cifp 2005 annual national conference linda j. murray, ll.b., cfe regulatory compliance concepts and...

CIFP 2005 Annual National Conference

Linda J. Murray, LL.B., CFE

Regulatory Compliance Concepts and Recent Regulatory Initiatives

Bulls, Bears and Lawyers….It’s a Jungle Out There!

A Survival Guide for the Busy Broker

Part I: Compliance Concepts

2 things to remember:

the basic obligations have not changed much over the years

the standard is not perfection—it is a reasonably prudent person, acting in good faith

Basic Obligations of Registrants

1. Registration:

be registered where client resides maintain proficiency level (CE) product knowledge only recommend to client securities

properly registered or exempt

Basic Obligations of Registrants

2. Disclosure:

MUST give full and true disclosure of all facts and risks required by client to make informed investment decision and not omit to disclose material information

MUST NOT disclose confidential information about clients or material information about a company that has not been generally disclosed

Basic Obligations of Registrants

3. Know Your Client & Suitability:

KYC requires reasonable steps to learn (and keep current) the essential facts relating to the client (investment objectives, risk, financial condition)

Suitability requires registrant to determine if each transaction is suitable for the client and to advise if it is not suitable (ongoing obligation so must be made based upon current information)

Basic Obligations of Registrants

4. Recordkeeping and Documents

Ensure client information up to date and instructions fully documented

Basic Obligations of Registrants

5. Gatekeeper Obligation

act honestly, in good faith, in the best interest of the client, giving the client priority

refuse to act for persons who would cause injury to the integrity of the markets

not engage in any activity that might bring the industry into disrepute

Code of Ethics/Code of ConductJoint Forum, FPSC, CAPSA, FCIDB, CLHIA, IBC, IFB and ADVOCIS/CLU and IDA (CPH)

IntegrityObjectivityCompetenceFairnessConfidentialityProfessionalismDiligence

LAWS

SRO RULES &REGULATIONS

FIRM POLICIESAND PROCEDURES

Approach of Regulators

95% want to comply and try to Audit v. investigation (clear at audit stage) Reasonable people can agree to disagree

(issues arise, don’t make them personal) Regulators have limited resources (help them

focus on the 5% and not on you) SRO system relies on the honour system You know your business best (if you don’t police

yourself, someone else will)

Role of Compliance

One of the firm’s service departments Most new regulatory initiatives are aimed at, or

flow through, Compliance Compliance is a buffer between the salespeople,

clients, regulators & lawyers Compliance can assist with difficult clients and

help deal with complaints Sometimes the answer has to be ‘no’

Benefits of Compliance

Catch issues early, less work & stress Identify areas for improvement & prevent

problems Promote good reputation of registrants,

employees, firm and industry Focus on building the business Fewer unhappy clients, complaints & lawsuits Regulators and police can focus resources

Costs of Non-compliance

Less time for business development More stress, paperwork, time, expense Unhappy client, firm, registrant, Compliance,

regulators, lawyers Impact on reputation of registrant, firm and

industry Increased regulatory audits Potential sanctions & business interruption

Areas of Potential Liability

• Suitability• Unregistered activity• Unauthorized trading• Misrepresentation/omission regarding

investment• High pressure sales practices

How to Avoid Problems

Deal honestly, promptly and professionally with clients—your most valuable business asset

Know your client (initially and update annually) Know your products Ensure that product is suitable for that client at

that point in time (and follow up) Fully disclose the good and the bad aspects of

potential investments

How to Avoid Problems

continuing education Identify and use firm resources (ie.

Compliance) Resolve client issues quickly & amicably 20% of your clients will bring 80% of your

business (fire bad clients) DOCUMENT, DOCUMENT, DOCUMENT

Prohibited Conduct

Discretionary or unauthorized trading Churning and excessive commissions Unregistered activities (broker and product) Conflict of interest/client priority Representations of future listing, price, return,

dividend, interest, re-purchase Theft of cash or securities Misrepresent benefits or risks of investment Mutual fund switches without investment purpose Release of confidential information, insider

tipping/trading

Good Compliance = Good Business

Key to dealing with ever-changing regulatory requirements and resulting paperwork?

team approachreasonable diligencegood faith

Part 2: Regulatory Initiatives

Recent move toward general financial industry reform and corporate governance

Industry members through corporate governance and regulatory enforcement

Regulators through reviews

Recent Issues

• Harmonization of financial regulation• SOX and corporate governance initiatives• New disclosure rules for investment funds• Do Not Call Registry, licence telemarketers• Hedge fund regulation• Criminal Code (whistleblower, insider trading,

Production Orders)• Bank Act review (banking & insurance services)• ASC review and changes at OSC

Regulator Up-date

• MFDA• RS• IDA• CSA/Commissions• IMET• AML• Privacy

Litigation Update

• Blackburn v. Midland and Levesque (Ont)• Portus and Norshield (hedge funds)• Market timing cases (IDA, OSC, MFDA)• Buckingham Securities and auditor• AIG and Willis North (insurance)

Recent Statistics

RS (2004)2002 4 cases $ 82,0002003 15 cases $1.0 million2004 11 cases $5.6 million

MFDA2004 1 settlement (IG)2005 7 notices (3 decisions)

Recent Statistics

IDA (2004)

Complaints 1,297Discipline decisions 75Warning letters 24ComSet filings 1,896Audits each firm

Recent Statistics

IMET (2004)7 major investigations26 less serious probes

FinTRAC (2004)197 case disclosures representing $700

million in suspicious funds

Recent Statistics

CSA (first half 2004)Proceedings commenced 77Orders and settlements 59

BCSC (Sept 03/04)Enforcement orders 45Undertakings 35Investigations 21