portfolios should be done to ensure the proper valuations of portfolios. Possible topics for policies and procedures include: Fiduciary policy - duty to clients Documentation and maintaining client agreements and client files, including account opening and closing procedures Process for collecting and ensuring current KYC information Guidelines for investment management in client portfolios, including ensuring suitability and complying with restrictions and investment objectives of clients Portfolio management procedures, including performing research to support investment decisions Use of pooled funds in managing client accounts Derivatives usage and risk management Money market risk management Fee schedule, disclosure of additional compensation, referral fees, performance NI sections: 13.2 (KYC) 13.3 Suitability Handling Complaints Dispute Resolution 14.6 Holding Client Assets in Trust 14.8 Securities subject to safekeeping agreement Allocating investment opportunities fairly Content and 14

15 based fees, etc. Sub-advisory agreements, due diligence and monitoring sub-advisors Gifts, rebates, contributions or other payments Resources Custody of client assets Proxy voting Valuation of client accounts, including pooled funds and the principles for such valuation for specific securities Compliance with insider and early warning reporting, including collecting and updating clients status as insiders of reporting issuers Monitoring service providers and providing oversight delivery of trade confirmation Client Statements NI Insider Reporting Requirements and Exemptions NI The Early Warning System and Related Take-over Bid and Insider Reporting Issues NI Investment Fund Continuous Disclosure (proxy voting) Procedures for dealing with clients in jurisdictions where not registered 15

16 7. Performance Measurement and Marketing In order to deal fairly, honestly and in good faith with clients, it is necessary to ensure that all marketing material include accurate information that is not misleading to clients. Possible topics for policies and procedures include: Guidelines on the preparation of performance data and composites, including standards for performance measurement and calculations and methodology Guidelines for preparation and use of hypothetical, back tested and/or model performance data Guidelines for use of benchmarks NI Mutual Funds Part 15 CFA Performance Presentation Standards and Global Investment Performance Standards Responsibilities of marketing staff and oversight Process for the preparation, review and approval of all marketing materials Website and use of social media by firm and representatives policies and monitoring Procedures for holding out registration status of firm and individuals and no representations of approvals by the OSC or other applicable regulators Authorship material copyright and trade mark Media relations and press inquiries 16

17 8. Anti-Money Laundering and Terrorist Financing Define money laundering and provide examples of suspicious transactions to enhance staff awareness. Explain significance of firm s responsibilities to prevent money laundering and terrorist financing. Ensure compliance with FINTRAC Guidelines applicable to securities dealers. Possible topics for policies and procedures include: Identify and define money laundering and explain terrorist financing identify risks of money laundering or terrorist financing through the firm Appoint AML compliance officer Procedures for handling prescribed and/or suspicious transactions Procedures to identify clients, including any who would be PEPs (Politically Exposed Foreign Persons) Procedures to report prescribed and suspicious transactions Maintenance of records as outlined under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and Regulations Proceeds of Crime (Money Laundering) and Terrorist Financing Act and Regulations FINTRAC Guidelines particularly on Compliance Procedures Financial Action Task Force Recommendations Procedures to audit AML compliance policies and procedures as required (every 2 years) Procedures to carry out required risk assessments Employee training on AML procedures 17

18 9. Administrative Procedures Include procedures for record-keeping, KYC, suitability, client reporting, custody of client assets. Note that these topics may overlap with some of the other topics noted in this Reference Guide. Possible topics for policies and procedures include: Regular period-end procedures (e.g. daily, monthly, quarterly, annually) Regular reconciliation of cash and securities is to be conducted and documented daily, weekly or monthly as appropriate for client account activity Regular reporting to clients (e.g. monthly, quarterly, semi-annually, annually) Systems procedures Pricing and valuation of accounts (including treatment of foreign exchange) Maintaining corporate records and records management including delivery of records, retention policy, signing authorities Client communication / reporting Annual review process Fees - calculation, collection Change of address / hold mail procedures NI : 11.5 General requirements for records 11.6 Form, accessibility and retention of records Handling Complaints Dispute resolution service Content and delivery of trade confirmation Client Statements Personal Information Protection and Electronic Documents Act (PIPEDA) 18

19 Death of a client Non-discretionary holdings Compliance with privacy requirements [federal privacy legislation and equivalent provincial privacy legislation] Errors correction policy Leverage policy and monitoring Client complaints and maintenance of a log of clients complaints which includes a description of the resolution Dispute resolution services Referral arrangements 19

20 10. Human Resources Policies and procedures about employee relationships and hiring/retention may also be included. Some of these topics may overlap with other topics in this Reference Guide. While these topics may not be specifically about compliance with securities regulation given the nature of the business conducted by the firm, it is in order for the compliance manual to touch on these topics, for the sake of completeness and because of the impact of securities regulation on representatives and permitted individuals of the firm. Firms also must consider applicable labour and employment laws and health and safety laws in considering topics related to human resources. Employment law related topics include policies on workplace violence and health and safety issues. Possible topics for policies and procedures include: Recruitment, selection, hiring, terminations and resignations Conducting background checks - criminal/credit NI Registration Information Employee training and ongoing development Executive and employee compensation Employee outside business activities, including outside directorships Performance appraisals Monitoring to avoid employee fraud Employee use of social media Succession planning ::ODMA\PCDOCS\TOR01\ \4 20