Addressing Conflicts of Interest
Vulcan Asset Management Corporation (VAM), is an independent investment management firm, based in Ontario and registered and regulated by the Ontario Securities Commission (OSC) in the category of a Portfolio Manager. The OSC has mandated new regulatory requirements known as Client Focused Reforms (CFRs). These reforms are intended to ensure the protection and fair treatment of clients.
VAM operates in Ontario under the name Vulcan Investments and is the business of offering investment advice to clients. The firm offers only separately management accounts under fully discretionary investment management agreements (DMAs). VAM invests on behalf of its clients in a portfolio of individual securities. VAM offers it clients the Vulcan Intrinsic Value Portfolio (VIP) and the Business Owner Security and Stability (BOSS) Portfolio.
What is a Conflict of Interest?
As a registrant, VAM and individuals acting on its behalf are expected to identify, address and resolve material conflicts of interest which would be expected to arise between VAM and its clients. A conflict of interest may arise where (a) the interests of VAM or those of its representatives and those of a client may be inconsistent or different, (b) VAM or its representatives may be influenced to put VAM or the representatives’ interests ahead of those of a client, or (c) monetary or non-monetary benefits available to VAM, or potential negative consequences for VAM, may affect the trust a client has in VAM. A conflict of interest may be considered to be material or not material. In the normal course of business, a client would expect to be informed of a material conflict of interest, what the nature of that conflict is, what the portfolio manager is doing to address it and how it is being resolved in the interest of the client.
VAM will address and resolve any material conflict of interest in the best interest of the client at all times and will avoid any material conflict of interest that cannot be resolved in the best interest of the client.
A description of the material conflicts of interest that VAM has identified in relation its role as portfolio manager for its managed account clients, the potential impact and risk that each conflict of interest could pose, and how each conflict of interest has been or will be addressed, is set out below.
This document will be provided to each client at the time the client’s account is opened. We will update this document annually, or sooner if, we identify new material conflicts of interest as part of our ongoing conflicts of interest management. The updated version will be provided to each client in a timely manner with the delivery of each client’ account statement (by either mail or email as per the client’s preference).
Fair Allocation of Investment Opportunities
VAM has a process in place that is designed to ensure a fair allocation of investment opportunities to all clients. The objective of the fair allocation process is to ensure that all clients are treated equally and no account is treated more favourably as compared to any other. This concern is most acute when a security is unusually attractive at the time of purchase and/or difficult to obtain, or it is unattractive at the time of sale and disposal is difficult. All clients are segregated in either one of the two investment portfolios offered based on their objectives and determined at the time of their onboarding. VAM aggregates orders for all clients in a particular portfolio and executes a bulk trade. The bulk trade is allocated to individual accounts in proportion to the portfolio size and is determined through a standard portfolio management software that is widely used in the investment industry. All allocations are made to clients at the same time and at the same average price at which the trade is executed. However, this policy recognizes that no rigid formula will always lead to a fair and reasonable result, and that a degree of flexibility to adjust to specific circumstances is necessary. Therefore, under certain circumstances, allocation on a basis other than strictly pro rata based on order size is permitted if it is believed that such allocation is fair and reasonable.
VAM has a detailed policy towards monitoring personal trading by employees as laid down in the Personal Trading Policy section of the Policy and Procedures Compliance manual. The firm has a procedure to determine securities that employees may not trade in. This is designed to obviate any conflict of interest such that employees may not use sensitive information about a trade to their own advantage.
VAM may also invest its surplus capital, however there is a clear distinction made between types of investments that VAM makes and that are made for clients. There is no overlap between these investments and investments made by VAM are highly restricted and most investments are prohibited. This is closely monitored and any perceived conflicts will be addressed immediately and in favour of clients.
Broker Selection / Best Execution
In selecting broker-dealers to effect portfolio transactions for accounts, VAM has a fiduciary duty to seek to obtain best execution (i.e., the most advantageous execution terms reasonably available under the circumstances, but may not necessarily be the lowest price). VAM executes trades on behalf of accounts under management through brokers it has reasonable reason to believe provide the best execution. Allocation of trades is also to be seen in context of VAM receiving research support on various investment ideas that it pursues in order to select securities for client portfolios. VAM maintains a list of approved broker-dealers that meet its requirements for execution and research capabilities. VAM performs periodic evaluations of order execution capabilities and products and services received from the approved broker-dealer(s) and will update the list, as appropriate.
Soft Dollar Arrangements
Soft dollar arrangements are a common practice in the investment industry for portfolio managers to buy research from various vendors that could bolster in-house stock selection capability. These services are paid for from brokerage commissions generated by portfolio trades. Soft dollar arrangements, if used to benefit the firm rather than the client, are a major conflict and must be avoided. Soft dollars used to purchase any thing other than research or order-execution services that would otherwise not be available to the firm is a conflict and must be avoided. VAM does not use soft dollar arrangements.
Fair Valuation of Assets
Portfolio management firms earn fees on the value of the assets under management. Accordingly, there is a potential conflict of interest if the portfolio manager could inflate the value of the assets under management. At VAM, valuation of the portfolio and determining of closing prices are not done internally and closing prices are provided by the custodian of each client’s account. VAM has no role to play in determining closing prices used for valuation purposes.
There may be a conflict when it comes to errors encountered while managing client accounts. The more common errors occur during executing a trade and errors in calculating and applying fees to client accounts. In both cases the conflict, if any, is resolved in favour of the client. Any losses arising from trading errors are attributed to VAM and settled by the firm. Fee calculations are not handled by VAM but by the custodian. Any errors in calculating fees if resulting in a higher fee being charged in error is resolved immediately upon discovery, fully to the benefit of the client. VAM has a process in place to check client accounts each accounting period for accuracy of application of the management fee.
Gifts and Entertainment
The giving and receiving of gifts by employees of VAM could create a perception of conflict of interest if the gift given or received is above a certain threshold. VAM has a policy in place when it comes to the giving and receiving of gifts and also with business entertainment especially with persons and entities with whom VAM does business or seeks services needed to accomplish its portfolio management goals. VAM will only approve gifts or benefits which it considers reasonable and which would not be of such a nature as to influence decision-making.
VAM as a discretionary portfolio manager has the right to vote proxies on behalf of clients. This can be a source of conflict as the portfolio manager can exercise the right to vote in a manner that may be under some circumstance prejudicial to the interests of clients. VAM does have a relationship with any issuers and does not hold meaningful positions in the securities of issuers such that its vote could be influential. Nor does VAM seek to do business with any issuer whose securities it invests in. VAM has a policy of not voting proxies and if a proxy vote was deemed necessary it would be exercised in a manner beneficial to clients.
At times, VAM’s representatives may participate in activities outside of their employment with VAM, such as serving on a board of directors, participating in community events or pursuing personal outside business interests, whether paid or unpaid. A potential conflict can arise from a representative of VAM engaging in such activities as a result of compensation received, the time commitment required or the position held by the representative in respect of these outside activities. The potential impact and risk to clients are that these outside activities may call into question the representative’s ability to carry out their responsibilities to clients or properly service clients, there may be confusion which entity(ies) the representative is acting for when providing clients with services and/or if the outside activity places the representative in a position of power or influence over clients. VAM has a defined procedure for permitting certain outside activities. No outside business activity is permitted for any employee if it conflicts in any way with the interests of clients or if there is reason to believe that it may impair the ability of the employee in the full and honest discharge of their duty to clients. All outside business activities must be reported to the Chief Compliance Officer and approval for the same is required.
Referral arrangements – whereby VAM pays or provides a fee or other benefit for the referral of a client to VAM, or whereby it receives a fee or other benefit for the referral of a client to another entity – creates a conflict because the person recommending the service to the client is getting compensated for that referral. Referral arrangements may be entered into both with other registrants and with non-registrants.
VAM has referral arrangements with individuals and entities outside the firm. The purpose of these referral arrangements is for VAM to have access to clients that it may otherwise not have access to. In all cases, the referral arrangement will be set out in a written agreement which will be entered into in advance of any referrals being made. Details of how the referral fee is calculated and paid and to whom it is paid and other required information regarding each referral arrangement will be provided to affected clients as required. VAM also has policies and procedures that are designed to ensure that fees and other benefits received or paid or provided, as applicable, in connection with referral arrangements are appropriate and do not provide inappropriate incentives, and that any referral by VAM is in the client’s best interest. VAM undertakes periodic reviews of referral arrangements. Clients do not pay any additional charges and fees in connection with referrals, and are not obligated to purchase any product or service in connection with a referral.
Compensation and Incentive Practices
Some firms and its representatives earn compensation in connection with the investments made in your account. The potential conflict is that the firm may be incentivized to provide clients with more products and service to earn more fees for the firm. A conflict can also arise if employees are compensated through performance incentives. VAM does not sell any products to its clients and does not earn any commissions or extra fees. VAM charges management fees, agreed to by clients and fully disclosed in the discretionary management agreement. VAM employees’ compensation is not tied to sales targets and there are no incentives offered to employees that could be a cause of conflict.
Trades Between Client Accounts
So-called “cross trades” may give rise to conflicts of interest as VAM is responsible for determining the terms of the trade, and in particular the price, for both accounts and the terms of the trade may benefit one account to the detriment of the other account. In addition, there are significant regulatory restrictions surrounding cross trades. VAM does not trade securities between client accounts. All transactions in client portfolios are done at arms length and in a transparent manner.
Addressing a complaint by a client can create a potential conflict if VAM has a choice between addressing the complaint in a manner that is beneficial to VAM or addressing the complaint in the best interests of the client. The potential risk to clients is that VAM acts in its own business interests.
To control this potential conflict, VAM has a complaints handling policy and procedure which applies to its activities as a portfolio manager. All complaints, whether written or oral, received by any employee of VAM must be forwarded immediately to the Chief Compliance Officer. Only the Chief Compliance Officer has the responsibility and authority to deal with and resolve complaints. VAM shall keep and preserve in its office either a separate file of all complaints of customers and action taken by VAM, if any, or a separate record of such complaints and a clear reference to the files containing the correspondence connected with such complaint as maintained in such office.