Make sure you’re compliant

There have been dramatic changes to the Canadian regulatory landscape thanks to National Instrument 31-103; so now’s a good time to self-diagnose your personal compliance regime. Here are five things to review

By Prema K. R. Thiele | May 1, 2012 | Last updated on May 1, 2012
3 min read

  • Know-your-Client, Suitability and Disclosure to Clients:

    If any files are missing written KYC information, go back and complete them. Also ensure KYC data in all files is current—the frequency of your updates will depend on the nature of the client and the investments. Younger clients need more frequent updates that follow shifting needs. More established clients, generally less so. Your firm cannot delegate KYC and suitability obligations to other parties. They’re your clients (see Mythbuster, right).

    • You have to conduct your own assessments

    You’re always obliged to do KYC and suitability paperwork—even if another advisor handed over the client.

  • Your Own Registration Form:

    When’s the last time you updated your Form 33-109F4? There are strict requirements for notifying the regulators about changes to the information on file for every registered representative. Some regulators levy late filing fees, and may impose additional terms and conditions to your registration if the filings are either not made or are repeatedly late.

  • Marketing:

    OSC auditors recently reviewed marketing practices and found rampant violations. The rules call for investment performance information delivered to clients be clear (e.g. described as net or gross of fees) and for advisors to disclose material differences between returns and benchmark returns (e.g. use of leverage or short positions, and concentrated versus broad portfolio holdings).

    You also can’t exaggerate claims or use phrases like “proven performance,” “superior to index returns” or “best in class” unless they’re actually supported by numbers.

    Reps can’t point to performance returns generated at a firm where they used to work if they weren’t directly responsible for those returns or if the old firm’s investment strategy was different from where they work now. OSC staff has a problem with that, but newly registered portfolio managers with no (or limited) performance records tend to point to these returns.

  • Social Media:

    When using social media for advertising or other purposes, be mindful of applicable securities regulations. Social media provides an efficient, cost-effective way to communicate ideas with clients.

    But there are pitfalls. Misleading, unbalanced or exaggerated disclosure counts as misrepresentation and exposes you, and the firm, to liability. Regulators are also concerned about selective disclosure and tipping that can take place. You might be seen as soliciting trades, providing advice or making a recommendation. What’s more, 140 characters doesn’t leave room for the disclaimers that lawyers, like me, insist on.

    Firms are also just starting to understand how to monitor these communications. They’re required to track and supervise so they know representatives are communicating accurately, fairly and honestly with clients. Advisors, meanwhile, must keep records of all client communications they transmit over social media networks.

    • Prema K. R. Thiele

    • Learn From Others’ Mistakes:

      Provincial securities commissions, especially the OSC and BCSC, regularly report the results of their compliance audits. Make sure you aren’t guilty of any of these common deficiencies:

      • Trading between client accounts
      • Not disclosing soft-dollar arrangements whereby dealers pay for computer software, data subscriptions, continuing education, or other goods and services used by advisors
      • Delegating Know-your-Client and suitability obligations to third parties

    • Know-your-Client, Suitability and Disclosure to Clients:

      If any files are missing written KYC information, go back and complete them. Also ensure KYC data in all files is current—the frequency of your updates will depend on the nature of the client and the investments. Younger clients need more frequent updates that follow shifting needs. More established clients, generally less so. Your firm cannot delegate KYC and suitability obligations to other parties. They’re your clients (see Mythbuster, right).

      • You have to conduct your own assessments

      You’re always obliged to do KYC and suitability paperwork—even if another advisor handed over the client.

    • Your Own Registration Form:

      When’s the last time you updated your Form 33-109F4? There are strict requirements for notifying the regulators about changes to the information on file for every registered representative. Some regulators levy late filing fees, and may impose additional terms and conditions to your registration if the filings are either not made or are repeatedly late.

    • Marketing:

      OSC auditors recently reviewed marketing practices and found rampant violations. The rules call for investment performance information delivered to clients be clear (e.g. described as net or gross of fees) and for advisors to disclose material differences between returns and benchmark returns (e.g. use of leverage or short positions, and concentrated versus broad portfolio holdings).

      You also can’t exaggerate claims or use phrases like “proven performance,” “superior to index returns” or “best in class” unless they’re actually supported by numbers.

      Reps can’t point to performance returns generated at a firm where they used to work if they weren’t directly responsible for those returns or if the old firm’s investment strategy was different from where they work now. OSC staff has a problem with that, but newly registered portfolio managers with no (or limited) performance records tend to point to these returns.

    • Social Media:

      When using social media for advertising or other purposes, be mindful of applicable securities regulations. Social media provides an efficient, cost-effective way to communicate ideas with clients.

      But there are pitfalls. Misleading, unbalanced or exaggerated disclosure counts as misrepresentation and exposes you, and the firm, to liability. Regulators are also concerned about selective disclosure and tipping that can take place. You might be seen as soliciting trades, providing advice or making a recommendation. What’s more, 140 characters doesn’t leave room for the disclaimers that lawyers, like me, insist on.

      Firms are also just starting to understand how to monitor these communications. They’re required to track and supervise so they know representatives are communicating accurately, fairly and honestly with clients. Advisors, meanwhile, must keep records of all client communications they transmit over social media networks.