Don’t miss important compliance reminders

These days, it seems a regulatory announcement comes out every day. So it’s easy to lose track of meaningful guidance.

Take the MFDA’s recent suitability research paper, which was “a blip on the radar” in the context of all the major discussion papers that have been coming out, says Barrie, Ont.-based MFDA advisor Edwin Pavey.

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At first glance, the paper highlights current due diligence and disclosure requirements for advisors, touching on topics like the role of KYC and KYP forms, and which risks you need to disclose when recommending products.

But there’s more to the release: the paper offers guidance on the suitability of leveraged strategies—one area regulators are watching. The use of leverage, the paper says, leads to “additional obligations imposed on an approved person in each stage of […] suitability analysis,” under MFDA rules.

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As the paper suggests, you must do much more than collect basic information if a client agrees to employ a leveraged strategy. MFDA says you need to:

• Revisit his basic information (e.g., income, risk tolerance, portfolio liquidity).
• Determine his current financial obligations and ability to repay loans, why he wants to invest, and the depth of his financial and tax knowledge.
• Have longer conversations about the potential investment’s market exposures and risks, and assess whether the investment complements or destabilizes a client’s portfolio.

Says Pavey, who’s a regional director at Investors Group: “I would think the rules discussed are common sense, but that isn’t always the case.” In a world of shifting regulation, it’s important to get a handle on your basic obligations and know how to exceed them.

That’s particularly important if you have older clients seeking better returns. While topics such as leverage have been under the microscope of the MFDA and other regulators before, current compliance priorities have a lot to do with demographics, says Pavey. “Baby boomers are either retired or about to retire,” and you have to be careful with their portfolios and assets.

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Also consider that MFDA isn’t the only watchdog stressing advisors’ compliance requirements. Along with CRM2 and CSA’s sweeping proposals and commission-ban discussion, IIROC is in the middle of reviewing its KYC and suitability requirements; that process was started in November 2016, according to the SRO’s 2017 priorities report.

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When a client suggests an investment

The MFDA also highlights how to help clients when they recommend a strategy or investment. Its paper says, “[…] Where a client proposes a transaction that is not suitable, including a transaction involving leverage, the member or approved person must advise the client of this and maintain a [written] record of that advice.”

To protect clients from themselves, MFDA suggests getting advice from a third-party and, if needed, withdrawing your services.

Pavey says making note of any changes in a client’s behavior or communications is key if you start getting unusual requests. “If communication and disclosure from a client breaks down, [that] impedes the advisor from working in that client’s best interests. Then, the advisor and client should question the relationship.”

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The lesson

MFDA’s research paper doesn’t include new information, but it does present suitability requirements in a digestible, relevant way—it uses IIROC case examples and is targeted at all advisors. It also hints at which practices and areas of the market regulators are monitoring.

In an email to Advisor.ca, MFDA’s director of public affairs Ian Strulovitch said the paper was mainly meant for MFDA firms and advisors, but also for “interested members of the public, investor advocates and other stakeholders. The suitability requirement[s] covered […] apply to all securities, including ETFs, and generally to all registrants with a suitability obligation.”

Strulovitch adds transactions are not often proposed by clients, but that “the research paper is intended to educate people on the current legal status of the suitability obligation.” He says other MFDA resources that can be used by all advisors include its recent falsification of signatures warning, as well as its discussion paper on the use of investor questionnaires from 2013 and MFDA Staff Notice 69 on the Suitability Obligation, which was updated in 2013.

Pavey says, “The industry is moving away from […] focusing on product sales and toward full-service planning and advisors being accredited professionals.” As a result, it can be useful to review the basics as you take on more responsibility and aim to meet increasingly higher expectations.

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Other regulatory resources

To help advisors understand their duties, regulators and industry organizations provide the following resources.

On KYC and suitability: IIROC offers a 2012 guidance note on advisor requirements. On CRM2: IIROC offers a 2012 guidance note on the CRM. IFIC and OSC have both released portals and resources in 2017, and MFDA offers this guidance from late 2016. On the supervision of client accounts: IIROC offers outlines of Rule 1300 and Rule 2500. On borrowing to invest: IIROC offers a summary of comments and responses from 2014.