As regulators take steps to combat unapproved outside business activities (OBA) by advisors, dealers are likely to be more closely monitoring the day-to-day activities of advisors, according to David Di Paolo, partner, manager of the Toronto commercial litigation group and regional chair of the securities litigation group at Borden Ladner Gervais LLP.
Speaking at the Independent Financial Brokers (IFB) fall summit in Toronto on Wednesday, Di Paolo said regulators are increasingly zeroing in on OBA as a problem area.
“Unapproved OBAs – usually those in which the approved person is selling securities outside of the dealer or simply engaging in some sort of ponzi scheme – are an ongoing problem in the industry,” Di Paolo said.
OBA is defined as any business activities carried on outside of the member. Given the broad definition, this can include a broad range of activities, Di Paolo said.
The regulators are particularly interested in any fraudulent activity that may be taking place, however even legitimate business activities can present conflicts of interest, and regulations require that any such conflicts must be disclosed and addressed.
As this issue comes into the spotlight, both mutual fund dealers and advisors should take steps to ensure they’re operating in compliance with the rules, Di Paolo said.
In particular, advisors should ensure they’re disclosing to their firm any OBA they’re involved with, getting approval before proceeding with those activities, and keeping the firm updated on any changes with respect to the activities over time. This is critical in order for advisors to protect themselves from liability, Di Paolo said.
“Even if the OBA is not fraudulent, there are legitimate conflict of interest issues that arise,” he said. “If the OBA hasn’t been disclosed to the dealer, then those conflict of interest issues can’t be managed.”
When a case ends up before the regulators, Di Paolo said, they’ll look specifically at what steps the advisor took to seek approval for the OBA.
Dealers, meanwhile, could face disciplinary action of their own when their advisors are found to be engaging in OBA – particularly if the regulators find that the firm was aware of the activity. Thus, Di Paolo said dealers should have documented policies and procedures in place for monitoring and appropriately dealing with any OBA that emerges.
To further protect themselves, he urged dealers to monitor any potential conflicts of interest on an ongoing basis, and to be on the lookout for any potential undisclosed OBA.
“The worst thing that dealers can do is bury their heads in the sand,” he said.