Credit for cooperation still under the radar

Yes, regulators really do give credit to firms that cooperate with compliance inquiries and then make bona fide efforts to clean up operations. But you won’t read about it in the papers because those cooperation agreements generally preclude the regulator from providing details about what took place.

On the flipside, Jeffrey Kehoe, director of enforcement litigation for the IDA, told a recent Canadian Institute securities conference that when a true and un-contrite bad actor is dealt with, the regulator tells the world because that’s what the public has come to expect. The problem, said other conference participants, is that gives the impression the regulator is only intent on bringing actions that will ensure splashy headlines and increase credibility with the investing public.

And there’s another problem, says David Hausman, a lawyer with Fasken Martineau in Toronto. He says he’d like to tell clients to cooperate fully, but there’s no guarantee they’ll get due credit — even if in his view the client cooperates fully and then he as counsel provides the regulator with a good-faith Wells response to the issues raised. Even when all that’s done, he said, the regulator can still deem the firm didn’t cooperate because it didn’t agree with the regulator’s legal theory. “That should have no impact on the outcome,” he said.

The definition of “cooperation” does appear to be up in the air. Hugh Corbett, the MFDA’s director of litigation, said his threshold requires a firm to provide information that examiners would not have uncovered on their own. So you won’t get credit if you simply beat the regulator to the mea culpa. “Because we’re a younger regulator and dealing with a different kind of firm, we’re more likely to see things that are errors in judgment as opposed to deliberate wrongdoing,” he said.

Another concern, notes Hausman, is that no matter how much a firm does to self police, or self-correct, it still takes a hit because of the actions of the bad actor. The firm can do everything to show it has taken steps to ensure problems will never recur, but in the end it doesn’t matter how contrite it is because the firm still has to recover its reputation with customers and the public. Meanwhile, the bad actor simply leaves the securities business and starts over.

Kehoe conceded the regulatory structure is blame-oriented by design, and isn’t suited to helping firms change the way they do business or develop a culture of compliance. But Alberta Securities Commission enforcement director John Petch noted regulators have repeatedly heard a lot of the same stories and excuses over the years. “I can’t stand wimpy miscreants,” he said. “Most people in the dock seem to be very contrite and the pitch from counsel is they’ll never do it again. That pitch will receive a lot of cynicism from regulators.”

Filed by Philip Porado, Advisor’s Edge, philip.porado@advisor.rogers.com