Read it and don’t weep

(August 2006) I’ve been to at least a half dozen industry conferences recently and there’s a good deal of chatter in the hallways about the second round of practice examinations being conducted by the Mutual Fund Dealers Association. And a lot of people are saying they don’t know what to expect from examiners, or what documents they’ll be expected to produce.

Really? You don’t know what to expect? You don’t know what kinds of things the examiners will want to review? You have NO IDEA what types of documents to gather and present?

For those making such claims, here’s a hint: Take a peek at the MFDA’s web site. Better yet, open those bulletins they mail you periodically. Guess what? A recent one contains a checklist that details what you’ll be expected to deliver to the regulatory staffers who come to your door. It even has check boxes where you can tick off which requirements apply to the way your firm does business and which do not.

In case you missed bulletin number 0193-C (who names these things anyway?), here are some highlights. When the MFDA visits, they want you to have a list of branches and a rundown of the approved persons at each location. This list should include phone numbers and the designated branch managers. The MFDA also says it wants a list of all web sites, including the personal web sites of all approved persons at the firm. Why? Well, say members of MFDA’s compliance team, the SRO has an interest in the way members are marketing themselves and they want to make sure web sites aren’t being used to get around registration requirements and sell products that aren’t authorized by a rep’s dealer.

Beyond that, the regulator wants to know how many accounts you’ve opened in the past year. They want them listed, and they want to know the account type, its number, the date it was opened, when the first transaction took place and which approved person filled out the paperwork. This list doesn’t have to include rollovers or conversions of registered accounts, but should show every new or transferred-in account.

I ran the chatter I’ve been hearing past people at firms that are known for their compliant practices to get their thoughts. “Nobody that takes compliance seriously can say they don’t know what to expect. The bulletins are mailed to you and they’re on the web site,” said an executive at a large non-bank mutual fund dealer. “Give your head a shake.”

Furthermore, he says, it’s just common sense to cooperate. Putting examiners in the one room where the a/c doesn’t work and feeding them cold coffee and stale doughnuts went out with skyrocketing IPOs. And, notes the dealer, “It helps the MFDA if the stuff ’s ready when they arrive. It’s efficient. You can say, ‘Here it is, help yourselves.’ The more you help them, the easier you make your own life.”

Never forget your SRO has regulatory powers over you. It behooves you to carefully review their correspondence and make sure the compliance department gets together with management to discuss how to respond to changing requirements.

People who have gone through MFDA reviews recently say they’ve found examiners more than willing to listen to their sides of the story. Even on larger issues, like a unique system Scott Sinclair, president and CEO of AEGON Dealer Services in Toronto, came up with to treat trust account cheques, the regulator was all ears. While the examiners insisted he put his system in writing, they also acknowledged it had been carefully constructed and designed with the clients’ best interests in mind. Sinclair added that people were actually laughing and joking during the exit interview.

But, while regulators are certainly becoming more communicative, they’re also getting busier. New regulations requiring that firms ensure they’re not being used to launder funds for illicit purposes, and related laws in other countries where advisors do business, complicate the compliance regime and increase the sheer volume of material that must be looked at during a routine cycle exam.

“If a client brings in $100,000 or $1 million you need to understand where that’s coming from and the circumstances behind that,” says Wayne Bolton, chief compliance officer at AIM Trimark Investments. “It’s very tough from an advisor perspective because people can feel you’re violating their privacy.”

And yet, that’s the new paradigm. The rules are more complicated and exams are taking longer. Bolton notes that in the 20 years he’s been experiencing regulatory audits, this most recent round are the most diligent and thorough. It’s hard and time consuming for the firms, he says, but on balance it’s a good thing because mistakes and problems need to be caught before they escalate.

AER

(08/22/06)