For Branch Managers Only: Detecting undisclosed business

As branch manager you are in the best position to detect undisclosed outside business activity and other situations that can cause conflict of interest.

Here are some of the warning signs you should be looking for:

1. Does your advisor have incoming mail that he or she doesn’t want to be opened by your staff?

2. Does the advisor keep unusual hours?

3. Are there meetings on site with individuals who are not clients?

4. Are there any brochures or information packages around their office for financial products you aren’t familiar with?

5. Does your representative seem to have lots of call volume or many meetings which don’t result in the usual investment production?

6. Have any clients questioned administrative staff about their “other statement” or that “special statement” or something else that might indicate outside securities-related business?

7. Does your representative’s spouse have a business name? Have you ever heard clients talk about cheques being made payable to that other business name?

8. On redemptions, are there any patterns of outgoing cheques to a similar third party across different clients? Who is that third party? Could it be your representative’s undisclosed outside business?

9. Does the advisor seem to be living beyond his or her means according to the production figures you know? Are there significant changes in purchasing habits or vacation styles?

Many firms have an annual questionnaire, which includes querying about outside activity. This survey, while valuable, doesn’t always get straight answers from representatives. You need to be aware of red flags that could indicate outside business activity. The best way to catch prohibited behaviour is to know your advisors.

What does IIROC say?

The Investment Industry Organization of Canada (IIROC) expressly prohibits personal financial dealings with clients, in a rules notice circulated for comment a year ago. With certain exemptions, the prohibited financial dealings include:

Entering into any private settlement agreements with clients.
Lending money to clients.
Borrowing any money from clients.
Having any control or authority over the financial affairs of clients.

The objective of these rules is to clearly state that personal financial dealing with clients, subject to limited exemptions, is considered inappropriate conduct, a conflict of interest and a violation of the general business conduct standards.

In the same proposal, IIROC is codifying its current expectations regarding outside business activities by imposing a specific and positive obligation on Registered Representatives and Investment Representatives to:

disclose any outside business activity to the Dealer Member
obtain the Dealer Member’s approval before engaging in any outside business activity in order for the Dealer Member to ensure that they are not inappropriate and do not give rise to a conflict of interest.

The MFDA and outside business

The Mutual Fund Dealers Association of Canada (MFDA) has identified inappropriate outside business activities for Approved Persons:

securities sold outside of the Member, including principal protected notes deemed to be securities under provincial legislation, private placements, limited partnerships and other securities sold pursuant to exemptions from securities legislation.
referral of securities related business outside of the Member.

The MFDA allows outside business activities in these circumstances:

the Approved Person is permitted by legislation to devote less than his or her full time to the business of the Member for which he or she acts on behalf of;
the activity is not prohibited by a securities commission in the jurisdiction in which the Approved Person carries on business;
the Member is aware of and has approved the outside activity;
the Member has appropriate procedures to ensure continuous service to clients and to address potential conflicts of interest;
the activity does not bring the MFDA, its Members, or the mutual fund industry into disrepute;
clear disclosure is provided to clients that any activities related to such other gainful occupation are not business of the Member and are not the responsibility of the Member.

For more information on this topic—including an informative webinar —and to learn more about their compliance, training and practice-building tools and services, visit www.SecuritiesBranchManager.ca.

Mark Ziebarth

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