Outside business activities (OBAs) are a “minefield” for the financial services sector and are currently a high-priority area for both Canadian self-regulatory organizations, said Robert Brush, partner with Toronto-based Crawley MacKewn Brush LLP, during a presentation at the Association of Canadian Compliance Professionals’ annual forum in Toronto on Monday.
“Both [the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC)] have emphasized [to me] that they are expecting a more significant effort by firms to supervise and ensure that they’re aware of what their advisors are doing,” Brush said.
Brush’s experience is that OBAs tend to be a bigger issue on the MFDA side, as these financial advisors are often more entrepreneurial and looking for alternative ways to bring in business by providing additional services, such as financial planning and insurance. Although the client may see these services as a holistic offering, they are considered OBAs for mutual fund advisors.
The MFDA is looking for greater disclosure and distinction being made between an advisor’s job in recommending and selling mutual funds, insurance and the creation of a financial plan, according to Brush.
“If you look at your approved person base, many of them wear all three hats in the same meeting and they kind of blend the advice,” said Brush. “That, I can tell you, is something the regulators want to see changed. They want there to be a clear separation [between activities] and they want the separation to take the form of clear statements and clear differentiation in the documents that are executed and the recommendations that are made.”
Regulators are also expecting a greater effort on the part of the firms to educate their advisors on their obligations under disclosure of OBAs.
“There’s a feeling that the approved persons who inadvertently get into trouble didn’t really understand the OBA requirement,” Brush told the audience of compliance professionals.
Thus, Brush recommends compliance professionals that when it comes to managing OBAs, “If you don’t understand it, don’t approve it.”
The OBAs that often cause grief for compliance officers are the activities that were disclosed but are complicated and the compliance officers did not understand them, Brush explained.
The compliance department must look at every activity critically, ask questions and follow up with the advisor.
The compliance department must also supervise the OBAs after it has given advisors the permission to conduct them, Brush noted. Specifically, compliance officers must follow up with the advisor periodically and ensure that the OBA, as it was initially described, is occurring.
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