Registration reform needs team-based approach

Somewhere in the glass towers of law offices, security regulators and dealer boardrooms, legal experts, compliance officers and owner-dealers are hammering out the details of how registration reform, scheduled to take effect on March 30, 2009, will impact their businesses.

Laurie Cook’s advice is simple: “Buy t-shirts and create teams.”

As a partner at the Toronto offices of Borden Ladner Gervais LLP, Cook has worked tirelessly to make sure clients are well aware of how the reforms and their deadlines will impact the financial services industry in Canada. She explains that, based on the reform’s mandated transition periods, different people and different departments within the same organization may have to comply with the reform’s requirements at different times.

At the Strategy Institute’s 5th Annual Implementing Registration Reform conference in May, Cook said that each industry member needs to focus on four essential aspects of the proposed registration reform to develop effective implementation strategies. These four factors are:

  • Transition periods
  • Complaint handling
  • Conflicts of interest
  • Referral arrangements

Transition Periods

“This is where you will need to buy t-shirts,” said Cook. While registration reform will take effect on March 30, 2009, not all industry members will be affected in the same way and at the same time, says Cook.

For example, individuals and firms considered registered by the effective date will be slotted into one of six categories: investment dealer, mutual fund dealer, scholarship plan dealer, restricted dealer, portfolio manager and restricted portfolio manager. (In Ontario and Newfoundland and Labrador, a firm registered as a limited market dealer or an international dealer on the effective date will be deemed to be registered as an exempt market dealer).

Which category firms or individuals fall into under the reforms will dictate how long they have to comply with proficiency requirements and applications for grandfathering or exemptions, explains Cook.

For example, all firms and individuals slated to be included under the new categories (such as investment fund managers and exempt market dealers) must apply for registration within six months of the effective date. These registrants must then complete all proper requirements within 12 months of the registration reform effective date. However, individuals such as “ultimate designated persons” (UDPs) or “chief compliance officers” (CCOs) will have only one month to apply for registration (though the 12-month period to complete proficiencies or become grandfathered does not change).

Also, as of the effective date, all registered individuals will be slotted into one or more of the following categories:

  • Dealing representative
  • Advising representative
  • Associate advising representative

“Every firm and individual has to keep in mind the three big dates after the effective date,” said Cook. These dates are one month, six months and 12 months after March 30, 2009. However, Cook “expects [firms and individuals] to be well under way [with the reforms] before the cut-off days.”

She also said to registrants and firms that the “[securities] commissions will be overwhelmed if people leave it to the last minute.” She advises compliance departments to “get the application in and rest easy for a bit, but not to forget the timeline for compliance to proficiency requirements.”

She noted that firms must be aware of new capital and insurance requirements.

“Registered firms are exempt from the maintaining capital, reporting capital deficiencies and giving notice of subordination agreements, provided they comply with existing regulation for one year after the effective date.”

The minimum capital requirements for other industry categories have been raised.

In accordance with these reforms, registered firms are also exempt from insurance requirements mandated in NI 31-103, provided they comply with existing requirements for a period of six months after the effective date.

Complaint Handling

As before, “all registrants will be required to establish a ‘system of controls and supervision,’ documented in the form of written policies,” states Cook. However, a new requirement under this rule means that all registered firms must also participate in an independent resolution service, such as Ombudsman for Banking Services and Investments (OBSI), should the firm and the complainant be unable to resolve the issue in house.

While this reform does not explicitly state that firms must handle resolutions under OBSI, “to allow for other players in the market to set up shop, if they so desire,” Cook said, all firms must have a principle-based process for effective complaint handling in place and, when these principles do not result in a satisfactory conclusion, an outside dispute resolution service must be employed — unless, she clarifies, the firm is required by its home security regulator to use the dispute resolution service provided by that authority (a situation that will arise at least for Quebec-based firms).

Investment fund managers and exempt market dealers are waived from having to adhere to complaint-handling rules, says Cook.

However, firms in an external dispute resolution process, even if a ruling is made, are not compelled to comply with the ruling, says Cook. In fact, dispute resolution organizations cannot order a firm to follow a recommendation; however, these [external dispute resolution firms] have “an excellent track record and their method of enforcement is to make public any firm that refuses to abide by a recommendation,” Cook adds. “People seem to think this is a great idea, but legally we believe we can get caught.” Her advice to firms is to keep all principles and policies on file and to follow the new complaint process as outlined in the reforms. This includes:

  • All complaint records must include the following:
    • Date of complaint
    • Nature of complaint
    • Complainant’s name
    • Name of the person who is subject of the complaint
    • Financial product or service that is the subject of the complaint
    • Date and nature of the decision made about the complaint
  • Acknowledge receipt of the complaint within 10 business days
  • Provide a substantive response to a complaint within three months
  • Notify CCO and appropriate supervisors of all complaints
  • Notify all senior management about complaints that deal with serious misconduct and legal actions
  • Bi-annually, each registered firm must provide a report containing each complaint made, resolved and unresolved. Each report will cover a six-month period — with January 30 filing date to cover July 1 to December 31, and July 30 to cover the January 1 to June 30 period.

Conflicts of Interest

Cook believes that a major area that firms will need to address, based on registration reform, is in real or perceived conflicts of interest. According to the legislation, firms will have to identify any existing conflicts of interest and then notify clients of the “nature and extent” of the conflict of interest. This section does not apply to investment fund managers, who are governed by National Instrument 81-107.

“This new rule is not intended to capture inconsequential matters,” said Cook. “It is intended to identify and respond to [potential and] existing conflicts of interest.”

Cook used the example of a firm that registered in 1978. “Based on the new rules, this firm would need to hand to clients its current disclosure statement,” said Cook. “If their position changes, the firm then needs to notify the client, within a reasonable amount of time, which is generally deemed before a conflict of interest arises.”

She noted that, if a firm acquires another registrant’s books or assets, the firm has to provide the client with written notice within 30 days, “although this rule is not new in Ontario, where it is already on the books.”

Cook also emphasized that all communication with clients cannot be in legalese. “Firms need to put it in language [the clients] get.”

She conceded that current legal opinion is unsure as to whether or not firms are solely responsible for communicating real or potential conflicts of interest solely through their home regulator or if they must provide communication to each regulator in each province in which they have clients.

One common example of a conflict of interest is an individual’s participation on a board of directors. Cook explains that individuals who also serve on a board of directors can find themselves in a conflict of interest based on: conflicting fiduciary duties owed to the company and to a registered firm or client; possible receipt of inside information; and conflicting demands on the individual’s time.

Under the new rules, firms must become more in tune with the nature of outside business activities their representatives are conducting. “Before approving any of these activities, registered firms should consider potential conflicts of interest. If the firm cannot properly control a potential conflict of interest, it should not permit the outside activity.”

Referral Arrangements

Also under the new rules, referral arrangements will need to be documented and disclosed, to both clients and regulators. While Cook suggests firms and registered individuals examine the new rules in detail, to determine what types of referral arrangements are subject to disclosure, she does suggest that any potential or current client who is referred to another registrant will require documentation and disclosure on behalf of the individual and/or the firm referring.

“This rule goes back to 1999, when the CSA provided details about relationships that needed to be disclosed,” explains Cook. “These new rules simply codify this practice. These specific new rules [on referrals] are highly anticipated, particularly from the exempt market dealer world.”

On the whole, Cook is confident that most individuals and firms will not wait until the last minute to implement registration reforms. However she does advise all participants in the financial services industry to be aware of the looming deadline and the subsequent proficiency and fulfillment target dates that must be adhered to. “T-shirts with your expected deadline date, worn by those that are affected, may be a good way to remind everyone that the reforms will impact everyone,” just at different times.

Originally published on Advisor.ca on May 18, 2008