Stop digging

(March 2007) Regulators don’t like to be kept waiting. And if one’s singled you out, it really doesn’t make sense to deprive the examination staff of information.

For some reason, that hasn’t completely sunk in with everyone in this industry. During the course of a year, a read-through of regulatory actions from the Investment Dealers Association of Canada and the Mutual Fund Dealers Association turns up numerous citations of firms failing to cooperate with information requests. And, more often than not, the act of stonewalling lands the firm before a hearing panel; which means the infractions become a matter of public record.

In almost every case, a request for information comes in the form of a letter and the regulator will provide a date by which the advisor must respond. Firms generally are given 10 business days to pull materials together, and extensions are granted in the event there’s a problem — for example, if the regulator requests a suitability analysis that’s too complicated to complete in the allotted time.

“If you can’t meet the deadline, be proactive and contact whoever at the regulator sent the letter — either the case assessment or enforcement division — and explain the situation and ask for an extension,” says Bill Donegan, chief compliance officer at Worldsource Wealth Management in Markham, Ont. “In my experience, where a compliance officer is being reasonable and needs more time, it’s granted.” Donegan should know, before joining Worldsource, he was an enforcement counsel at the MFDA.

Unfortunately, as IDA enforcement director Alex Popovic says, “some people decide to take the harder road.” That’s evinced in a recent hearing panel notice that found Creditfinance Securities failed to cooperate with an IDA request for information about the undertakings of various people at the firm.

Further, IDA requested production of the backs of certain cheques and noted Creditfinance didn’t make any effort to get at those documents even though it knew where they were located. The firm also failed to inform the regulator about any progress on the matter before the submission deadline passed.

Popovic says the IDA understands many documents are stored offsite and can be difficult to access; and Donegan adds regulators know it can take time for head office to get its hands on papers in the possession of someone at a branch. Still, it’s not fair to keep regulators waiting. “People’s lives may be put on hold until these things are resolved. You could have a trading freeze. You might be in the media for a longer time than necessary,” Popovic says. “There are all sorts of collateral issues that go along with this.”

Advisors should also keep in mind that they get credit for incremental responses. A regulatory request will contain a numbered list of the documents needed or the analyses to be performed. So, it behooves the respondent to quickly pull up the information that’s easy to get at and then, if one or more requests will take longer, to turn over what’s ready and inform the regulator the remainder is on the way.

In the event of something unusual, like files being locked in the offices of an advisor who’s on vacation, simply tell the regulator the date of that advisor’s return and then estimate how much time will be needed to pull together what’s squirreled away.

“Generally, you need to go to the branch and get the file; and the branch manager should have access to all the client files,” Donegan says. “The exception is if it’s a sub branch and there’s only one person there. Even then, there should be people with file access to service the clients while that person’s away.” He notes the majority of firms have a computer-based system that houses know your client data, trading records, statements, blotters, and other things of primary importance so they can easily be printed out.

Original signed documents, such as account-opening statements and trading authorizations tend to be in paper form but many firms are shifting to having them scanned in at the branch level. “If that occurs, all the original signed paper documentation can be printed out at the head office level,” he says.

Typically, if the IDA or MFDA is responding to a complaint, they’ll ask for the client file and any statements relating to that account. If the complaint involves suitability, the regulator may request a multi-client review in which the firm is asked to review files from 25 people and determine if any are unsuitably invested. “They may ask for elderly, or low-income people because they have low risk tolerances,” says Donegan. “What they’re trying to avoid is letting the dealer cherry pick all the people who are young, have a long time horizon, and are classified as being able to take more risk.”

He adds any firm that’s watching its own complaint process will be able to anticipate, and perhaps even time, the arrival of a regulatory request. Complaints involving anything beyond a basic service issue have a good chance of generating a regulatory inquiry. And if the word “suitability” comes up, it’s a virtual certainty. Since that’s the case, Donegan suggests a firm go ahead and start compiling information before the regulator even asks. “It’s always good to get going with your complaint handling early, while people’s memories are fresh,” he says. “It makes you better prepared to respond.”

Indeed, the easiest way to get out of the regulatory crosshairs is to walk over to the filing cabinet and start thumbing through the documents.

This article first appeared in the February 2007 edition of Advisor’s Edge Report.

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(03/07/07)