Alternative Products:
Scary Stuff or
Good For Business
13th Annual ACCP Compliance Forum
April 28, 2014
Prema K.R. Thiele
What are
Alternative Investments
2
What are Alternative Investments?
• Variety of investments with risk and return characteristics
that are different from those offered by traditional stock
and bond investments
• Includes hedge funds, private equity, venture capital, real
estate, segregated funds (?), commodities, others?
3
Potential Key Benefits of
Alternative Investments
• increase diversification
• level performance over longer periods of time
• enhance returns
• reduce volatility
• improve portfolio efficiency
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Are Non-Traditional Investments the New
Normal?
• used to complement a traditional portfolio
• used to help manage risk
• not considered a new concept
• increased exposure
• accessed through traditional means (mutual funds)
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Context of Regulation
in 2014
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OSC Annual Report 2013
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Regulatory Focus – 2014
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Overall focus: “retail” investors and the retail investor experience
• Investor advocates
• Registrant misconduct
• 2008/09 financial crisis
Examples of focus:
•
•
•
•
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Aim of achieving greater participation by investors and
greater knowledge
•
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OSC’s Office of the Investor and Investor Advisory Panel
Outreach and research with retail investors
OSC/CSA cold calls to investors and “mystery shopping”
Dispute resolution (August 2014)
“Better”, more neutral advice
Continued focus on registrant compliance and detection
(and prevention) of registrant misconduct (prevent fraud and
investor harm, with deterrence)
• Onsite reviews and risk assessments
• Tone at the top
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Regulatory Focus – 2014
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Focus on “retail” investors understanding their investment
and what it costs – and who gets paid for what service
• Point of sale (Fund Facts disclosure)
• CRM-2 [client relationship model disclosure and reporting]
a. Account opening
b. Pre-trade
c. Confirms and quarterly account statements
d. Annual cost and performance statements
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Unease with current distribution methods, fees and relationships
of retail investors with advisors
• Fiduciary duty/best interest discussion
• Mutual fund fee study
• Biased advice (skewed by compensation models)
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Regulatory Focus – 2014
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Complex “retail” products
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Ensuring all industry participants are under regulatory control
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• ETFs, structured products, closed end funds
• “Alternative” funds
• Derivatives usage, with OTC derivatives a huge all-encompassing focus
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“Exempt market dealer” registration and rules (2010)
“Investment fund manager” registration and rules (2012)
UDP/CCO – responsibilities and expectations
Enhanced compliance reviews
Context 2014
• SEC indicates that alternative investments are a
compliance examination priority for 2014, including
reviewing adequacy of product due diligence (“KnowYour-Product”), the manner in which such products are
marketed to investors, and the representation and
recommendations made regarding the suitability of such
investments
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Due Diligence Processes for Selecting
Alternative Investments
• Seek position level transparency
• Utilize third parties to supplement analyses and validate
information
• Perform additional quantitative analyses and use
measures to detect aberrations in investment returns
• Expand due diligence processes to include operational
due diligence, legal documents review, financial
statements review
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The Sale of ETFs by Mutual Fund Dealers
• ETFs are “mutual funds”
• no express prohibition on sale by MFDs, but operational
and regulatory (political?) challenges
• IIROC vs MFDA?
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Thank you!
Questions
Prema K.R. Thiele
416.367.6082
pthiele@blg.com
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© 2014 Borden Ladner Gervais LLP