Bleaching out breach

(March 2006) Though they often make great business sources, mixing friends and family with your practice requires caution. You’re mistaken to believe these trusted clients might never consider launching a complaint against you, when in fact some of these relationships have been known to display a dark side — especially visible if the client loses money.

Further, you’ll slip into a danger zone if cajoled into ignoring your regulatory obligations. Remember when Daniel Duic sold childhood friend, RBC investment banker Andrew Rankin down the river? Taking advantage of that longtime friendship, Duic lulled Rankin into a false sense of security to the point where Rankin provided Duic confidential bank information. In the words of the trial judge, Duic engaged in “pestering, plodding, pleading [with Rankin],” and plying him with alcohol to extract confidential information concerning investment deals. Duic cut a deal with the OSC, the evidence from which ultimately led to Rankin’s six-month jail sentence (presently under appeal).

Bringing family relations into the advisor relationship can also prove risky, so beware the danger when old Uncle Richard asks you to bend the rules “just this once.” Advisors will often admit it’s harder to say no to friends and family who know what it takes to soften you. A Toronto taxi driver I met described the time an American tourist pressured him with cash to take five passengers in his cab. His licence and insurance coverage only allowed four travellers. Bribes aside, the driver said refusing the cash was easy because he could lose his licence if caught. But I wondered how easy it would be if a loved one asked for the same favour.

Dilemmas such as these are common in highly regulated industries, such as securities, where basic to the trade is that all transactions are suitable and investments diversified. However, when the performance of a particular security surpasses others, clients’ greed may push advisors to purchase unsuitable investments, or over-concentrate their accounts.

But it’s those same clients who will also be first to blow the whistle or complain. It’s also not a contest between the advisor and the client as to who is more ethical, and even convincing a judge your client’s goals were dishonest won’t necessarily save you from penalty.

So, how should you handle these situations? First, don’t ignore a red flag. If you feel uncomfortable with a request from any client that seems unsuitable, consider the ramifications. Follow your instincts and ask, is it an ethical, legal, regulatory or a company policy infraction? Your branch manager or compliance officer may need to assist you in deciphering the issue, but by addressing the issue you’ve demonstrated professionalism.

Of course, regulations and policies may require you to report to the branch manager and/or compliance, especially when a client complains, but you don’t have to wait for such events to bring them into the loop. Second, explain to the client that what they’re asking is unethical and that your licence is at risk. Let’s face it, how strong can their commitment to you really be if they’re asking you to risk your licence and your reputation?

Third, explain there are two levels of supervision, branch manager and compliance, both supported by sophisticated software specifically designed to stop these types of trades. Your supervisors will catch it if you do it, and they’ll even catch it if you try.

In a nutshell, be extra careful when providing investment-related advice to people with whom you have personal ties. Don’t allow yourself to be lulled into a false sense of security. Remember: a breach is a breach is a breach — no matter who the client may be.

Ellen J. Bessner is a lawyer at Gowling, Lafleur, Henderson. She practises in the area of brokers’ liability and offers compliance training to brokerage firms. The above is intended for a general audience and should not be considered legal advice. “Compliance Check” appears every other issue of Advisor’s Edge.

(03/28/06)