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Further, the practice spread to western Canada, where reps who’d never heard of referral arrangements saw an opportunity to act as intermediaries between clients who wanted specific securities, and investment dealers who were licensed to sell them. They started cold-calling clients to encourage transactions, even though they weren’t directly licensed to sell investments.

“This is where the problem starts,” says Gilkes, who also is president of North Star Compliance & Regulatory Solutions and spent seven years as manager of registrant regulation with the OSC.

“With that mentality, you easily trip the trigger to be registered as a dealer. If you’re in the business of dealing in securities—you make a living at it, you hold yourself out as that, you do the things that a dealer does—you need registration.”

Read: Are outside business activities worth the risk?

Registration triggers

That regulatory trap is particularly problematic for advisors who don’t carry full securities licences but have been in the business a long time.

By and large, this cadre of advisors has a solid foundation of knowledge about less-common products and how they can balance out client portfolio needs. Often, they buy such products for their own portfolios and want to let clients in on a good thing.

And, naturally, the fund or insurance advisor wants to control the relationship and be part of the process.

But what starts as an act of fiduciary intent can trip the business trigger requiring the rep (and the firm he or she works with) to be registered as an EMD or investment dealer.

By wanting to be helpful or provide good customer service, they end up performing activities—often as simple as delivering the subscription agreement to a customer or delivering a client cheque to a dealer or EMD—deemed to be in furtherance of a trade.

Read: Prepare to be squeezed

Avoid both scenarios.

“Securities regulators take it seriously. Across Canada, they have sanctioned those individuals who have engaged in activities that require registration,” says Brian Koscak, chair of the Exempt Market Dealers Association of Canada.

If you’re in the business of dealing in securities, you need registration. – David Gilkes

“If insurance agents are doing anything other than referring their books of business to a registrant, they need to get some legal advice on securities registration issues,” he says. “Just because an insurance agent has entered into a referral arrangement with a registrant does not mean they can engage in registrable activities.”

And, he adds, they should “also get guidance from the registrant receiving the referral of what they can and cannot do, and put it in writing.”

What dealers think

The exempt market dealers association asked its members:

What dealers think

Source: Exempt Market Dealers Association

Originally published in Advisor's Edge