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Independent Accountants' Investment Counsel Inc.

 

CONFLICTS OF INTEREST – CLIENT DISCLOSURE

June 2021

 

Overview

 

The terms “IAIC” and/or “the firm” refers to Independent Accountants’ Investment Counsel Inc. registered as a Portfolio Manager in Ontario with the Ontario Securities Commission and equivalent registration in Alberta, British Columbia, Manitoba, Newfoundland, New Brunswick, Nova Scotia, Prince Edward Island, Quebec and Saskatchewan.

 

IAIC must take reasonable steps to identify existing material conflicts of interest, and material conflicts of interest that are reasonably foreseeable,

 

  • between the firm and the client, and
  • between each individual acting on the firm’s behalf and the client

and must address such conflicts in the best interest of the client.

 

This Conflicts of Interest Client Disclosure Document (‘Disclosure’) sets out those circumstances that have been identified by IAIC where a reasonable person (an impartial observer) would conclude that either IAIC or its advisers’ interests would, or could, conflict with their duty to act in the clients’ best interest, together with a high-level overview of the systems and controls adopted to manage such circumstances.

 

Other conflicts may exist in relation to certain aspects of IAIC’s business which do not entail a risk of damage to the interests of IAIC’s clients (non-material conflicts). IAIC believes that such conflicts are appropriately managed through business processes, and accordingly they are not reflected in this Disclosure. 

 

Identification, Recording & Management of Conflicts of Interest

 

IAIC has established and implemented policies, procedures, and training to support the firm’s conflicts of interest policy to enable staff to easily identify situations where a conflict may exist or arise, and to set out the steps to be taken to prevent, avoid or manage conflicts as applicable.

 

IAIC’s employees are responsible for identifying conflicts of interest and reporting such conflicts to the firm’s Chief Compliance Officer (CCO).  Employees understand that where a conflict is identified as a material conflict of interest, it must be avoided or managed in the best interests of the client and that the employee may not engage in any activity related to such conflict without the consent of the CCO. 

 

IAIC’s CCO provides guidance to the firm and its employees on the identification and management of conflicts of interest.  The CCO maintains a Conflicts of Interest register and provides regular reports to the firm’s President, and Board of Directors on conflicts of interest management including how material conflicts are addressed in the best interests of the client.  The CCO monitors the effectiveness of internal controls as part of their ongoing monitoring responsibilities, including confirming that effective disclosure of material conflicts is provided to clients.

 

IAIC’s goal is to address conflicts in a fair, equitable and transparent manner, consistent with the best interest of our clients. The firm aims to avoid conflict where possible, and in all other cases manages conflicts through internal controls and, where relevant, disclosure. Conflicts deemed too significant to be addressed through controls or disclosures must be avoided. Disclosures of conflicts will be made in a timely, meaningful, and prominent manner enabling clients to assess their relevance when evaluating recommendations made by their adviser.

 

The following information is intended to assist clients in understanding IAIC’s conflicts of interest, including how IAIC addresses such conflicts.   For ease of reference, we have grouped the conflicts into the following categories:

 

Personal (employee) conflicts

  • Compensation arrangements – advisers
  • Compensation arrangements – compliance and other supervisory staff
  • Directorships and other external arrangements
  • Gifts and entertainment
  • House accounts
  • Personal relationships with clients - authority over the financial affairs of a client
  • Personal relationships with clients – being named as beneficiary in a Will
  • Personal relationships with clients - financial dealings with a client
  • Personal trading

 

Conflicts between clients

  • Cross trades
  • Fair allocation of trades among clients

 

Firm conflicts

  • Compensation – compensation models for different product types
  • Compensation – for services offered
  • Error resolution
  • Execution services
  • Gifts and entertainment
  • Leveraging or borrowing to invest
  • Payment for research services (soft dollar arrangements)
  • Proprietary products
  • Proxy voting
  • Referral arrangements

 


Conflicts of Interest Disclosure

 

Personal (Employee) Conflicts

 

 

Conflict

Compensation Arrangements - Advisers

 

Conflict Description

There is a risk that the employee compensation and incentive structure could encourage employees to place their personal interests ahead of those of their clients. 

 

Conflict Management

CONTROL

IAIC does not offer employees incentives for the sale of particular products or services.  Although IAIC advisers are not compensated directly based on products and services sold to clients, they do participate in an employee profit sharing program which is based on overall annual revenues earned by the firm. 

 

To address this potential conflict, IAIC has policies and procedures prohibiting recommendations solely for the purpose of generating revenue without any benefit to clients.

 

IAIC has put in place compliance programs to monitor advisers and ensure recommendations are in the best interest and suitable for their clients.  Advisers will:   

  • gather sufficient information through our 'Know Your Client' process to support a suitability determination
  • develop appropriate investment asset mixes for each client based on the 'Know Your Client' information obtained
  • assess and approve suitable investments through IAIC's 'Know Your Product' process and select investments that are suitable for each client's circumstance.

 

Conflict

Directorships and Other External Arrangements

 

Conflict Description

Advisers or other employees may have ownership interests or hold positions in organizations other than IAIC (whether within the IAFG group or external to the Group) such as directorships, non-executive positions, advisory board memberships, or other arrangements either paid or in a voluntary capacity.  There is a risk that these arrangements may cause the employee to place their interests or the interests of the external organization ahead of the interests of IAIC clients.  

 

Conflict Management

CONTROL

Securities regulations prohibit an IAIC adviser from assuming directorships of other registered firms unless they are firms that are affiliated with IAIC.   Where outside offices are held by advisers, or an adviser intends to hold such a position, or when an adviser is engaged in a business activity external to IAIC, reporting and, in many cases, pre-approval is required. 

 

Employees are provided with annual training with respect to IAIC policies and procedures on directorships and other external arrangements and must also sign an annual attestation confirming they have reviewed the policy and will comply with it.


 

Conflict

Gifts & Entertainment

 

Conflict Description

The firm or its employees may give, solicit or be offered gifts and other entertainment incentives which may influence their behaviours or induce them to act in an inappropriate or unethical manner to the detriment of clients. 

 

This may influence the firm or the adviser to favour a third party or business partner over its clients.

 

Conflict Management

CONTROL

To manage the risks associated with gifts and entertainment benefits, IAIC has adopted a gifts and entertainment policy that provides guidance to ensure that its employees do not offer or give, solicit or accept gifts or entertainment which are likely to conflict with their duties owed to clients.  Gifts and entertainment must be declared and recorded, and in some cases, must be pre-approved.  In certain circumstances, gifts and entertainment will not be permitted.

 

Employees are provided with annual training in respect to the policy and must also sign an annual attestation confirming they have reviewed the policy and will comply with it.


 

Conflict

‘House’ Accounts

 

Conflict Description

IAIC permits advisers to open “House Accounts” which include their own personal accounts, accounts for family members or friends, or clients who have business relationships with the adviser prior to the adviser becoming an IAIC employee. 

 

Advisers may be compensated differently for these House Accounts and there is a risk that this may influence the adviser to put their own or the interests of their House Account clients ahead of their clients who are not House Accounts.

 

Conflict Management

CONTROL

IAIC expects all employees to adhere to general ethical standards in accordance with the IAIC Code of Ethics.

 

IAIC has put in place compliance programs to monitor advisers to ensure recommendations are in the best interest and suitable for all their clients and that they

will:

  • gather sufficient information through our 'Know Your Client' process to support a suitability determination
  • develop appropriate investment asset mixes for each client based on the 'Know Your Client' information obtained
  • assess and approve suitable investments through IAIC's 'Know Your Product' process and select investments that are suitable for each client's circumstance

IAIC also has additional policies and procedures such as the personal trading policy and best execution policy to manage transactions where conflict with clients’ interests may arise.  

 


 

Conflict

Personal Relationships with Clients - Authority Over the Financial Affairs of a Client

 

Conflict Description

A client may request their adviser to act in a position that gives the adviser authority over the client’s financial affairs, for example, as named Attorney under a Power of Attorney, as an executor for a client’s estate, or as a trustee of a client’s trust account.

 

With the power, authority and discretion given to the adviser in such circumstances, the adviser would be a position to put his or her interests ahead of those of the clients and this could affect the decisions and recommendations made by the adviser.

 

Conflict Management

CONTROL

IAIC policy prohibits advisers from acting as a power of attorney, executor, or trustee for a client, with the exception of immediate family members (parent, spouse or common law partner, grandparent, sibling or child).

 

Advisers must seek approval from the firm's CCO when acting as a power or attorney, executor, or trustee for an immediate family member. 

 

An annual attestation is signed by all advisers acknowledging they are not acting as an executor, power of attorney or trustee for a client other than as authorized.

 


 

Conflict

Personal Relationships with Clients - Being Named as a Beneficiary in a Client's Will

 

Conflict Description

Being named as a beneficiary in a client’s Will would put the adviser in the position of having a personal interest in the client’s estate and may affect the decisions and recommendations made by the adviser to put their interests ahead of the client.

 

Conflict Management

CONTROL

IAIC policy prohibits any adviser from knowingly being named as a beneficiary in a client’s Will, with the exception of immediate family members (parent, spouse or common law partner, grandparent, sibling or child).

 

An annual attestation is signed by all registered staff acknowledging that to the best of their knowledge, they are not named as a beneficiary in a client’s Will other than as authorized.

 


 

Conflict

Personal Relationships with Clients – Financial Dealings with a Client

 

Conflict Description

A client and adviser may develop a personal relationship, and in the course of that relationship, the client may offer the adviser a benefit, such as a loan, an opportunity to invest or to purchase a personal asset from the client.  Advisers may also wish to loan money to clients to enable them to take advantage of an investment opportunity.

 

This personal relationship may cause the adviser to put one client’s interests ahead of another client.

 

Conflict Management

AVOID

IAIC policy prohibits advisers from entering into personal financial dealings with clients. 

 

Employees are provided with annual training in respect to the policy and must also sign an annual attestation confirming they have reviewed the policy and will comply with it.


 

Conflict

Personal Trading

 

Conflict Description

Advisers may make personal investments in securities or funds which they manage as part of their portfolio management duties. 

 

This may influence an adviser to take advantage of their knowledge of client trading or other knowledge gained as an employee of the firm, for personal gain to the detriment of their clients.

 

Conflict Management

CONTROL

IAIC has adopted a personal trading policy, which requires pre-clearance and reporting for most employee trades. 

 

Advisers must periodically attest compliance with, and understanding of, IAIC's personal trading policy.

 

Account statements for each adviser are reviewed on a monthly basis ensuring only approved trades have been executed.

 


 

Conflicts Between Clients

 

Conflict

Cross Trades

 

 

 

Conflict Description

From time to time, securities sold on behalf of one client may be suitable for purchase by another client.  IAIC may execute the transaction via a trading counterparty (a 'cross trade'), and this means that other clients are not given the opportunity to purchase the sold securities.

 

 

 

Conflict Management

CONTROL

Cross trades are subject to internal policies and procedures and require approval from the Chief Investment Officer.

 

Further, cross trades will only be undertaken by IAIC as permitted under applicable law or client restrictions and when in the best interests of both the purchaser and seller. To further manage conflicts, IAIC does not receive fees or commissions when making these trades.

 


 

Conflict

Fair Allocation of Trades Among Clients

 

Conflict Description

In some circumstances, IAIC may place an order which is not fully filled, requiring the allocation of the filled orders among its clients. 

 

This may create a conflict between clients’ accounts where certain clients may benefit over other clients in certain investment opportunities. 

 

Conflict Management

CONTROL

IAIC’s Fair Allocation policy directs that any orders that are not fully filled are distributed to a client's account on a pro-rata basis so that all clients are treated equitably. 

 

IAIC advisers are not involved in the allocation of client orders post trade.  The allocation is reviewed and approved by IAIC's Chief Investment Officer.    

 

 


Firm Conflicts

 

 

Conflict

Compensation – Compensation Models for Different Product Types

 

 

 

Conflict Description

IAIC offers a variety of portfolio types with differing fee structures.  There is a risk that advisers may recommend a portfolio type based on fees charged to increase the revenue earned rather than based on what is in the client’s best interests.

 

 

 

Conflict Management

CONTROL

IAIC does not offer employees incentives for the sale of particular products or services.  Although IAIC advisers are not compensated directly based on products and services sold to clients, they do participate in an employee profit sharing program which is based on overall annual revenues earned by the firm. 

 

To address this potential conflict, IAIC has put in place compliance programs to monitor advisers to ensure recommendations made are in the best interest and suitable for their clients.  Advisers will:

  • gather sufficient information through our 'Know Your Client' process to support a suitability determination
  • develop appropriate investment asset mixes for each client based on the 'Know Your Client' information obtained
  • assess and approve suitable investments through IAIC's 'Know Your Product' process and select investments that are suitable for each client's circumstance.

 


 

Conflict

Compensation – for Services Offered

 

Conflict Description

Compensation for services offered by portfolio management firms can come from a number of different sources and this may influence the firm to put its own interests ahead of the client for monetary gain.

 

Conflict Management

AVOID

IAIC informs clients of its fees and how it is compensated.  IAIC derives income from a fee charged to each client as a percentage of AUM.  No other commission or compensation is earned.    We do not receive commissions on trades made on clients’ behalf from the brokerages nor do we receive payment from securities issuers or other third parties based on products sold.

 


 

Conflict

Error Resolution

 

Conflict Description

Where an error occurs (e.g., a trading error), there is potential for IAIC to benefit to the detriment of the client as IAIC may stand to avoid a loss or make a gain from the error at the client's expense.

 

Conflict Management

CONTROL

IAIC has procedures in place to ensure that errors are identified, investigated and remediated in the best interests of the client.  When correcting any error, the client is returned to the position they would have been in had the error not occurred with no benefit to IAIC.

 


 

Conflict

Execution Services

 

Conflict Description

IAIC may be incentivized to use certain brokers over others when executing orders and putting the firm's interests ahead of a client's best interests.

 

Conflict Management

CONTROL

With the exception of debt purchases, IAIC does not place trades on behalf of its clients.  All equity orders are processed through the correspondent broker where the client account is held (the custodian). IAIC’s Trading and Brokerage Policy requires IAIC to obtain the most advantageous execution terms for its clients that are reasonably available under the circumstances. 

 

No compensation or incentives are received from any broker.


 

Conflict

Leveraging or Borrowing to Invest

 

Conflict Description

Leveraged strategies involve a client taking out loans or leveraging equity in existing investments to increase their wealth.  Assisting or encouraging a client to borrow can create a conflict of interest as it increases the assets under management which is advantageous to the firm and the adviser and may create an incentive for the adviser to place the interests of the client to whom money has been loaned, ahead of the interests of other clients. 

 

Conflict Management

AVOID

IAIC does not lend money, extend credit, or provide margin to its clients, and its employees are prohibited from doing so. It is also against our firm policy to recommend to clients that they use borrowed money to finance any part of a purchase of a security. If, however, a client chooses to do so, the adviser must provide detailed disclosure of the risks associated with this investment strategy.


 

Conflict

Payment for Research Services (Soft Dollar Arrangements)

 

Conflict Description

Brokerages that are used to execute client trades, pay commissions on those trades to the firm that places the order.  In soft dollar arrangements, firms are allowed to use a portion of those commissions to pay for investment research services offered by the brokerages, rather than paying separately for the research. 

 

This may affect the decisions of the firm to use certain brokers over others when executing orders and putting the firm's interests ahead of a client's best interests.

 

Conflict Management

AVOID

With the exception of debt purchases, IAIC does not place trades on behalf of its clients – these are completed by the client’s custodian.  When research services are required, fees are negotiated based on the use of the research and are independent of any other arrangement between IAIC and the brokerage.  


 

Conflict

Proprietary Products

 

Conflict Description

Investment firms that manufacture and sell their own investment products (proprietary products) may be in a conflict position when they recommend their own products over those of third parties as they may put their own monetary interests ahead of the clients’ interests when making investment recommendations.

 

Conflict Management

AVOID

IAIC does not offer proprietary products to clients


 

Conflict

Proxy Voting

 

Conflict Description

In some instances, IAIC is provided with discretionary authority to vote on the client’s behalf on corporate actions in the companies we invest in.  There is a potential that IAIC could vote in a manner that promotes its own interests over those of the client. 

 

Conflict Management

CONTROL

IAIC maintains a proxy voting policy and associated procedures that are designed to ensure that proxies are voted in the best interests of the client.  Voting recommendations are made by the adviser and submitted to the Chief Investment Officer for review, approval, and filing. 

 


 

Conflict

Referral Arrangements

 

Conflict Description

IAIC pays a referral fee to certain firms who refer clients to IAIC for investment management services.  These firms may have an ownership interest in IAIC.  This fee and the ownership interest may be perceived to be a conflict of interest.

 

Conflict Management

DISCLOSURE

Referral fees are generally a conflict for the entity that receives the fee as they may be incented by their own interests in receiving the fee rather than those of their clients.  However, IAIC understands that the payment of a referral fee may be perceived as a conflict for IAIC and therefore is transparent to its clients about its ownership structure and business model. 

 

The portfolio management services we offer our clients are provided through the integration of services of two separate companies:  your chartered accountant’s firm and IAIC.  IAIC is a wholly owned subsidiary of Independent Accountants’ Financial Group Inc. (IAFG).  Your chartered accountant’s firm has an indirect ownership interest in IAFG. 

 

IAIC derives income from a fee charged to each client as a percentage of AUM.  No other commission or compensation is earned.  At account opening, we inform clients of any fees and compensation which is paid by us to the referral parties.