Being investigated by a regulator? Co-operation is crucial

This article appears in the June 2020 issue of Advisor’s Edge magazine. Subscribe to the print edition, read the digital edition or read the articles online.

During a regulatory investigation, co-operating and mounting a defence aren’t mutually exclusive.

A regulatory investigation can be frightening, triggering an instinct for self-preservation and to ignore the inquiry. But a head-in-the-sand approach makes matters worse.

Maureen Doherty, a partner at Borden Ladner Gervais in Toronto, says advisors have an obligation to respond fully to regulatory inquiries. “It doesn’t mean you’re not defending yourself,” she says. “It means you’re providing responses in a manner in which [the regulators] can do their job.”

When an advisor doesn’t co-operate, hearing panels typically deem the advisor ungovernable and thus a risk to investors. Co-operation can lead to a more positive outcome.

An investigation doesn’t always lead to enforcement, Doherty says. When advisors are “forthcoming and flexible,” regulatory staff can more easily close a file if appropriate.

Hearing panels have cited co-operation as a mitigating factor (and as an aggravating one where advisors aren’t co-operative), Doherty says.

Also, when an advisor remains in the industry after being disciplined, co-operation helps preserve the relationship with the regulator, she says.

Still, responding to an investigation can be challenging. Independent advisors, or those whose relationship with their dealers has deteriorated, may want to retain legal counsel, Doherty says.

In most cases, dealers will help advisors through the investigation and provide counsel. Doherty encourages dealers to maintain an open line of communication with the advisor, promoting co-operation and helping them gather files.

When asked if there’s ever a good reason to refrain from co-operating, Doherty says no. “You should defend yourself to the best of your ability,” she says.

In 2019, the Mutual Fund Dealers Association of Canada concluded 120 hearings, with 22 permanent bans. Four of the bans were for failure to co-operate.

The Investment Industry Regulatory Organization of Canada prosecuted 28 individuals last year, permanently banning three. One was a former rep who failed to co-operate, resulting in the ban and a $15,000 fine.