Warming up to compliance

By David Lister | December 1, 2010 | Last updated on December 1, 2010
8 min read

Does the sight of the compliance officer make you a bit nervous? When they come around, do you often catch yourself wondering what “somebody” did? If so, you’re not alone. The compliance officer has not traditionally been the average advisor’s favourite person. His or her job, in the eyes of many advisors, is to catch you doing something wrong, like a school vice-principal lurking in the hallways waiting to catch someone out of class without a hall pass.

But what advisors sometimes forget is the compliance department exists to make sure you, and your firm, don’t get into trouble with regulators or clients. That’s it. Sounds simple, right? Unfortunately, it’s not.

More rules, more complexity

Our industry, and the rules that govern it, are becoming increasingly complex. When bad things happen to investors, regulators have to act. New rules get put into place to deal with each new problem that crops up. This constant regulatory influx makes everyone’s job more difficult by adding more and more things to remember and apply. And for those of us who don’t get everything right, the risk of client complaints, regulatory investigations and getting sued goes up. None of these are fun. If you’ve been there, you know this all too well. At a minimum, they cost you time and stress. Even if your defence succeeds, recouping your legal costs for a regulatory hearing is next to impossible. If you goof up badly enough, you get suspended, have exams to rewrite and fines to pay before you can work again. Really screw up and you’ll need to find another line of work. As a compliance officer, you may well be wondering why I say “those of us.” But your friendly neighbourhood chief compliance officer is registered just like you are. We have specific obligations under the rules too. If your CCO messes up badly enough, he or she can end up in the same hot water as any advisor. And like you, most CCOs don’t have a backup profession.

The pecking order

Basically, there’s a compliance food chain. The provincial securities commissions are the primary rule-makers (as a group, they’re the Canadian Securities Administrators). The Investment Industry Regulatory Authority of Canada (IIROC) has its own rules, some of which are mandated by the commissions’ rules. Occasionally, the commissions audit IIROC. In turn, IIROC audits your firm and the CCO, usually every year – and sometimes twice. The CCO audits your trading and your dealer’s procedures, and reports to the ultimate designated person (UDP, normally the CEO or president) and the board of directors. The CCO and UDP are responsible for supervising pretty much all activity at the firm, with advisor conduct being a big part of that.

At this point, you might be thinking, “Gee, the advisor is at the bottom of that food chain.”

But the truth is, the CCO is sandwiched at the bottom between you and the regulators. CCOs are responsible for your behaviour, so if something goes wrong, they may have to explain why they didn’t catch the problem first! Normally, the IIROC audit helps a firm identify areas that can be improved upon. Sometimes it finds serious issues that are sent to the IIROC Enforcement Division. Your firm must report all client complaints, legal actions and more serious rule violations – any of which may trigger an investigation. In light of all this, compliance officers like to think they’re the good guys. They can help prevent the problems that cost you the most and can ruin your reputation. But because we compliance officers so often run into that deer-in-the-headlights stare when we approach an advisor, here are a few of the scariest things about compliance – and some reasons why you shouldn’t be afraid.

The procedures manual

Does your compliance manual make War and Peace look like a short story? Does it read like the Tax Act or a computer manual? As already mentioned, regulations are constantly increasing in complexity. As each new situation arises, a regulation is created to deal with it. And the old rules are rarely taken off the books. Part of any investment advisor’s responsibility is to be familiar with his or her firm’s procedures. You’ve probably signed off at least once at your firm saying you are. You should have a copy at hand (paper or electronic). Now, a good compliance officer can simplify these rules into workable – and comprehensible – procedures, although sometimes even the best CO has to pass along the complexity to you.

Just remember: Don’t be afraid to call compliance if you don’t understand something or are doing something new. Compliance officers actually like it when you call (really, we do). It means we can help get things right the first time and avoid problems later. It may mean a little more work on your part, but you know the old saying: An ounce of prevention is worth a pound of cure.

Client documents

Depending on your business, you may not deal with complicated types of accounts very often (estates, offshore corporate clients, trusts, etc.). So when a new type of account comes along, you may not remember exactly what documents are needed. You pull together what you think is correct, but then the compliance department calls to say additional documents are needed or the ones you’ve submitted are filled out wrong. Going back to a client a second or third time to get an account opened doesn’t make anybody look professional. So when in doubt, ask someone in the new accounts or compliance department (or maybe check the good old procedures manual) beforehand to see what you need.

Anti-money laundering

The most difficult part of opening new accounts is the anti-money laundering rules (the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and the accompanying Regulations). Canadian AML rules are probably the most detailed in terms of what you have to do, and how. Essentially, you must either meet your client face-to-face and see his or her original identification, or choose two other methods of verifying identity – typically, a cheque deposited as well as a credit check done by the firm (there are six combinations specified in the regulations). If your client is offshore, your firm has to retain an agent to verify the client for you.After the account is opened, you are required to keep an eye out for “suspicious transactions” that look like they might be related to money laundering or terrorist financing. These could include transactions that don’t make sense or lots of transfers between accounts of different clients.

Check out this discussion on what’s considered a suspicious transaction.

Don’t panic

It’s true the rules are complex. The good news is you don’t need to know all of them – that’s your CCO’s job. The reality is, nobody can remember all the rules all the time. The important thing is to know the rules that apply directly to your business. If you start into something new (a product, a marketing campaign or just different kinds of clients), then check your firm’s manual or call compliance to see if there’s something you should be doing differently. It could save you some grief down the road. Besides, your compliance officer really does want your call.

Housekeeping Items

In addition to the three biggies (the procedures manual, getting client documents right and knowing anti-money laundering rules), there are a few housekeeping items to keep in mind in your day-to-day practice:

Registration conditions

Any conditions on your registration are on the Commission Web sites for all to see. IIROC sometimes puts advisors who are being investigated under strict or close supervision – another good reason to avoid complaints.


Remember, electronic correspondence is forever. E-mail is business correspondence and it’s archived by your firm for at least five years, even if you delete it immediately after sending or receiving it. Also keep in mind that something you think is funny can later be misinterpreted by an unsympathetic investigator. Once an e-mail is sent, where it goes next is beyond your control. All it takes is one bad judgment call and you could have a lot of explaining to do.

Discretionary trading

This is a common problem – putting in a trade without a specific instruction (stock, number of shares, price, etc). Your clients are busy, and they always follow your recommendations anyway, so they want you to just put in the trade and tell them later. No problem: It’s what your clients want, right? Wrong: Big problem! Instead, consider alternatives like managed products, or maybe let your client know they can fill out a trading authorization form so that someone they trust (a spouse, a relative or an accountant) can give instructions when they’re not available.

New products

Before you sell a novel new product, make sure you understand it well enough to know how it works and which clients will benefit. You need to be able to explain it to clients and your firm probably has a formal approval process before you can sell something really new. This is the new know-your-product rule that goes alongside the traditional know-your-client rule.

Approval for market letters

Remember, any e-mails or letters that resemble a research report or a market letter need prior approval. They are also subject to the general rule that any communication must not contain anything untrue or misleading, must not omit something important and must not include any unjustified promises.

Know your client

The KYC rule has been in place since forever. It’s the cornerstone of our business. It relates to suitability, gatekeeper responsibilities and more. You really need to know your clients’ circumstances, especially if they’ve had a run-in with securities regulators in the past. Any relevant changes to your clients’ circumstances must be recorded on a New Account Application Form or similar document (some firms have an Update form). This will be a big help in the event of an investigation, compliant or legal action. The first thing that gets looked at is the New Account Form – if it’s ancient and inaccurate, you could have a problem justifying the trades you recommended to your client.

Private placements and accredited investors

Regardless of the procedures your firm has in place, you must make sure any of your clients buying a private placement fall into one of the definitions of accredited investors or have another exemption that allows them to purchase the private placement. This applies to non-brokered deals as well as ones your firm is doing.

Gatekeeper responsibility

Even if your firm lets a transaction go ahead or it doesn’t raise any questions, there’s still no guarantee everything is okay. In more than one instance, IIROC has pursued an advisor for transactions that were allowed by his or her firm. You can’t abdicate Gatekeeper responsibility; it won’t be a defence to say “but nobody told me there was a problem” (see IIROC v. Ewaniuk, April 2010). If you have any concerns about a transaction your client wants to do, call or e-mail your compliance officer.

Unsolicited orders

You must document these. It gets more difficult after the fact to say this or that order was unsolicited. One good suggestion I heard way back was to ask your client where they heard about the stock. Put this into the notes on the order entry system (or write it on the ticket). It’ll go a long way if there’s a problem later. At a minimum, you have to code the trade as unsolicited. This should show on your daily commission sheets, so if you don’t see it on the trade, talk to someone in the compliance department or to your branch administrator to make sure you’re doing this right.

  • David Lister is chief compliance officer at Octagon Capital Corp .

    David Lister