Managing conflicts when making investment recommendations

Conflicts have become a material part of examinations, said panellist Irene Winel, senior vice-president of member regulation and strategy at IIROC. This includes asking firms to detail how they manage conflicts.

Referencing the client-focused reforms, panellist Karen McGuinness, senior vice-president, member regulation – compliance, at the MFDA, said regulators are looking at conflicts “in a lot more detail,” and are identifying common ones and taking regulatory action when necessary.

Among the conflicts discussed were those arising from an investment recommendation.

In a case study analyzed by the panellists, a CFP (certified financial planner) professional introduced clients to an investment opportunity offered by the planner’s family member without disclosing the family connection.

That the planner didn’t disclose the familial relationship is “particularly troubling,” said panellist Elizabeth King, deputy director of compliance and registrant regulation at the OSC. A registered dealer or advisor who failed to disclose that relationship would likely be in breach of their obligations related to fair dealing and responding to conflicts, she said.

Panel moderator Damienne Lebrun-Reid, executive director at the FP Canada Standards Council, noted that a lack of a referral fee from the family member doesn’t remove or resolve the conflict arising from the relationship.

McGuinness said that, where an MFDA advisor recommends or sells an exempt security and an associated familial relationship exists, “it’s unlikely that that can be done in compliance with the conflict-of-interest rules.” Further, any recommended trades must be done through member dealers.

The case also gave rise to questions of whether the planner’s introduction of the investment opportunity to clients required securities registration.

The investment discussion between the planner and clients reflects “classic registrable activity of a dealer,” said King. The planner is “directly soliciting investments in securities with her client, and this is an act of furtherance of a trade,” regardless of whether or not the planner received a referral fee from the family member.

The solicitation could also be considered registrable advising activity; that is, discussing the merits of a particular investment opportunity with a client, King said.

She added that the family member could be offside with securities regulation regarding registration and distributing securities without a prospectus or prospectus exemption. If that’s the case, ultimately, the planner would be risking civil action, she said.

In the case study, the planner referred her clients to a lawyer to review the documentation and contracts associated with the investment; however, King said such a referral didn’t solve the registration issues.

Similarly, MFDA registrants can’t structure transactions as referrals as a way to avoid conflicts, McGuinness said.

Lebrun-Reid noted that, for a planner who isn’t securities-licensed, referring a client to a securities-licensed advisor to buy a certain product is a recommendation.

An audience member asked for clarification on a planner giving clients a list of online platforms for investment management. If a robo-advisor, for example, has a limited number of products, would the planner be making a recommendation?

Talking about investing options isn’t recommending a specific investment opportunity, King said.

Where a planner is securities-licensed, Lebrun-Reid added that they should provide clients with information about the products available to them, so that clients can make informed decisions.