Close to home

(February 2006) While it’s true the first line of defense for any compliance regime is the registered representative who interacts with the public, a web of compliance professionals still needs to provide backup.

Case in point: the Investment Dealers Association’s recent action against David Yanor, an Edward Jones rep who was fined $30,000 and suspended for a year after making unsuitable recommendations to clients. Yanor worked at a Vancouver sub-branch that was supervised out of Ontario, and that arrangement caught the IDA’s attention.

While noting the investor placed her trust in the individual rep and not in a compliance department located some 4,000 kilometres away, an IDA hearing panel said it questioned “the efficacy of a system” designed to provide supervision of individual offices via a single compliance centre several time zones away. “It makes little sense to us,” the panel said.

Edward Jones noted the Yanor incident marks the first time in 11 years of doing business in Canada that any former or current investment rep has been disciplined for selling unsuitable investments. The firm added the IDA has reviewed its supervisory practices numerous times in routine compliance audits and never raised a concern over supervision of sub-branches.

Further, an Edward Jones spokesperson says the separation of sales and supervisory functions is deliberate because it better defines each role. “Our compliance supervisors are solely devoted to supervising our investment representatives, unlike branch managers who split their time between sales, branch administration and supervision,” he says.

Centralizing compliance does have advantages, says Prema Thiele, a partner at Borden Ladner Gervais in Toronto, especially for larger organizations using smaller shops to achieve wide geographic coverage. She notes know-your client forms, copies of client signoffs, exception reports, trade reports and much of the other minutiae of day-to-day compliance review can easily be transmitted to a central office from field locations. “Supervision has changed a lot,” she says. “In this day and age, there is so much activity taking place over the phone or over the Internet. There aren’t as many face-to-face meetings as there used to be.”

What’s more important, says Thiele, are the details of how a centralized office will implement effective monitoring techniques and ensure site visits take place to examine those scattered storefronts. “I’d want to see a plan in place that says, ‘I understand this is a big country and I have reps all over the place,’” she says. “The ones that do well are the firms that have dedicated people to rove around and do these field reviews. They may be based in Toronto, but they spend a lot of the year inbranch offices around Canada.”

Site visits are crucial, she says, because some compliance rules are keyed to the layout of the office. For example, rules for firms that conduct investment banking preclude the research personnel from sitting next to the investment bankers. The only way to ensure that’s not happening is for a compliance officer to walk through thedoor and see for herself.

But proximity also has advantages. Carolyn Maugeri, mutual funds manager for State Farm Investor Services in Toronto, says her firm has been careful to ensure there’s a compliance presence in every province where business is conducted — those being Alberta, New Brunswick and Ontario. That arrangement allows the company to send people to a site more easily if any problems crop up.

State Farm’s largest compliance contingent, five people, is housed in its head office in Ontario, Maugeri says. The Alberta and New Brunswick operations are smaller, but do afford a localized presence in the field. Exams at sales offices are conducted every two years and telephonic reviews take place during off-years. Compliance personnel are available by phone if any questions need to be answered. “The approach is multifaceted. It may seem cumbersome, but if you’re going to seek out and go into those provinces, you have to have a regime that’s going to support it and grow the pool of advisors out there,” she says. “And then there’s the concern about reputation risk. You don’t want someone out there that you don’t have a hold on and doesn’t understand the rules. You don’t go out there if you can’t do it 100%. It’s not just appeasing the regulators, it’s upholding the company standard as well.”

Where the physical presence can be an advantage, Thiele says, is with younger reps, who benefit from face time with a compliance officer. Also, she says, if a firm has a large presence in more than one province — say 600 reps in Ontario and 300 in British Columbia — that would certainly be a case for having multiple compliance centres.

But if a firm has six people scattered across a province, it’s probably smarter to spend money hiring and training good compliance people and then paying airfare to ensure they make the necessary site visits. She points out compliance officers have to be registered with securities regulators in the province where the firm has offices, even if the officer is not physically resident. “The important thing is to show regulators that meaningful compliance is happening,” she says. “The flow of information has to be happening between the offices and the branches. The reviews have to be taking place on a regular basis.”

AER

(02/10/06)