Being sued is not a scenario that anyone wants to find themselves in, but it’s a possibility that is best dealt with by being prepared. Indeed, moving with care through this process can not only improve outcomes, it can reduce the stress and aggravation that inevitably accompanies a lawsuit. In addition, good preparation may help you avoid the courtroom altogether.
“The court process has to be followed, in terms of going through examinations for discovery, production of documents – all of those kinds of pretrial things,” says William Gange, a partner at Gange Goodman & French LLP in Winnipeg. “[But advisors] don’t actually get into the physical court room very often.”
Most issues with clients arise from financial advisors who may have fallen behind in their suitability, know your client (KYC) and know your product (KYP) obligations, according to David Di Paolo, partner at Borden Ladner Gervais LLP in Toronto.
Typically, an advisor will receive a complaint from a client, usually regarding an underperforming investment, before the situation escalates to legal action. This initial complaint is where your next steps are crucially important – handling that complaint properly could avoid a lawsuit altogether.
So, as soon as it appears that a client is particularly upset and may take legal action, it’s time to do some organizing. Says Di Paolo: “Get your notes in order, get all your records in order, get all your emails pulled together.”
That way, advisors can show their lawyer that they did their due diligence in executing their KYC, suitability and KYP obligations.
It’s key to get in touch with the compliance department and explain the situation. Advisors have an obligation to inform the compliance department of a client complaint, says Di Paolo. But, more importantly, the compliance team may be able to help advisors prepare for the worst.
For example, the compliance department can instruct advisors on organizing files relevant to the compliant, what to say to the client, what their regulatory reporting obligations are and whether or not it’s time to contact a lawyer.
If the complaint is made via email, the advisor must respond in kind, says Di Paolo, as an unanswered email could be taken as an admission of responsibility. “It’s critical that [advisors] respond in writing,” Di Paolo says, “so they’ve got a paper record if they need [one] once they get sued.”
Adds Di Paolo, advisors need to make sure that any response they send to the client is accurate and complete, and should not come across as dismissive.
If the issue can’t be resolved at the complaint stage, the client may then choose to escalate the dispute by issuing a statement of claim. Advisors should then take certain steps. For example, they must inform their branch managers of the claim, which will lead to certain regulatory obligations, says Brad Moore, partner at Fasken Martineau DuMoulin LLP in Toronto, adding that it’s likely that the dealer will also be named in the lawsuit. “The branch manager may already know about it, but it’s best to open that line of communication.”
Advisors must also alert their errors and omissions (E&O) insurance provider, says Moore, as there is probably a time limit for making an insurance claim.
Once the insurer has been contacted, a claims examiner or lawyer will be assigned to the advisor. This individual will ask for all of the advisor’s documents – both hard copies and electronic versions – relating to the client, says Gange, and will ask for the advisor’s side of the story.
Once this information is gathered, says Moore, it must be secured to ensure it will not be destroyed or altered. Advisors may need to speak with their branch manager and dealer to make sure this step is taken properly.
When telling their side of the story to a lawyer, advisors have to be open and honest right from the beginning. “There’s no advantage to be gained by not being honest with your lawyer about everything that happened,” says Di Paolo, “because the reality is everything comes out [during the litigation process].”
Another immediate “must do” after receiving a notice of claim is for the advisor to read the documents closely and write down everything that he or she can remember about the client and the client/advisor relationship, even if it seems trivial or irrelevant.
“Memory, unlike wine, is not going to improve with time,” says Moore. “And your memory is probably never going to be better than it is that day.”
Advisors should also use this opportunity to review the client’s file and all of their written communication with him or her.
During this time, advisors should also do a loss calculation for the client’s account. “Even if the advisor made a recommendation that fell below [suitability] standards,” says Di Paolo, “if the client hasn’t suffered any losses, then the client’s got no claim.”
One thing advisors should not do during a civil action is try to contact the client. “By the time a claim has been issued,” says Gange, “the person has already taken the step of consulting a lawyer; they’ve got advice and it’s a pretty serious situation at that point.” Or, the client may feel bullied and complain to a regulatory body or claim that the advisor admitted to wrongdoing.
Talking with the client could also put your E&O insurance at risk, says Gange, which means the advisor could end up being liable for the entire cost of the proceedings.
Regulatory action may coincide with a lawsuit
While a civil action against an advisor doesn’t automatically mean trouble with the regulators, the lawsuit is likely to pique their interest.
When an advisor – and, in all likelihood, the dealer – is named in a civil action, the appropriate regulator must be informed of the lawsuit, says Brad Moore, partner with Fasken Martineau DuMoulin LLP in Toronto.
The courts and regulatory bodies, such as the Investment Industry Regulatory Organization of Canada (IIROC), are separate entities: this obligatory notification should not mean that an advisor will end up jumping from the lawsuit frying pan into the regulatory fire.
“They are separate processes,” says Moore. “A civil claim does not mean there will be a regulatory proceeding, [and] a regulatory proceeding does not necessarily follow the commencement of a lawsuit.”
However, according to David Di Paolo, partner with Borden Ladner Gervais LLP in Toronto, the odds that a regulator will pay closer attention to a lawsuit are increasing. Cases often stem from suitability issues, says Di Paolo, which regulators have been scrutinizing more carefully over the last two years.
“If [an advisor is] sued in relation to an investor loss case,” says Di Paolo, “there’s a reasonably good chance that the regulators, either IIROC or the MFDA [Mutual Fund Dealers Association of Canada], will conduct an investigation.”
The investigation may only be cursory, says Di Paolo, and the regulator will simply ask to review the advisor’s notes relating to the client. If nothing is out of place, the issue will probably be closed. However, he adds, there is a chance that the regulator could launch a “full-blown investigation.”
Whether that investigation is cursory or more intensive, one thing advisors can be sure of is that everything will happen at once. Says Di Paolo: “The investigation will be taking place at the same time that [the advisor is] having to defend the litigation against the client.”
© 2014 Investment Executive. All rights reserved.