Alternative Products:

Scary Stuff orGood For Business

13th Annual ACCP Compliance ForumApril 28, 2014Prema K.R. Thiele

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What are

Alternative Investments

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?

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Potential Key Benefits ofAlternative 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

OSC Annual Report 2013

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Regulatory Focus – 2014

Overall focus: “retail” investors and the retail investor experience

• Investor advocates• Registrant misconduct• 2008/09 financial crisis

Examples of focus:

• 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)

Aim of achieving greater participation by investors and greater knowledge

•“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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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 openingb. Pre-tradec. Confirms and quarterly account statementsd. Annual cost and performance statements

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

• ETFs, structured products, closed end funds• “Alternative” funds• Derivatives usage, with OTC derivatives a huge all-encompassing focus

Ensuring all industry participants are under regulatory control

• “Exempt market dealer” registration and rules (2010)• “Investment fund manager” registration and rules (2012)• UDP/CCO – responsibilities and expectations• Enhanced compliance reviews

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Regulatory Focus – 2014

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Context 2014

• SEC indicates that alternative investments are a compliance examination priority for 2014, including reviewing adequacy of product due diligence (“Know-Your-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

416.367.6082pthiele@blg.com

The views expressed in this presentation are solely those of the presenter and should not be attributed to Borden Ladner Gervais LLP or its clients. We make no claims, promises or guarantees about the accuracy, completeness or adequacy of any information referred to or contained herein. No person should act or refrain from acting in reliance on any information found herein without first obtaining appropriate professional advice. This presentation was presented for informational purposes only and does not constitute legal or other professional advice and does not create a solicitor-client relationship between you and the presenter.

© 2014 Borden Ladner Gervais LLP