Questions to Ask when Preparing a Policies & Procedures Manual (PPM)

Section 11.1 Compliance system of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) requires registered firms 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 each individual acting on its behalf complies with securities legislation, and
b. manage the risks associated with its business in accordance with prudent business practices

Registered firms that are members of self-regulatory organizations must maintain a PPM that substantially complies with the provisions set out in NI 31-103, but should contact IIROC or the MFDA, for their specific requirements.

While many registered firms request a checklist of topics and matters for preparing a PPM, a checklist approaches compliance from the wrong perspective. NI 31-103 is a principals-based instrument, which provides firms with leeway to produce a PPM that is specific to their own operations. One size or one checklist does not fit all. Therefore, we present you with a non-exhaustive set of questions you should consider in designing your PPM.

 
  • What is the general compliance supervision of the firm and what are the controls in place to monitor compliance?
  • What are the roles, duties and responsibilities of the ultimate designated person (UDP) and the chief compliance officer (CCO)?
    • Is there a culture of compliance that starts from the top down?
    • Does the CCO have the support of the firm's senior management and shareholders?
    • Does the CCO report to the firm's senior management and/or board on a regular basis?
     
  • Does the firm have risk management policies and procedures - risk management is not merely about managing the risks with the investments and client portfolios, but also about global, enterprise-level risk management systems.
  • What is the firm's complaints policy?
 
  • Are the employees who provide advice to clients, registered with the appropriate securities regulatory authorities?
  • How do you ensure that employees that are not registered, do not conduct registerable activities?
    • Do you have a separation of duties between client-facing representatives and the portfolio managers?
    • Do unregistered client-facing representatives understand the prohibition to conduct any registerable activities?
    • Are registered and unregistered representatives holding out their titles and duties accurately in marketing materials, including business cards?
    • Are all branch locations and branch representatives registered with the securities regulatory authority?
    • Does the CCO conduct regular training to staff about compliance?
     
  • Do you maintain proper books and records of the firm's business activities?
  • Are the firm's books and records secure and backed up?
  • Do you have a disaster recovery and business continuity plan?
    • Do you test this plan on a regular basis?
    • Do your staff know the details of this plan and what they need to do in the event of a disruption?
    • Do you have a secondary location in the event of a business disruption?
    • Do you have a succession plan for key operational employees?
     
 
  • How does the firm manage conflicts of interests?
  • Does the CCO have a list of all the related parties to the firm and its employees?
  • Is the firm sharing office space with other parties? If so, how does the firm safeguard confidential information?
  • Does the firm allow outside business activities for its employees?
    • Are you aware of the employees' outside business activities?
    • Do the outside business activities create any conflicts?
    • Has the CCO approved the outside business activities?
     
  • Does the firm allow personal trading by its staff?
    • How does the firm monitor staff personal trading?
    • Does the staff follow guidelines from the CFA Institute for reporting personal trades?
    • Are there trade and timing restrictions and blacklists in place?
    • Does the firm disclose its personal trading and trade allocation policy to clients?
     
 
  • Who prepares and completes new client account forms?
    • Are these staff registered?
    • Does the CCO review suitability of products and/or advice before approving new client accounts?
    • Does the CCO conduct spot checks of older client files for currency of client information?
    • What is the firm's policy for updating client information?
    • Are the client forms current with securities legislation and other regulatory requirements, such as for client identification and privacy legislation?
     
  • Does the firm summarize the client's investment needs and objectives in an investment policy statement (IPS) signed by the client?
    • Does the firm regularly monitor and rebalance the clients' portfolios based on changing circumstances to the client and/or market conditions?
    • Does the firm update the IPS when significant changes have occurred to the client's circumstances?
     
  • Does the firm send statements to clients on a regular basis?
    • Are the clients' holdings reconciled with the custodial statements?
    • Who reconciles and who reviews and approves?
     
  • How does the firm provide client relationship disclosures, as required by section 14 of NI 31-103?
    • Are the disclosures in an investment management agreement?
    • Do the disclosures discuss the conflicts of interests of the firm in managing the client's account?
    • Do the disclosures include a warning about the risks of borrowing money to invest?
    • Does the firm disclose its policy for fair allocation of trades?
    • Does the firm disclose all the fees payable by the client beyond the management fee, such as commissions, brokerage, and custodial fees?
     
 
  • Is the firm aware of the relevant trading-related securities instruments, such as:
     
  • Does the CCO monitor trading, either directly or via a trade blotter?
    • Does the trade blotter capture all the information necessary for review?
    • Does the trade blotter capture failed and unsettled trades?
     
  • Does the firm have policies for best execution?
    • How does the firm select brokers?
    • Does the firm allow client-directed brokerage?
    • Do brokers provide the firm with research and does the firm, in turn, direct trades to those brokers? Does the firm disclose this conflict to clients?
    • Does the firm conduct block trading? What are the procedures to ensure fair allocation of block trades?
     
  • Does the firm require pre-trade approval from portfolio managers?
  • Does the firm allow cross transactions between the different accounts and funds under management?
  • What are the post-trade settlement and reconciliation procedures?
 
  • Have the CCO and marketing staff reviewed the guidance in CSA Staff Notice 31-325 Marketing Practices of Portfolio Managers?
  • What kind of marketing is the firm using?
    • Who produces the marketing materials?
    • Is there a review and approval process prior to the marketing activity?
    • Is the reviewer aware of the need to ensure that the firm presents the marketing materials fairly and in good faith without misrepresentations?
     
  • Does the firm present performance information?
    • What procedures are in place to ensure that the performance information is accurate and presented fairly to prospective and current clients?
    • Are the calculations industry standard, such as time weighted and total returns?
    • Does the firm use composites?
    • Are benchmarks used, and if so, are they relevant?
    • Does the firm use hypothetical or model performance? If so, how does the firm ensure that the presentation of such performance is not misleading?
    • Does the firm provide adequate disclosures with the performance presentation?
     
  • Does the firm have referral arrangements? 
    • Is the firm following the requirements under section 13 of NI 31-103 for referral arrangements?
    • Is there written agreements between the parties involved?
    • Is there proper disclosure of the arrangement to clients affected by the agreement?
     
 
  • How often does the firm monitor its working capital?
  • Is the person calculating the working capital qualified to do so?
  • Does the CCO review the working capital?
  • Is there evidence of review and approval?
  • How will the firm address a working capital deficiency?
  • Does the firm have current bonding or insurance?
  • Is the bond adequate to cover the firm's operations and assets under management?
 
  • Does the firm have access to or hold client assets? Why?
  • What procedures are in place to safeguard the assets?
  • Does the firm use trust accounts?
  • Is the firm's bonding appropriate to cover the firm's assets under management?
  • How does the firm reconcile the client assets and/or trust accounts?
  • Does the firm have power of attorney (POA) for client accounts? Why
  • What procedures are in place to ensure that the firm is using the POA appropriately?
 
  • Is the firm using any exemptions to distribute investment products?
  • What procedures are in place to ensure that the firm is using the exemptions properly?
  • What procedures are in place to ensure that the clients qualify for the exemptions?
  • What disclosures does the firm provide to the clients, and are those disclosures current and in the correct form, for example offering memorandums and risk acknowledgement forms?
  • Does the firm have reporting and fee payment requirements to the securities regulatory authorities?
 
  • What are the procedures for calculating a fund's NAV?
  • Who prepares and calculates the NAV?
    • What are the procedures to ensure the accuracy of the valuations?
    • How are private or illiquid holdings valued?
    • How frequent is the NAV calculation?
     
  • Who reviews and approves before public dissemination of the NAV?
 
  • What are the procedures for subscribing and redeeming units of funds under management?
  • Are these procedures disclosed to clients clearly and in plain language?
  • Who processes the subscriptions and redemptions? Is there a separate reconciliation process to review and approve the orders?
  • Are there procedures to ensure currency of unit holders?
 
 
  • Does the firm use service providers to manage certain operations, such as:
    • Portfolio management (sub advisers)
    • Fund accounting (NAV)
    • Transfer agent function (subscriptions and redemptions)
    • Custodian
     
  • How does the firm oversee its service providers?
    • Are there regular meetings?
    • Is there regular reporting?
    • Are service parameters and performance metrics in place?