Advisor at Risk

Ellen Bessner

Ellen Bessner is a well known, leading litigator with commercial litigation firm Babin Bessner Spry LLP. Her more than 20 years of experience includes defending investment and insurance industry participants, including dealers and individuals at all levels of courts.

Steps for advisors and their dealers to avoid OBA infractions

By Ellen Bessner |

You should always err on the side of disclosure and seek permission from your dealer first before you accept any outside business activity (OBA). This applies whether you're considering a role on your cottage association's board; the board of a public or private company, for profit or not-for-profit entity; or even your club or community.

Why? Based on regulatory requirements and internal company policy, you need approval, in advance, from your dealer. Specifically, your dealer needs to consider objectively whether there's a real, perceived or potential conflict, before approval is granted. This is regardless of whether the position is unpaid or paid, a one-time event or on a continuum.

There are several Mutual Fund Dealers Association of Canada and Investment Industry Regulatory Organization of Canada recently reported cases in which there have been penalties levied against both advisors for their failure to disclose and their dealers for failure to identify undisclosed OBA. There are also cases against dealers for having failed to properly supervise an advisor's disclosed OBA.

As there is so much confusion about OBAs, here is a list to help you understand and avoid inadvertent infractions:

  1. Take the word "business" out. Just because the rule refers to an outside "business" activity, it doesn't have to be a business activity, per se. Even volunteer work must be disclosed, in advance, to your dealer.
     
  2. Think outside the box. Some OBAs might not be that obvious. There are some notable examples, including:
    1. investing in your brother's business to help him with some short-term cash flow; or
    2. helping a client with her taxes, even though you didn't charge her.
       
  3. Don't do indirectly what you might need to disclose otherwise. For example, you know that you would have to disclose any remuneration that's made directly to you. Yet, you might think that if you arrange for no payment directly to you or your spouse, or an exchange of favours, you could avoid disclosure. However, you cannot avoid disclosure by redirecting remuneration.
     
  4. Take the annual questionnaire seriously. When completing your dealer's annual questionnaire, don't be vague; be detailed and comprehensive; don't leave anything out. If you need to do a separate memo, then go ahead and do it.
     
  5. Don't wait for the questionnaire. If there's an opportunity for any OBA during the year, you can't just wait to disclose it in the annual questionnaire. You need to seek permission in advance; so, don't wait for the questionnaire to report, send an email in the interim to disclose and seek permission.
     
  6. Seek permission for changes. If there was an approval granted for an OBA and there's a change to your role, you need to disclose details of the change. For example, instead of just being on the board of directors, you are now asked to chair the board; instead of investing in a cottage property with your client/best friend, you have decided to develop the property for rentals. Disclose in advance and seek permission for the changes.
     
  7. Dealer's obligation to supervise. Once the dealer approves the OBA, the firm must supervise the activity. This includes:
    1. If an advisor is carrying on an OBA under a company or trade name. In these circumstances, the dealer must search the web regularly for that company or trade name. That's because the dealer has to determine if there's any further activity that has not been disclosed or it has morphed into something beyond the disclosure.
    2. During a branch audit, look for signs that the OBA is limited to what has been revealed.
    3. Ensure the branch manager is aware of the OBA to ensure he or she is on the lookout for any concerns that could be associated with the advisor's activities.
    4. If there are terms and conditions associated with the OBA, ensure there's supervision of the terms and conditions to determine whether they're being adhered to.
    5. If it's determined that there must be disclosure to clients in writing, ensure that such disclosure is delivered and test for this at audit time.


There have been many regulatory matters released recently against advisors and dealers in which the advisors failed to disclose, and the dealers failed to supervise, an OBA. To avoid becoming one of these public cases, always be thinking of the following: if you're an advisor, is this an OBA for which I need permission? For a dealer, consider if the OBA can be supervised properly before granting permission.

Advisors must always err on the side of disclosure, while dealers must ensure that any OBA that's approved is supervised. Both advisors and their dealers must take the necessary steps to avoid the aggravation and costs of bad publicity related to a regulatory matter, which wreaks havoc on your reputation.