Staying clear of some common compliance mishaps

Approved person transfers

In the past, advisors who moved from one dealer to another had a relatively painless experience, in terms of the paperwork, which was mostly taken care of by the fund company. However, things have changed significantly. Now, due to regulatory concerns over client privacy and conducting registerable activity — such as the KYC process — before being registered with the new dealer, the process is much more complex. The new concerns, and how they are to be dealt with, are outlined in MR-0079, “Approved Person Transfers” from the Mutual Fund Dealers Association of Canada (MFDA). As a result, noted Hamilton, the new requirements have “kind of brought transfers, at least in the independent world, almost to a stop.”

Parker noted that, when advisors are changing firms, it can be difficult to curb their enthusiasm. However, when they learn of the various new account-opening procedures that must be performed, and the consents that are required from clients, “heartburn” can result for the advisor. Hamilton added that the transfer process situation has become “very difficult,” and added that many member firms of the MFDA are hoping that something can be done to address the issues that are currently slowing down advisor movement between firms.

Outside business activities (OBAs)

Parker noted that, in the independent model, most advisors have some sort of outside business activity. This is usually insurance, which has mostly been found to be acceptable by regulators. He added, however, that his firm is finding that regulators are now paying much closer attention to these insurance activities, checking that trade names, the nature of the insurance activity, the nature of the licensing effective dates of current employment and, sometimes, past employment details, all “line up.”

It was also noted that firms are doing more in the area of annual checks for these types of activities and that some OBAs are not being picked up until these checks are conducted. This can create headaches for the compliance department, which wants to know as soon as these activities commence, so that compliance staff can conduct conflict of interest reviews. More and more often, the panelists noted, compliance departments are disallowing these activities due to the risks they represent and the high level of monitoring that is required.

Charging for client quarterly statements

The panelists said that their firms either have already, or likely will begin, using electronic delivery for client statements. The advisors of clients who choose to keep getting paper statements may have the cost — usually about $2 — deducted from their commission payments.

Bate-Boerop noted that Monarch Wealth made the switch to electronic delivery this past March. She said that, so far, the uptake has been “very low” but that it was expected to pick up after the first charges begin to be levied. Parker said that his firm also moved to electronic delivery in March, with an uptake of about 30%, which is expected to increase.

Transferring leveraged accounts

When client accounts that include leveraged investments are transferred to Monarch Wealth, they are reviewed as part of the firm’s due diligence activities, Bate-Boerop said. The account is assessed according to the requirements of the MFDA’s MR-0069, which deals with the supervision and suitability of leveraged accounts. The advisor is informed about the review and advised that the client will be contacted if the account does not meet the requirements of MR-0069.

If the account does not meet those requirements, the client is informed of their options. Those include reducing the size of the loan, moving to payments of principal and interest, selling other assets to reduce the loan, or staying with the current strategy. The client is also provided with a head office contact in the event that they have further questions.

Parker noted that leveraged accounts coming from another firm are treated as if they are new accounts, and all the usual procedures for new leveraged accounts are followed. Specifically, he noted that client signatures on the appropriate forms directly follow sections setting out the calculations of the numbers involved and other elements of the suitability assessment. This helps protect the advisor and the firm, as well as the client, he said. “Later on, if [the client] decides they are unhappy, they have a more difficult challenge in terms of saying there was some problem with it that they didn’t know about,” Parker said.