Certain investment policy statements and portfolio rebalancing activities must be pre-approved, clarifies self-regulator
The Investment Industry Regulatory Organization of Canada (IIROC) has released guidance to help clarify which activities associate portfolio managers (APMs) are allowed to perform without pre-approval from a supervising PM.
According to a recent notice from IIROC, APMs can provide support to PMs with their managed accounts without pre-approval with respect to activities such as collecting KYC information; assisting with client relationships; doing research on and analyzing individual securities, the economy, and asset classes generally; and performing managed account rebalancing which is mechanical in nature.
“We do not expect PMs to pre-approve each trade an APM makes,” the self-regulatory organization said. “Rather, we require that they approve the APM’s advice before they provide it to clients.”
Because asset allocation recommendations are considered to be investment advice, IIROC said APMs must seek pre-approval from a PM before providing clients with investment policy statements (IPS) that include an asset allocation. Similarly, APMs are to seek pre-approval when selecting suitable model portfolios for a managed account.
Since IIROC considers rebalancing a portfolio in order to have it match the recommended asset allocation in a model portfolio to be mechanical in nature, it said APMs don’t need pre-approval to do that. But PM pre-approval is needed for “portfolio rebalancing of a strategic nature,” which includes:
- any change to an asset class’, investment’s or security’s target weight or range;
- any trades placed by the APM that would result in a either a change to, or a deviation from, the IPS, asset allocation or individual investment level investment directive pre-approved by the PM; or
- any trades that would make changes to a model portfolio (or over-ride a model portfolio).
“Based on their own monitoring, a PM may also direct the APMs they supervise to change an investment’s target weight or range in their client’s portfolios or make changes to a model portfolio,” IIROC said.
“When pre-approving or directing rebalancing of a strategic nature, we expect the PM to use their professional judgement to determine when trade-by-trade pre-approval is necessary, based on the circumstances (e.g. the type, liquidity, and complexity of securities), the impact of the change on the client and the APM’s level of experience,” the SRO added.
