Let’s set the scene: You’re at an industry gathering, the wine flowing freely, when another advisor boasts about getting his most conservative clients into a portfolio of emerging market equities.
Or maybe you’re walking past your colleague’s open office door, on your way to a client meeting, when you overhear her placing an order you’re pretty sure is insider trading.
Most damning of all, perhaps your assistant mistakenly opens a letter addressed to another advisor and comes to you with hard evidence of that advisor’s fraud.
What do you do? We’re taught from a young age not to tell tales—and, in the schoolyard, the whistleblower frequently fares worse than the bully.
Yet financial advisors have a professional responsibility to report wrongdoing by other advisors, whether they’re working under the auspices of the Mutual Fund Dealers Association (MFDA), the Investment Industry Regulatory Organization of Canada (IIROC) and/or the Financial Planning Standards Council (FPSC).
“Under Policy 6, approved persons [advisors] who are aware of any serious misconduct like fraud or theft or misappropriation have an obligation to tell the member [dealer] about the conduct,” says Shaun Devlin, vice-president of enforcement at the MFDA. “Then the member has an obligation to electronically report the information to us on the Member Event Tracking System. We screen those electronic reports and open the serious ones as cases.”
Connie Craddock, vice president of public affairs at IIROC, says while that organization doesn’t impose a positive obligation to report wrongdoing, the applied ethics section of IIROC’s Conduct and Practices Handbook does suggest registrants should feel an obligation to report wrongdoing if they’re aware of it.
And the FPSC’s Code of Conduct clearly states, under Principle 6, that “A CFP professional who has knowledge that another CFP professional has committed a violation of this Code, which raises substantial questions as to the CFP professional’s honesty, trustworthiness or fitness as a CFP professional in other respects, shall promptly inform FPSC.”
If you’re feeling torn between hard-learned lessons from childhood that taught you not to be a tattletale and your professional responsibility to raise concerns about the behaviour of your fellow advisors, the best move is likely to speak with your firm’s compliance officer. Get guidance from someone who understands the relevant regulations, who can prepare you if you decide to move forward and who can help you steer clear of potential pitfalls.
The reporting process
The provincial securities commissions, MFDA, IIROC and FPSC all have complaints and enforcement processes in place to take your calls and, if they would be better handled by another organization, to forward them to the appropriate place.
The securities commissions focus on violations of securities law, including illegal insider trading and activities by advisors who aren’t members of either the MFDA or IIROC. The MFDA and IIROC address violations of their own rules and bylaws, including the Know Your Client and suitability rules. The FPSC enforces its Code of Ethics for CFP professionals.
These organizations pay attention to what the others are doing, so a complaint that lands in one place may result in actions taken by several regulatory bodies.
At the Ontario Securities Commission (OSC), investigations into misconduct lead to a preliminary review that may prompt a formal investigation, and may in turn lead to proceedings and a public hearing. In addition to the disgrace of an announcement published on the commission’s Web site, the OSC has authority to impose reprimands, fines, suspensions and bans from the securities industry.
The OSC advises complainants to put as much as possible in writing, in sequential order; to assemble a file of supporting documents; and to create a comprehensive log of telephone conversations, e-mails and faxes related to the case. The commission also offers whistleblowers the option to file an anonymous tip if they know of potential violations of Ontario securities law.
At the MFDA, the first step after a complaint is received is generally to notify the dealer, who has a responsibility to supervise the advisor who’s the subject of the complaint. The dealer is expected to respond with any relevant information it has, and also to arrange to get a statement from the accused advisor and forward it to the MFDA.
If a full investigation is required, the MFDA’s enforcement department gathers information, conducts interviews, analyzes cases, and prepares reports and recommendations. All this background work can lead to a disciplinary hearing with the power to impose penalties such as reprimands, fines, suspensions and permanent prohibition and termination. The MFDA may also place conditions on an advisor’s authority to conduct securities-related business, put terms and conditions on the dealer’s membership and even appoint a monitor to oversee the dealer’s activities.
Of course, not every case gets that far.
“Anything that comes directly from a member of the public that could potentially be an issue under our rules gets opened as a case,” says Devlin. “We’d put it to the dealer, obtain any additional information necessary, and review the evidence. If we felt there was no violation, then we’d report back to the complainant and say we’re not taking action because there’s insufficient evidence to establish any violation.”
IIROC launched a dedicated whistleblower service in May of 2009 to connect advisors who have first-hand knowledge or tangible evidence of potential systemic wrongdoing, securities fraud or unethical behaviour by individuals or firms in the investment industry to senior and experienced professionals.
“It could be an insider calling about some fairly sophisticated or complex financial transaction,” explains Craddock. “We want to make sure the people who are taking those calls… are really able to evaluate the nature of that information.”
From the whistleblower service, a complaint may go to IIROC’s enforcement department, which conducts an investigation that may lead to a hearing. IIROC hearing panels can impose penalties, including fines, suspensions, permanent bars for individuals and termination of membership for member firms.
The FPSC does a few initial checks when a complaint comes in: Is the subject of the complaint a licensed CFP professional? And, if the facts of the complaint were true, would it constitute a breach of the Code of Ethics?
If the answer is yes, a full investigation is launched and the subject of the complaint is given an opportunity to respond.
If the FPSC enforcement staff believe a code violation has occurred, the matter goes before a hearing panel that can impose sanctions ranging from a letter of admonishment to permanent revocation of the right to use the CFP marks. Stephen Rotstein, vice-president of policy and enforcement and general counsel at the FPSC, says the lightest sentence for a breach of the code would likely be some form of continuing education.
“We take ethics and our disciplinary approaches very seriously,” he adds. “If CFP professionals are out there doing unethical things, it speaks to the whole integrity of our licensing. That’s why we have a robust enforcement process.”
Protection for whistleblowers
Being a whistleblower isn’t risk-free, though. For starters, no organization can guarantee anonymity once a case reaches a public hearing—and once word gets out, there may be a backlash from colleagues.
“Whistleblowers tend to come to a bad end. They may think they’re being ethical heroes, but they’ll be seen as rats or betrayers by their co-workers and, instead of being rewarded or praised, very often they’re sanctioned or demoted or fired,” acknowledges James Hunter, president of KPMG Forensic, who nevertheless relies on whistleblowers to bring to light many of the cases he investigates.
The stakes are rising, too, with the proposed Canadian Securities Act (still in draft form) giving the new Canadian Securities Regulatory Authority (CSRA) the power to impose sanctions for regulatory offences of up to $5 million in fines or imprisonment for a maximum term of five years less a day.
“There’s been a huge movement in Canadian law to provide harsher penalties for regulatory offences,” says Tyler Hodgson, counsel at Borden Ladner Gervais LLP. “You can go to jail for a strict liability offence—meaning that once the Crown has proved the acts have occurred, the onus shifts to the party defending it to prove… that they didn’t commit the offence.”
No advisor is going to look fondly on the whistleblower who caused him or her to face a possible jail term. And there’s some legal hot water swirling around whistleblowers too.
For one thing, what if you’re wrong?
“Defamation is when you publish a statement about another person that causes them to suffer harm to their reputation or otherwise. If you go to a regulator with information about a person, that would, in general, constitute publication. Of course, there are a number of defences to defamation claims, not the least of which is the defence of truth,” points out David Di Paolo, partner at Borden Ladner Gervais LLP. But “if it turns out [the accusing advisor] is wrong, absent some other defence, the other advisor could sue him for defamation.”
Di Paolo says if he were an advisor who suspected a colleague of wrong-doing, he’d be loath to start digging on his own to try to prove an allegation.
“If I became privy to a rumour that had some teeth to it, I’d just go to my compliance department and say, ‘I’ve heard this rumour. I don’t know if there’s any merit to it, but I thought I should bring it to your attention.’
“You’ve done your duty, and it’s up to the compliance department at that point to investigate the allegation and, if there’s merit to it, deal with it,” he suggests.
Whistleblower protection is being considered in the proposed Canadian Securities Act to give people who cooperate and disclose information to regulatory or criminal investigators immunity from civil action. But “they have to reasonably believe the information is true,” Hodgson emphasizes. “Suspicion is not enough.”
In the meantime, Di Paolo offers this reminder to those who know another advisor is doing something wrong but fail to report it: “It certainly would increase the exposure of the firm… if one of its advisors is in possession of information that suggests another advisor is engaging in inappropriate conduct that’s causing a client to suffer a loss. Then the firm is impressed with that knowledge.”
It may seem like a damned if you do, damned if you don’t situation, but as Craddock puts it, “We’re in a self-regulatory world [and] our members are certainly encouraged to have the highest standards possible. It’s in everybody’s best interests to ensure high standards of ethical and professional conduct, because the reputation of the industry, and [of] the individuals working within it, depends on that shared commitment to high standards.”
The overall message seems to be if you have well-founded suspicions, you should in good conscience avail yourself of one of the many avenues available to report them. Just be sure to tread carefully.
“Get advice before you do anything,” urges Hunter. “Speak to your professional association. Speak to a senior colleague. Be very, very careful, because on the one hand you don’t want to ignore wrongdoing, but on the other hand you don’t want to find yourself making false accusations. So the best thing is to consult and get senior advice.”