The practice of employing pre-signed forms to make client portfolio changes quicker and more convenient is a compliance infraction that is taking far too long to disappear, says the president of the Canadian Institute of Financial Planners (CIFPs).
Anthony Williams told delegates at the CIFPs annual conference in Niagara Falls, Ont., last week that the issue remains a concern for the industry.
“You would be surprised as to how many of these cases [there are],” Williams said during a conference session on ethical conduct.
According to the MFDA’s 2021 annual enforcement report, 32 allegations related to pre-signed forms made it to the case assessment stage last year, an increase from 22 in 2020 but down from 94 in 2019.
Pre-signed forms were also the leading allegation of unethical behaviour against financial professionals in 2021, when 40 complaints were filed.
To illustrate how easy it is to get caught up in an ethical dilemma, Williams offered a hypothetical scenario involving a certified financial planner named Idelle, whose client, Erling, is both a knowledgeable investor and also her cousin.
In the scenario, Erling believes that equities markets are poised for a significant correction in the near future. He’d like to exit the market at the first sign of trouble, and then re-enter at a much lower price.
His plan is complicated by the fact that he is about to leave for a three-month trip to scale Mount Everest, where he will be out of communication range.
He places 90-day limit orders in his margin account for four stocks on his radar. A more difficult question is how to alert Idelle when he’s ready to reinvest.
Idelle rightly dismisses suggestions that she simply act on his behalf, or be given trading authorization, or act under power of attorney while he’s away. She points out that those options could be viewed as conflicts of interest.
Ultimately, the two resolve to have Erling pre-sign three different transaction requests, which she can store and use as required in his absence.
But “Idelle cannot do what she’s proposing to do,” Williams said. “She of all people should know better because she knows about discretionary trading; she knows about the potential conflicts of interest, power of attorney and a trading authorization. Surely, she should know as well about pre-signed forms.”
Williams acknowledged the infraction is only likely to come to light if there is a spot audit of the firm.
“That’s when it gets detected, oftentimes,” he said. “But there’s a lot of that [kind of enforcement action] going on.”
The result would likely be a stiff penalty, with settlement agreements in the area of $25,000 and up, according to an analysis by Investment Executive.