The field examination is the main tool we use to monitor registrants. Examinations help ensure firms are conducting their activities in accordance with the securities legislation. The authority to conduct examinations is set out in section 141.2 of the Securities Act, RSBC 1996, c. 419 . This article describes why we carry out examinations, how we conduct them, and what we do to resolve issues found.
Certain market participants that trade or advise in securities in BC must register under section 34 of the Act, unless they rely on a registration exemption. The examination program ensures that registered firms have a compliance program in place and are conducting their activities in accordance with securities legislation.;
We examine firms that are not members of a self-regulatory organization (SRO). Firms directly regulated by an SRO, like IIROC or the MFDA, are normally examined by that SRO.
Who Conducts These Compliance Examinations?
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Two teams, comprised of Compliance Examiners and Compliance Officers, conduct the examinations. One team focuses on advisers and investment fund managers, while the other team focuses on dealers. Both teams report to managers, and both managers report to the Director of the Capital Markets Regulation Division.
We take a risk-based approach to rank all our registrants from a comprehensive risk questionnaire, which feeds a risk model. Your risk rating depends on factors, such as the:
- types of product you manufacture
- types of products sold
- sales practices of your firm
- number of representatives or advisers at your firm
- financial condition of your firm (excess working capital)
- complaints against your firm
- regulatory history (past exams, terms and conditions)
Based on the risk scores of all our directly regulated firms, we develop an annual audit plan. In general, our goal is to examine each registrant in a 3 to 4 year cycle. We will examine higher-risk registrants more frequently.
In most cases, prior to the exam, we send the CCO an exam introduction letter and a list of books and records to prepare in advance of our visit. However, examinations may occur on an announced or unannounced basis. Upon arriving at the registrant's office, examiners will speak to the chief compliance officer (CCO) of the firm and conduct an initial interview (also known as an opening meeting). During the opening interview, we will provide you with a copy of an "Appointment to review under section 141.2 of the Securities Act". This order authorizes the examinations team to conduct the examination.
Following the opening meeting, examiners will review your firm's books and records, as requested in the exam introduction letter. Examiners may request additional books and records during the course of the field exam. Electronic copies of the books and records are the most efficient way to provide examiners with the requested documents.
During the review, examiners will ask for your compliance evidence of review, the checks and balances you use, and ask questions relating to specific practices or about your business units. These help us understand your operations, and determine whether you have effective internal controls in place. Some areas of focus include:
- overall compliance processes
- account opening practices
- products offered
- working capital and financial condition
What Kind of Books and Records do the Examiners Review?
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A large part of the examination process involves reviewing specific books and records and interviewing your staff. Registrants must have books and records in accordance with Part 11 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). Samples of documents we review include:
- policies and procedures manual
- financial and working capital records, including subordination agreements, and bonding or insurance policies
- client records and files
- fee schedules and fee calculations
- client disclosures, forms, and contracts, such as investment management agreements and investment policy statements
- correspondence files
- referral arrangements and conflict of interest disclosures
- complaint files
- employee registration files and representative contracts
- performance numbers and presentation
- marketing materials, including advertising and promotional documents
- website and social media activity (blogs, Twitter, Face Book, LinkedIn)
Examiners seek to gain a better understanding of your firm and determine if operating and internal control systems are working properly and if the firm is enforcing them.
The length of an examination depends on the size of the firm, the number of locations, the availability of records, and other compliance information. An examination normally requires examiners to be onsite for at least a week or two; larger firms will likely require more time. In general, the time spent at your firm depends on the quality and effectiveness of your existing compliance program and culture.
After examiners complete the fieldwork, the examiners will draft a compliance examination report and will verbally outline the deficiencies cited in the report in a closing meeting. The closing meeting is typically at the firm's office and is usually within two weeks of the end of the fieldwork. After the closing meeting, we send the examination report to your firm and you must respond within 30 days, identifying your plan of action to resolve all deficiencies.
Do You Charge Fees for the Compliance Examination?
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Section 141.2(5) of the Securities Act allows the Executive Director to require a firm that is subject to a compliance examination review, to pay prescribed fees or charges for the costs of the review. Examples of situations that might result in the Executive Director exercising this discretion includes when a firm:
- fails to resolve past compliance deficiencies
- fails to maintain proper records
- fails to provide these records to compliance examiners in a reasonable time
- requires excessive attention from Commission staff during the compliance examination review, for example, the firm fails to answer questions or allow Commission staff to interview employees or agents of the firm
Examination findings maybe addressed in one of four ways:
- No further action letter - the firm has no major deficiencies that require action
- Deficiency letter - a deficiency letter is sent to your firm requesting your firm respond to the deficiencies and outline a written plan to resolve the deficiencies
- Conditions of registration or settlement agreement - if the problems found are very serious or there is evidence of systemic compliance problems, we may impose conditions of registration on the firm and its staff. Examiners may also refer files to our Compliance Officers, who may ask you to enter into a settlement agreement. Conditions of registration or a settlement agreement are vehicles that allow the Executive Director to offer simpler and potentially less costly ways to resolve our concerns.
- Enforcement referral - our Compliance Officers may refer very serious problems to our Enforcement Division for further investigation or action
- Suspension of registration - our Compliance Officers may recommend that the Executive Director suspend a firm's registration until the firm resolves very serious problems
Where Can I Learn More Information About Good Compliance Practices?
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Visit the Compliance Toolkit section of our website.
The mission of the BCSC Registrant Outreach program for CCOs, is to improve compliance by opening the lines of communication between CCOs of directly regulated advisers, dealers, and investment fund managers, and compliance staff in BCSC's Capital Markets Regulation Division.
Learn more about the Registrant Outreach program and upcoming workshops.
Can I speak to someone if I have a question?
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Please feel free to call our examination staff anytime. If you have any concerns during an examination, please contact a member of the team listed below: