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CIFP 2005 Annual National Conference

CIFP 2005 Annual National Conference. Linda J. Murray, LL.B., CFE Regulatory Compliance Concepts and Recent Regulatory Initiatives. Bulls, Bears and Lawyers…. It’s a Jungle Out There!. A Survival Guide for the Busy Broker. Part I: Compliance Concepts. 2 things to remember:

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CIFP 2005 Annual National Conference

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  1. CIFP 2005 Annual National Conference Linda J. Murray, LL.B., CFE Regulatory Compliance Concepts and Recent Regulatory Initiatives

  2. Bulls, Bears and Lawyers….It’s a Jungle Out There! A Survival Guide for the Busy Broker

  3. Part I: Compliance Concepts 2 things to remember: • the basic obligations have not changed much over the years • the standard is not perfection—it is a reasonably prudent person, acting in good faith

  4. Basic Obligations of Registrants 1. Registration: • be registered where client resides • maintain proficiency level (CE) • product knowledge • only recommend to client securities properly registered or exempt

  5. Basic Obligations of Registrants 2. Disclosure: MUST give full and true disclosure of all facts and risks required by client to make informed investment decision and not omit to disclose material information MUST NOT disclose confidential information about clients or material information about a company that has not been generally disclosed

  6. Basic Obligations of Registrants 3. Know Your Client & Suitability: KYC requires reasonable steps to learn (and keep current) the essential facts relating to the client (investment objectives, risk, financial condition) Suitability requires registrant to determine if each transaction is suitable for the client and to advise if it is not suitable (ongoing obligation so must be made based upon current information)

  7. Basic Obligations of Registrants 4. Recordkeeping and Documents Ensure client information up to date and instructions fully documented

  8. Basic Obligations of Registrants 5. Gatekeeper Obligation • act honestly, in good faith, in the best interest of the client, giving the client priority • refuse to act for persons who would cause injury to the integrity of the markets • not engage in any activity that might bring the industry into disrepute

  9. Code of Ethics/Code of ConductJoint Forum, FPSC, CAPSA, FCIDB, CLHIA, IBC, IFB and ADVOCIS/CLU and IDA (CPH) • Integrity • Objectivity • Competence • Fairness • Confidentiality • Professionalism • Diligence

  10. Approach of Regulators • 95% want to comply and try to • Audit v. investigation (clear at audit stage) • Reasonable people can agree to disagree (issues arise, don’t make them personal) • Regulators have limited resources (help them focus on the 5% and not on you) • SRO system relies on the honour system • You know your business best (if you don’t police yourself, someone else will)

  11. Role of Compliance • One of the firm’s service departments • Most new regulatory initiatives are aimed at, or flow through, Compliance • Compliance is a buffer between the salespeople, clients, regulators & lawyers • Compliance can assist with difficult clients and help deal with complaints • Sometimes the answer has to be ‘no’

  12. Benefits of Compliance • Catch issues early, less work & stress • Identify areas for improvement & prevent problems • Promote good reputation of registrants, employees, firm and industry • Focus on building the business • Fewer unhappy clients, complaints & lawsuits • Regulators and police can focus resources

  13. Costs of Non-compliance • Less time for business development • More stress, paperwork, time, expense • Unhappy client, firm, registrant, Compliance, regulators, lawyers • Impact on reputation of registrant, firm and industry • Increased regulatory audits • Potential sanctions & business interruption

  14. Areas of Potential Liability • Suitability • Unregistered activity • Unauthorized trading • Misrepresentation/omission regarding investment • High pressure sales practices

  15. How to Avoid Problems • Deal honestly, promptly and professionally with clients—your most valuable business asset • Know your client (initially and update annually) • Know your products • Ensure that product is suitable for that client at that point in time (and follow up) • Fully disclose the good and the bad aspects of potential investments

  16. How to Avoid Problems • continuing education • Identify and use firm resources (ie. Compliance) • Resolve client issues quickly & amicably • 20% of your clients will bring 80% of your business (fire bad clients) • DOCUMENT, DOCUMENT, DOCUMENT

  17. Prohibited Conduct • Discretionary or unauthorized trading • Churning and excessive commissions • Unregistered activities (broker and product) • Conflict of interest/client priority • Representations of future listing, price, return, dividend, interest, re-purchase • Theft of cash or securities • Misrepresent benefits or risks of investment • Mutual fund switches without investment purpose • Release of confidential information, insider tipping/trading

  18. Good Compliance = Good Business Key to dealing with ever-changing regulatory requirements and resulting paperwork? • team approach • reasonable diligence • good faith

  19. Part 2: Regulatory Initiatives Recent move toward general financial industry reform and corporate governance Industry members through corporate governance and regulatory enforcement Regulators through reviews

  20. Recent Issues • Harmonization of financial regulation • SOX and corporate governance initiatives • New disclosure rules for investment funds • Do Not Call Registry, licence telemarketers • Hedge fund regulation • Criminal Code (whistleblower, insider trading, Production Orders) • Bank Act review (banking & insurance services) • ASC review and changes at OSC

  21. Regulator Up-date • MFDA • RS • IDA • CSA/Commissions • IMET • AML • Privacy

  22. Litigation Update • Blackburn v. Midland and Levesque (Ont) • Portus and Norshield (hedge funds) • Market timing cases (IDA, OSC, MFDA) • Buckingham Securities and auditor • AIG and Willis North (insurance)

  23. Recent Statistics RS (2004) 2002 4 cases $ 82,000 2003 15 cases $1.0 million 2004 11 cases $5.6 million MFDA 2004 1 settlement (IG) 2005 7 notices (3 decisions)

  24. Recent Statistics IDA (2004) Complaints 1,297 Discipline decisions 75 Warning letters 24 ComSet filings 1,896 Audits each firm

  25. Recent Statistics IMET (2004) 7 major investigations 26 less serious probes FinTRAC (2004) 197 case disclosures representing $700 million in suspicious funds

  26. Recent Statistics CSA (first half 2004) Proceedings commenced 77 Orders and settlements 59 BCSC (Sept 03/04) Enforcement orders 45 Undertakings 35 Investigations 21

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