The gatekeeper obligation is central to investor protection and efficient capital markets. In return for the privilege of direct access to Canada’s markets, investment advisors, who are registered under provincial securities laws and approved by the Investment Dealers Association of Canada, undertake to guard the market place, their market place, against illegal, abusive and unfair practices.

What exactly does this mean? Dean Holley, then-superintendent of brokers at the B.C. Securities Commission, described it in the following terms in January 1995:

“Even if a registrant is not directly involved in an unfair or inequitable activity the registrant is expected to be inquisitive and proactive in dealing with such activities that are carried on by others and of which the registrant is or should be aware. Registrants should refuse to accept instructions from clients who, in the registrant’s judgment, are engaged in illegal, unfair or abusive trading activities. All such instructions or orders should be reported immediately to the registrant’s senior management. Senior management is expected to bring matters concerning serious misconduct in the markets to the attention of the stock exchange or the compliance and enforcement division of the Commission.”

Does this represent a high standard of ethical behavior? Absolutely. Is this high standard unfair? By no means. Advisors are entrusted with managing the savings of millions of Canadians to assist them in achieving their life financial goals. To do so they are in a unique position to observe how the capital markets operate. Efficient allocation of capital requires that investors have confidence that the great majority of honest and ethical investment advisors are vigilant in detecting and reporting abusive activity carried on by a few.

Joel Wiesenfeld, in his guest column “Rethinking the gatekeeper theory” (Investment Executive, May 2005), suggests that the gatekeeper obligation may result in a system of automatic compensation for losses suffered under any circumstances.
With respect, the gatekeeper obligation has nothing to do with determining who is at fault in any given dispute between a client and an investment advisor. It is intended to reduce the number of disputes by preventing misconduct that may result in compensation in the first place.

I agree that credibility is often at the heart of disputes between advisors and clients and that these claims are resolved, as often as not, in favour of the advisor. The reason is not because the gatekeeper obligation has eliminated the need to determine credibility.
Rather, it is because most of the “close calls” are resolved by the firm after an internal review or a recommendation by the Ombudsman for Banking and Investment Services.

IDA members are required to report all customer complaints involving a possible regulatory violation to the association within five days. In 2003, of the 1,933 customer complaints reported by member firms to the IDA, 1,696 or 88% were resolved by the firm.
In 2004, of the 1,297 customer complaints reported, 1,053 or 81% were resolved by the firm. The vast majority of the complaints were not taken any further. For businesses built on trust, aggressively settling customer complaints at the firm level is a policy of enlightened self-interest. That frequently leaves only the cases that the advisor and their firm judge to be truly without merit to be litigated. The fact that firms are successful in defending many of the claims supports the view that credibility remains an important factor in the resolution of disputes, whether it is an Ombudsman investigation, an
arbitration hearing or a trial.

Joel Wiesenfeld concludes that the logic of the gatekeeper theory removes the individual investor from the responsibility equation. Not so. Individual investors do have responsibilities for their investment decisions, which are enforced through the civil and criminal courts where appropriate.
They just don’t have any regulatory responsibility. Why should they? They are not putting through trades on the public markets on behalf of other clients and holding client monies in trust. Unlike registered advisors, clients owe no duties to the public or the markets generally. This asymmetry of regulatory liability in no way tilts the playing field against the advisor in a private dispute over civil liability with a client.

Nor has the gatekeeper obligation driven investment dealers to accept only those clients who have passed an investment knowledge test, although presumably any dealer could screen their clients in this fashion if they thought it necessary.

@page_break@We expect advisors to be more than passive bystanders when they see investors getting mugged. There is nothing unfair in this.
Indeed, I suspect the vast majority of advisors would enforce the gatekeeper obligation even if it was not a principle of securities regulation. Furthermore, if asked, I am sure they would say the unfairness results not from the existence of the obligation but rather from the inconsistent and infrequent enforcement of it when it was clearly in order. IE

Paul Bourque is senior vice president of member regulation at the Investment Dealers Association of Canada.