Compliance roundup

01 OSC eyes gender diversity

The Ontario Securities Commission (OSC) is seeking comment on a strategy targeting gender diversity on corporate boards. The regulator is proposing to “require TSX-listed companies to provide disclosure regarding women on boards and in senior management in Ontario.”

Currently, National Instrument 58-101—Disclosure of Corporate Governance Practices doesn’t mention gender in its board composition disclosure requirements.

The regulator’s model would require all non-venture issuers other than investment funds to provide annual disclosure of:

• policies regarding representation of women on the board and in senior management;
• consideration of representation of women in the director selection and board evaluation processes; and
• measures of the representation of women in the organization and, specifically, on the board and in senior management.

The model does not require creating or strengthening gender diversity policies. The emphasis throughout is on disclosure.

“An issuer should disclose whether it has a policy for advancing the participation of women in senior management roles and/or for the identification and nomination of female directors,” the paper says. If there is such a policy, the firm should:

• summarize its key provisions or disclose the policy,
• set out how the policy is intended to advance the participation of women on the board and also in senior management,
• explain how the policy has been implemented,
• describe any measurable objectives established under the policy,
• disclose annual and cumulative progress by the issuer on achieving the objectives of the policy, and
• describe how the board or its nominating committee measures the effectiveness of the policy.

If there’s no policy, “[T]he issuer… should explain why not and identify any risks or opportunity costs associated with the decision not to have [one].” Apart from the administrative hassle of cobbling together a document to satisfy this requirement, OSC appears to be providing no further regulatory incentive to promote gender diversity. The section on director selection gives the same impression.

“If the issuer does not take the representation of women into account in [the selection] process, it should explain why not and identify any risks or opportunity costs associated with the decision not to do so.”

Governance expert Richard Leblanc says the impulse behind the paper is admirable, but that it’ll do little to affect meaningful change. “It’s permissive—a company can choose whether or not to have a policy.”

Sound regulatory guidance would establish gender diversity as a principle and then itemize a set of best practices to achieve it, Leblanc argues.

This approach is positive and effective, suggests Anita Anand, a law professor at the University of Toronto. Her research on corporate governance has shown firms voluntarily comply with best practices, so “there’s no reason to expect firms will not also implement measures aimed at gender parity. [The OSC’s] initiative is an important first step in this direction.”

Mark Yamada, president of PU˙R Investing Inc., says the OSC’s proposal “lacks bite.” The regulator should “keep tabs on how well firms adhere to best practices as stipulated by [the] OSC.”

If results are unsatisfactory after a trial period, a legislated solution may be the best option, he says, adding quotas aren’t the preferred way to go because they can undermine effectiveness.

Instead, he favours blind selection for at least the first stages of the recruitment process. Screen for skill sets first. “No names or gender information on applications. The objective is not to put women on boards—it’s to get better boards. There are many exceptionally qualified women.”

The comment period ends September 27, 2013.

02 OSC launches registrant outreach program

The OSC has launched an outreach program for registrants to “promote stronger compliance practices and enhance investor protection.”

The initiative features a website with a wide range of compliance-related resources, including information on registration, filing and business conduct requirements.

The program also includes free educational seminars on key issues. A September event will explain working capital requirements under NI 31-103. Presenters “will discuss common deficiencies [they] have noted during compliance reviews and from regulatory filings of working capital. There will also be discussion of best practices and the action the OSC may take if a registrant is capital deficient.”

Other seminars will focus on CRM II and KYC obligations.

Registrants can submit suggestions for future topics to RegistrantOutreach@osc.gov.on.ca.

03 CSA reviews PM and EMD disclosure practices

The results are in: nearly two years after surveying more than 100 firms across the country, CSA has released its findings and offered guidance on how to improve compliance with relationship disclosure requirements under NI 31-103.

Of the 124 firms surveyed, 46 were registered as PMs and 26 as EMDs. Fifty-two were in multiple categories, including PM, EMD and investment fund manager (IFM). The regulator found firms were deficient in several areas, particularly when describing:

The nature or type of client account

Twenty-two percent of firms were deficient. In some cases “the disclosure did not discuss in what capacity the firm was acting on behalf of the client; for example, if the PM had discretion over the account or if the firm was acting as an EMD for the client.”

Guidance:

• PMs – Relationship disclosure information (RDI) should disclose that the registered firm acts as a PM for the client and indicate whether the client has a discretionary or non-discretionary account. While there’s no need to specify the type of account (e.g., registered, cash, etc.), PMs should describe the services they will provide and disclose where the client assets are held (e.g., at a custodian).
• EMDs – RDI should disclose that the firm acts as an EMD for the client. EMDs should describe how they operate client accounts and outline the services they will provide. EMDs should disclose where and how assets are held.

The types of risk clients should consider

Thirty-two percent of firms were deficient. Key problems include:

• Risk descriptions were vague;
• Registered firms verbally discussed risks with clients, but neither provided anything in writing nor recorded the discussion.

Guidance:

• PMs – Either explain the risks associated with making investment decisions (e.g., currency, interest rate, margin, leverage, liquidity, etc.) or refer to the risks discussed in the Investment Policy Statement. The risks should be relevant to the PM’s business environment, the investments offered and the investment strategies recommended for the client.
• EMDs – Either explain the specific risks of each product in the relationship disclosure document or refer to the risk disclosure contained in the Offering Memorandum or other offering documents. EMDs should ensure the RDI provided to clients also discusses the risks of investing in the exempt market in general.

Conflicts of interest

Twenty-one percent of firms were deficient. Some “provided insufficient or unclear explanation about conflicts and did not discuss the potential impact on clients,” notes the report.

Another problem was that firms wrongly assumed that no potential conflicts existed.

Guidance:

• PMs – Most PMs will have conflicts, such as soft-dollar arrangements, fair allocation and personal trading. PMs should describe all potential or existing material conflicts in detail. If PMs determine they have no conflicts, they should keep written documentation to show they’ve considered the issue.
• EMDs – Most EMDs will have conflicts, such as compensation received from issuers or an affiliation with an issuer. Similar to risk disclosure, an EMD may refer clients to offering memoranda when disclosing conflicts. EMDs should consider whether the disclosure in the offering memorandum relates to the issuer’s conflicts.

Yamada argues the main issue is whether the service provider has a fiduciary duty to clients. “It’s a legal requirement for portfolio managers. But [most] advisors have no legal requirement to act in their clients’ best interests, although 70% of clients think they do.”