When compliance comes calling

“Hi, I’m Andrew Symonds from Head Office; I’m calling to schedule your audit. What’s good for you the week after next?”

A call like this from compliance, about an impending branch review examination, is a surefire trigger for the fright and flight response. But a branch review needn’t be a cat and mouse game. Nor is it intended to be an adversarial enterprise.

“Try to stay calm, take a breath,” says Sandra Kegie, executive director at Association of Canadian Compliance Professionals and executive director at the Federation of Mutual Fund Dealers. “They just want to help you keep you and your business safe.”

While there is little doubt most firms and advisors want to do the right thing, business can go awry, due in part to lack of education and training, and partly for lack of support and technology.

“For those who have spent the time and effort to organize their compliance program, and have the right people in place and got assistance when they needed it from professionals, it can be relatively straightforward,” says Richard E. Austin, counsel at Borden Ladner Gervais LLP in Toronto. “For those who, let’s say, cut corner, it can be very painful.”

Whether you’re a branch manager or an advisor, there are a few basic steps that can be integrated into your daily practice to keep things safe and sound, and everyone involved sane.

Prepare a checklist Start following it sooner than later. “You can’t cram for this,” says Kegie. “You have access either in hard copy or online to your dealer’s policies and procedures manual; make a point of re-familiarizing yourself with it.”

It is easy enough to access the Mutual Fund Dealers Association Rules online. Looking for branch review requirements? There’s a policy for that.

“If you discover that you’ve strayed from your dealer’s process on something, correct it now,” Kegie stresses.

Check all of your advertising for compliance: signage, business cards, letterhead, telephone greetings, websites and other social media. Have a copy of your E&O insurance certificate ready just in case. Kegie’s checklist also includes:

• If you have a trade name and have a copy of the approval you received from your compliance department, be sure you have a copy at hand.
• Check that the information on your form 33-109F4 is current.
• Have ready a copy of all the forms you use: NAAF, KYC, LTA/LAF, disclosure, etc.
• If you’ve been audited before, go over that to make sure you did everything you said you were going to do.

Make good on promises Austin attaches particular importance to honouring promises made previously to regulators. “The first thing I would do is go back to the previous review and report from the regulator and see if there’s any promises made about addressing concerns that the regulators had before and make sure that they were in fact addressed,” he says.

“If they weren’t addressed, find out why they weren’t, or whether there was an extension provided because the worst thing, in terms of upsetting the regulator, is for you to promise to do something and not do it.”

That is arguably a sign you don’t really care, or it’s not a priority, he adds. The enforcement branches often have an annual report indicating areas of particular concern, or deficiencies they’ve seen at particular types of firms.

“If they’ve seen those deficiencies and expressed concern, you can expect that that will be an area that you’re going to be questioned upon when they come in.”

The auditor will come prepared, and so should you, cautions Kegie.

Facilitate the auditing process In other words make yourself available for as long as the auditor needs. Auditors start at the front door, so give them a tour. Make sure all signage is compliant and client files are secure.

Some of the others things advisors must be prepared for include:

• An interview;
• Questions about their background;
• What businesses they’re in;
• How they operate their mutual fund business;
• Details of order entry process, leverage, and how client complaints are handled.

“The auditor may have pre-chosen files to review but in the event that he/she hasn’t, be prepared to pull files,” says Kegie. “They should represent a reasonable cross-section that includes new and old clients, joint and individual accounts, accounts that include a leverage strategy, referral agreements and fee for service if any.”

A review also includes a close look at each client’s ‘know your client’ form for completeness; information about each portfolio, looking at risk and asset allocation; leverage accounts and product information.

Kegie says branch managers should expect an additional supervisory component which may include:

• An assessment of supervisory procedures and practices;
• Individual interviews, as well as with other supervisory staff and advisors;
• A review of trade blotters and other supervisory documentation, client files, sales communication, advertising and client communications, and complaints and your complaint log.

Respond to suggestions Make it thorough and timely. “Your auditor may meet with you before he/she leaves your office to let you know briefly about any deficiencies they found,” says Kegie. “They will assess all of the information collected during the course of the audit which will then be detailed in a written report which will set out deficiencies, any requests for more information or actions to take and deadlines.”

The report is a road map to the ultimate closing of the audit file, a conclusion everyone desires. “So make sure you understand what is expected of you; if you’re not sure, call the writer of the report,” she says.

Every effort must be made to avoid submitting piecemeal information. You must follow through on any commitments made to implementing changes.

Stick to the rules On a day to day basis, it pays to make sure your policies and procedures are being followed, and they accurately reflect the requirements under the rules. A departure from these rules must be backed by a reasonable clarification.

“You’d better have an explanation as to why you’re doing things differently or why a certain aspect doesn’t apply to you,” says Austin. “If you’re taking a different view about the requirements for whatever reason, the law ultimately decides.”

Branches shouldn’t do business poorly in the first place. It is futile to try and fix it all up just before the compliance review is due. That won’t work; there will be telltale signs. If a branch hasn’t been doing what it’s supposed to do for a long period of time, there isn’t much it can do to prepare.

A better strategy, say compliance experts, is embracing the process, having a constructive attitude and learning to do business better. Firm policies and procedures are not hoops to jump through, but rather helpful directives to ensure better client experience.