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CIFP 2005 Annual National Conference
Linda J. Murray, LL.B., CFE
Regulatory Compliance Concepts and Recent Regulatory Initiatives
Bulls, Bears and Lawyers….It’s a Jungle Out There!
A Survival Guide for the Busy Broker
Part I: Compliance Concepts
2 things to remember:
the basic obligations have not changed much over the years
the standard is not perfection—it is a reasonably prudent person, acting in good faith
Basic Obligations of Registrants
1. Registration:
be registered where client resides maintain proficiency level (CE) product knowledge only recommend to client securities
properly registered or exempt
Basic Obligations of Registrants
2. Disclosure:
MUST give full and true disclosure of all facts and risks required by client to make informed investment decision and not omit to disclose material information
MUST NOT disclose confidential information about clients or material information about a company that has not been generally disclosed
Basic Obligations of Registrants
3. Know Your Client & Suitability:
KYC requires reasonable steps to learn (and keep current) the essential facts relating to the client (investment objectives, risk, financial condition)
Suitability requires registrant to determine if each transaction is suitable for the client and to advise if it is not suitable (ongoing obligation so must be made based upon current information)
Basic Obligations of Registrants
4. Recordkeeping and Documents
Ensure client information up to date and instructions fully documented
Basic Obligations of Registrants
5. Gatekeeper Obligation
act honestly, in good faith, in the best interest of the client, giving the client priority
refuse to act for persons who would cause injury to the integrity of the markets
not engage in any activity that might bring the industry into disrepute
Code of Ethics/Code of ConductJoint Forum, FPSC, CAPSA, FCIDB, CLHIA, IBC, IFB and ADVOCIS/CLU and IDA (CPH)
IntegrityObjectivityCompetenceFairnessConfidentialityProfessionalismDiligence
LAWS
SRO RULES ®ULATIONS
FIRM POLICIESAND PROCEDURES
Approach of Regulators
95% want to comply and try to Audit v. investigation (clear at audit stage) Reasonable people can agree to disagree
(issues arise, don’t make them personal) Regulators have limited resources (help them
focus on the 5% and not on you) SRO system relies on the honour system You know your business best (if you don’t police
yourself, someone else will)
Role of Compliance
One of the firm’s service departments Most new regulatory initiatives are aimed at, or
flow through, Compliance Compliance is a buffer between the salespeople,
clients, regulators & lawyers Compliance can assist with difficult clients and
help deal with complaints Sometimes the answer has to be ‘no’
Benefits of Compliance
Catch issues early, less work & stress Identify areas for improvement & prevent
problems Promote good reputation of registrants,
employees, firm and industry Focus on building the business Fewer unhappy clients, complaints & lawsuits Regulators and police can focus resources
Costs of Non-compliance
Less time for business development More stress, paperwork, time, expense Unhappy client, firm, registrant, Compliance,
regulators, lawyers Impact on reputation of registrant, firm and
industry Increased regulatory audits Potential sanctions & business interruption
Areas of Potential Liability
• Suitability• Unregistered activity• Unauthorized trading• Misrepresentation/omission regarding
investment• High pressure sales practices
How to Avoid Problems
Deal honestly, promptly and professionally with clients—your most valuable business asset
Know your client (initially and update annually) Know your products Ensure that product is suitable for that client at
that point in time (and follow up) Fully disclose the good and the bad aspects of
potential investments
How to Avoid Problems
continuing education Identify and use firm resources (ie.
Compliance) Resolve client issues quickly & amicably 20% of your clients will bring 80% of your
business (fire bad clients) DOCUMENT, DOCUMENT, DOCUMENT
Prohibited Conduct
Discretionary or unauthorized trading Churning and excessive commissions Unregistered activities (broker and product) Conflict of interest/client priority Representations of future listing, price, return,
dividend, interest, re-purchase Theft of cash or securities Misrepresent benefits or risks of investment Mutual fund switches without investment purpose Release of confidential information, insider
tipping/trading
Good Compliance = Good Business
Key to dealing with ever-changing regulatory requirements and resulting paperwork?
team approachreasonable diligencegood faith
Part 2: Regulatory Initiatives
Recent move toward general financial industry reform and corporate governance
Industry members through corporate governance and regulatory enforcement
Regulators through reviews
Recent Issues
• Harmonization of financial regulation• SOX and corporate governance initiatives• New disclosure rules for investment funds• Do Not Call Registry, licence telemarketers• Hedge fund regulation• Criminal Code (whistleblower, insider trading,
Production Orders)• Bank Act review (banking & insurance services)• ASC review and changes at OSC
Regulator Up-date
• MFDA• RS• IDA• CSA/Commissions• IMET• AML• Privacy
Litigation Update
• Blackburn v. Midland and Levesque (Ont)• Portus and Norshield (hedge funds)• Market timing cases (IDA, OSC, MFDA)• Buckingham Securities and auditor• AIG and Willis North (insurance)
Recent Statistics
RS (2004)2002 4 cases $ 82,0002003 15 cases $1.0 million2004 11 cases $5.6 million
MFDA2004 1 settlement (IG)2005 7 notices (3 decisions)
Recent Statistics
IDA (2004)
Complaints 1,297Discipline decisions 75Warning letters 24ComSet filings 1,896Audits each firm
Recent Statistics
IMET (2004)7 major investigations26 less serious probes
FinTRAC (2004)197 case disclosures representing $700
million in suspicious funds
Recent Statistics
CSA (first half 2004)Proceedings commenced 77Orders and settlements 59
BCSC (Sept 03/04)Enforcement orders 45Undertakings 35Investigations 21