compliance-rules

You probably know more about your clients’ financial lives than anyone outside their immediate families.

But you must maintain an arm’s-length relationship to protect you and your client from impropriety.

For instance, NI 31-103 forbids registrants from lending money, extending credit and providing margin to clients (there is an exception regarding margin for IIROC advisors). That’s because an advisor’s responsibility is to make investment recommendations based on the client’s financial situation. The client-advisor relationship would be damaged if the advisor acts as a lender. The advisor’s judgement could be impaired because she may be more interested in protecting the loan, instead of what’s in the best interests of the client.

Read: How the MFDA finds deadly sins

Instead, advisors can recommend borrowing money to purchase securities, and under certain circumstances, this may be appropriate advice. However, advisors must disclose the risks involved. The borrowed funds must come from an outside source, and compliance will give the proposed transaction thorough review to ensure suitability. An advisor receiving a loan from a client is absolutely prohibited.

Client estates

The MFDA forbids advisors from accepting a PoA or Limited Trading Authorization. If the advisor is given PoA, it can place her in a difficult position. That’s because she’ll have the ability to make financial or life decisions on behalf of a client, and this opens her up to claims of acting on her own interests.

Being named executor also leaves her vulnerable. Worst case, she could end up in a bitter court battle with beneficiaries. This is particularly relevant for elderly clients who may face life-changing events. Also, advisors cannot be named as beneficiaries of a client’s estate.

Read: The importance of beneficiary designations

The only exception to being a client’s executor and/or beneficiary is in the case of immediate family members, and compliance must be informed.

The penalties for contravening these regulations vary greatly according to the severity of the infraction. The MFDA can impose a reprimand, monetary penalties of up to $5 million, and/or suspend someone’s involvement in the industry, either temporarily or permanently.

Tied selling and discretionary management

Firms cannot require that clients use one service offered by a firm as a condition for buying or selling a security. This could include making a client buy insurance from you as a condition for him to hold a securities account with you.

Only advisors who are appropriately registered (i.e., Advising Representatives) have the authority to manage client funds on a discretionary basis. All others must obtain client approval before performing a transaction. The idea of having pre-signed forms might seem to make life easier for all involved, particularly for clients who spend a lot of time away, but this is prohibited.

Read: How regulators catch trading errors

Knowing your clients and wanting to ensure the best for them must have limits. If a client wants you to perform a role that goes beyond what the legislation allows, or what your dealer thinks is permissible, tell your compliance department. Full disclosure is the surest way to protect against impropriety, and will reduce the possibility of a damaging entanglement. Remaining impartial allows you to provide effective and sound advice.

Jonathan Heymann is President of Wychcrest Compliance Services Inc., a consulting firm specializing in securities compliance and registration.
Originally published on Advisor.ca

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