Although many chief compliance officers surveyed for Investment Executive‘s 2012 Regulators’ Report Card are generally satisfied with their involvement in the regulatory audits of their firm’s compliance practices, others are becoming increasingly frustrated by finding themselves excluded from this process in greater frequency.
When asked to rate “the extent to which members and approved persons are involved in a regulator’s review,” CCOs gave generally positive ratings and feedback, with most saying that there’s quite a bit of interaction and communication between the firm and the auditors throughout the process. This is important, CCOs say, in order to ensure auditors get all the information they need to produce an accurate report.
“We’re very involved,” says a CCO with a Quebec based dealer licensed by the Investment Industry Regulatory Organization of Canada. “They continually ask us questions. It’s very collaborative.”
Adds a CCO with a firm in Ontario regulated by the Mutual Fund Dealers Association of Canada: “There’s lots of opportunity to be involved. They do take us in to consideration.”
LESS INVOLVEMENT
However, not all CCOs report such a collaborative experience. In fact, although all the regulators – IIROC, the MFDA and the provincial securities commissions – had fairly strong ratings in this category, they also saw their ratings decline year-over-year, with some CCOs citing less involvement in the review process as the reason.
“There is a process of going back and forth,” says a CCO with an IIROC-licensed dealer in British Columbia, “but it’s less open than in the past.”
“There is a degree of involvement,” adds a CCO with an Ontario-based dealer regulated by the MFDA. “But any time you’re dealing with an auditor, they’re being paid to find a problem. There should be more back-and-forth [communication] and more opportunity to provide explanations.”
In fact, one CCO says auditors at IIROC are no longer willing to conduct exit interviews – an important part of the process in which auditors typically reveal to the audited firm’s staff what was found during the review. “Once, they gave me their report on 2 p.m. on a Friday and asked for a response that day,” this CCO says. “The process has to be more collaborative, but it’s not.”
The SROs fared slightly better in this category than the provincial regulators. IIROC saw its score slip by 0.3 of a point year-over-year to 7.5, while the MFDA saw its rating decline by twice that margin, to 7.0 from 7.6. As for the provincial regulators, they earned an average rating of just 6.8 – down by 0.8 of a point from last year’s Report Card.
In particular, several CCOs say there’s a noticeable difference in the extent to which they’re involved in SRO’s reviews vs the provincial regulators’ reviews.
“We were very involved with the MFDA,” says a CCO with a Manitoba-based dealer. “I appreciated being involved, being asked questions and holding meetings to provide explanations. With the Manitoba Securities Commission, I was not involved at all. They came, took a document and left.”
Making matters worse, there appears to be a significant disconnection between what CCOs think of the review process and the regulators’ perception; in fact, the regulatory bodies interviewed for this year’s Report Card insist that there’s plenty of open dialogue between their auditors and a dealers’ staff during a review.
EXTENSIVE FEEDBACK
“When we go in to review organizations that we have jurisdictions over,” says Bill Rice, chairman and CEO of the Alberta Securities Commission, “we have lengthy dialogue; we give them extensive feedback.”
Similarly, the B.C. Securities Commission conducts interviews with dealer personnel at both the beginning and end of a compliance review, and the BCSC also consults with the dealer’s staff throughout the process to clarify facts, says Sandy Jakab, director of capital markets regulation with the BCSC: “There’s a fair number of points during which firms are asked for, and expected to give, input.”
IIROC and the MFDA also strive to get dealers involved in the process as much as possible, say executives with both SROs.
Dealer input is critical in order for auditors to collect the background information and context they need, says Karen McGuinness, vice president of compliance with the MFDA. “Our objective is to get them more engaged and more involved,” she says. “The more a member is willing to work with us, the easier and faster the audit goes.”
Many of the CCOs surveyed for this year’s Report Card say the process is indeed as open as the regulators suggest. In fact, some say the level of involvement is so high that the reviews actually consume too much of their time.
“They basically take over your life for a few months,” says a CCO with an IIROC-licensed firm in Ontario. “It’s burdensome.”
That said, it’s imperative that dealer firms step up and take part in the process, says Susan Wolburgh Jenah, president and CEO of IIROC. In fact, she suggests, regulators aren’t the only ones responsible for keeping the lines of communication open during the compliance review process.
“This is not a one-way street,” Wolburgh Jenah says. “[Dealer] staff members should be as open as possible with the regulator, too.”
And if regulators get the sense that the firm is trying to hide something, Wolburgh Jenah says, “The dynamic of that compliance review is going to change dramatically.”
© 2012 Investment Executive. All rights reserved.