Watchdog strengthens review of investment dealers

Compensation under microscope

Compensation grids and sales targets are coming under greater scrutiny as the Investment Industry Regulatory Organization of Canada steps up an assessment of how the country’s investment dealers handle compensation related conflicts.

Investment dealers will be required to turn over their compensation grids as a standard item in every upcoming business compliance exam, so the self-regulatory agency can“better review dealers’ treatment of compensation related conflicts ,” I IR O Cs aid Thursday.

The grids will help determine whether clients are being put into investments that trigger richer rewards for advisers and dealers.

“We will assess a Dealer’s grid to determine whether it is productneutral and unbiased with respect to account type. If we have concerns, we will perform further investigations,” the self-regulatory agency said in a document that includes the findings of a recent “targeted” review covering 20 firms from a cross-section of IIROC’s membership.

That review, which looked at how well investment firms are meeting a requirement to manage compensation-related conflicts in the best interest of the client, found that firms were relying too heavily on disclosure of conflicts without first addressing them with clients in another way.

The report said this was compounded by poor quality of disclosure.

IIROC said future business conduct compliance examinations would pay close attention to sales targets set by the firms, and their impact on sales.

“It’s … possible inappropriate sales activity will result from a Dealer setting overly aggressive sales targets that representatives must meet,” the self-regulatory agency said in Thursday’s report.

Going forward, dealers will be asked “to explain the rationale behind sales targets and controls they have implemented to guard against inappropriate sales activity.”

In the recent targeted review, the regulator found a general “lack of comprehensive review of compensation programs and their associated conflicts.”

Another theme that came up repeatedly throughout the targeted review, IIROC said, was a shift to fee-based and managed accounts without appropriate supervision and monitoring of the risks associated with such accounts.

The regulator found most dealers provide the highest possible grid payout to their representatives for fee-based revenue.