Association of Canadian Compliance Professionals Toronto, ON April 25, 2016

Compliance Update

Agenda Sales Compliance Activity Round 4 – Sales Examination Findings Round 5 – Sales Examination Process Changes Focus on Fees Additional Reforms to Improve Suitability Standards Member Education and Proficiency

Sales Compliance Activity

Round 4 Compliance Activity January 2012 to December 2015 125 Head office locations 311 Branch office locations 24 Targeted exams

Round 4 - Sales Examination Findings

Sales Examination Findings Email Communications Form part of the Member’s books and records Issues include: use of non-Member email accounts; acceptance of trade instructions; delivery of confidential documents; access by Member; maintaining evidence of delivery of regulatory required documents

Sales Examination Findings Branch Review Program Risk ranking methodology Not all locations being reviewed within 3 years Inadequate test procedures and documentation Report not identifying all issues and not issued on a timely basis Resolution not timely or adequate and lack of follow-up Not updating location risk

Sales Examination Findings Suitability of Investments Income vs. cash flow DSC considerations Time horizon Age Concentration No policy Include higher risk sector funds

Sales Examination Findings Suitability of Leverage Risk Management Regular review of loan value vs market value Issues with use of ROC/T-series/monthly pay funds If fund return is less than distribution rate, MV of investment will decrease while loan remains the same if interest only or decreases at a slower rate if P&I Inappropriate marketing and presentation of the strategy Self funding, generate income, tax advice Risks Erosion of capital Sustainability of fund distributions Changes to interest rates Clients ability to service debt Tax deductibility of interest

Sales Examination Findings Resolution of KYC Patterns MFDA staff have noted KYC uniformity recommendations relating to: Leverage trading in high risk exempt securities or sector funds Resolution Supervisor to contact clients to assess KYC 10

Round 5 - Sales Examination Changes

Round 5 - Sales Examination Changes Updated trade blotter request Access to the Member’s system Risk model CRM2/POS3

Focus on Fees

Focus On Fees DSC Fee-based programs Premium/Investor Series Funds Sales Incentives and Conflicts of Interest Expanding Charges and Compensation Reporting 14

Additional Reforms to Improve Suitability Standards

Additional Reforms to Improve Suitability Standards Enhance supervision DSC trades Concentration limits Enhance KYC standards Comprehensive standards to assess KYC Frequency of updates

Member Education and Proficiency

Member Education and Proficiency Continuing Education ETF’s Financial Planning Titles Best Practices in the Advisory Process 18

Enforcement Update

Statistics Cases opened Formal Proceedings commenced Regular Track Bulk Track Signature Falsification Member and Supervisors Detection, Investigation, RSI and Internal Discipline

Insurance Regulators FSCO Other Provinces Cases Member Initiatives Theft, Fraud Borrowing from clients and other conflicts Churning Fine payment Member Initiatives

OBSI Independent Review Industry Comments Process for impasse cases Fairness harmonized with regulatory standards In consultation with Members and other stakeholders Transparent principles and case examples Followed consistently by OBSI staff Applied impartially Process for impasse cases OBSI regional meetings with Members

Investor Education Existing Future Opening Your Investment Account The Benefits of Working with an MFDA Member POS3 Investor Notice Future A Guide to Selecting a Mutual Fund Advisor CRM2 – What It Means For Clients

Issues From Current Cases Suitability Account transfer and material change Trade reviews and complaint handling Accuracy of recorded KYC information Explanation of features, risks and benefits DSC trades time horizon and seniors Disclosure at time of purchase and redemptions

Suitability Concentration Sector Funds, e.g. Precious Metals Exempt Products Members involving high risk AP’s in resolution of: Leveraging suitability “Waivers” Clients needing preservation of capital Risk vs. Return explanation Special Purpose e.g. Buying House

Other Issues Complaint handling Outside financial planning Complaint handling staff Requirements of Policy 3 Outside financial planning “Double dipping” in agreements Information Security and Fraud AP’s acting on email instructions from persons posing as clients

Recent Cases Equity Associates Global Maxfin HollisWealth Sunlife Beckford Eagan Rumball

Questions