TORONTO, May 31 (Reuters) - The Ontario Securities Commission said its biggest targeted sweep of portfolio managers and exempt market dealers found that many did not abide by rules meant to protect investors.
Exempt market dealers are authorized to deal in securities that require less oversight on behalf of qualified clients that include high-net-worth individuals.
OSC, the regulator for Canada’s largest securities market, said on Friday in a statement that it investigated 87 portfolio managers and exempt market dealers in an operation that ended in June last year.
More than 60 percent of those targeted were issued deficiency reports and some 30 percent were deemed significant, requiring the dealer to provide the OSC with a detailed plan to fix the failings.
In two of most serious cases, further action has been taken, while three others discontinued operations after the review, the OSC said.
In one case, a portfolio manager used client money to fund a start-up company with no revenue or assets, without disclosing that the manager was also taking a management fee from the young company.
“Enhancing compliance among portfolio managers and exempt market dealers is critically important and we are taking appropriate regulatory action where we identified significant compliance issues,” Howard Wetston, head of the OSC, said in the statement.
The regulator said almost half of those targeted did not provide adequate relationship disclosure information, and that two-thirds did not collect or adequately maintain enough information about their clients to be able to serve their investment needs.
The report said that 15 percent of the targeted exempt market dealers did not ensure their clients were not investing too much of their total portfolio in one security. Such dealers are registered to deal in or underwrite securities which are prospectus exempt or sold to clients who are accredited investors.
An individual can qualify as an accredited investor with financial assets worth more than C$1 million, pre-tax income exceeding C$200,000 in the past two years, or similar evidence of high net worth.
The OSC said it found 26 investors at eight of the exempt market dealers had purchased some C$1.7 million of securities despite not qualifying as accredited investors.