The Ontario Securities Commission (OSC) announced April 6 that Mackenzie Financial Corporation will pay administrative penalties and investigation costs after it was found that the mutual fund company regularly and repeatedly engaged in sales practices contrary to National Instrument 81-105.
The OSC has ordered Mackenzie to submit to a review of its practices and procedures by an independent consultant at its own expense. The company will also pay an administrative penalty in the amount of $900,000, and investigation costs totaling $150,000.
National Instrument 81-105 and its companion policy prohibit sales practices and compensation arrangements that could be perceived as inducing dealers and their representatives to sell mutual fund securities on the basis of incentives.
According to the settlement agreement, investment fund managers are prohibited from making a payment of money, or providing non-monetary benefits to participating dealers or their representatives. “The purpose of NI 81-105 is to provide a minimum standard of conduct to ensure that investor interests remain uppermost…and that conflicts of interest arising from sales practices and compensation arrangements are minimized.”
Despite this, and despite being warned in an earlier investigation that certain spending was excessive, the commission found that Mackenzie failed to meet the minimum standards of conduct expected. It also found that Mackenzie did not have systems, controls or supervision in place sufficient to provide reasonable assurances that it was complying with its obligations under NI 81-105.
In particular, the commission says Mackenzie permitted excessive spending on dealer representatives for promotional activities. The list of excessive spending outlined in the settlement agreement is extensive and wide ranging. Examples include one-day golf and reception events (where the mutual fund company paid $1,149 per representative to attend) and gifts of tickets to a range of sporting events and concerts (including playoff games and big ticket concerts for representatives and their guests), without requiring that a Mackenzie employee attend the event.
Dress shirts and iPads
The company also hosted promotional activities where attendees were given custom-fit dress shirts (worth $226 each) and iPads. (Sections of NI 81-105 allow fund managers to provide representatives with non-monetary benefits, provided they are promotional “and of minimal value.”) Between 2014 and 2016, Mackenzie provided more than 190 dress shirts and more than 450 iPads to conference attendees.
In March 2014, commission staff first engaged in discussions with Mackenzie regarding a three-day golf event it held in Bermuda. “Staff raised a number of issues with Mackenzie in relation to this event, including advising Mackenzie in April 2014 of staff’s view that the cost of $565 to $730 per (representative) per day for the event seemed excessive.”
New sales compliance guidelines
In December 2014, Mackenzie adopted new sales compliance guidelines that increased the amount it could spend on non-logoed items and activities to $1,800 per year, up from the prior annual spending limit of $1,500 per year. The guidelines permitted spending in excess of the limit if pre-approval was obtained from management. In subsequent months, company management approved excessive promotional activity spending repeatedly. In several other instances staff also engaged in excessive spending on one-time events without pre-approval from management. In addition to sporting events and concerts, the company sent representatives and their guests golfing and skiing.
From 2014 to 2017 the company also maintained a Promo Store, which contained a large number of branded and unbranded items including espresso machines, iPads, golfing putters, leather briefcases, Sony docking stations, Bose speakers and more.
“In order for gifts of items of a promotional nature and of minimal value to be permissible under section 5.6 of NI 81-105, the provision of these items must be neither so extensive nor so frequent as to cause a reasonable person to question whether the provision of these benefits improperly influences the investment advice given by the (representative) to his or her clients,” says the OSC settlement agreement.
Contributions to non-educational events
In addition, from September 2015 to December 2017, the company also made financial contributions to 102 non-educational dealer events.
Despite efforts to track benefits provided to each representative, the company gave a total of $33,000 in tickets from 2015 to 2017 that were not allocated to specific representatives. Where the cost of an event exceeded $500 but half of that cost was to pay for the representative’s guest to attend, Mackenzie did not consider the event to be in breach of its $500 large activity limit.
Multiple breaches of internal sales practices
Overall, in February 2017, Mackenzie told OSC staff that it had identified 31 breaches of its internal sales practice limits from 2015-2016. During the course of the OSC’s investigation, however, the company discovered an additional 42 breaches that were not detected by regular internal testing procedures.
According to the settlement agreement, the OSC says Mackenzie failed to adequately train and supervise its employees, to consistently record all of its costs, or to test its own internal controls. It also failed to enter all expenditures, did not consistently track the names of representatives who received tickets and did not consistently track the names of employees who attended events.
Mackenzie says management expense ratios were not affected by the monetary and non-monetary benefits paid to representatives.