Both regulators and dealer firms continue to insist that advisors put their clients’ interests first, ahead of the advisors’ own interests. However, advisors need to protect their licences and place a priority on complying with their regulatory and legal obligations ahead of servicing their clients.
Let me explain: Jack, not his real name, is an advisor who met with Mr. and Mrs. Smit three times. In the final meeting, he had them sign the necessary documents to open the accounts as well as to enable Jack to start purchasing securities in their accounts. Jack’s assistant, Hank, tells him that he missed three places for the Smits to initial. As the Smits are busy people with big careers, Jack doesn’t want to bother them, so he decides to insert Mr. and Mrs. Smit’s initials instead of sending the documents back to them to initial. Jack made this decision in a split second and didn’t take the time to consider the serious ramifications this infraction would have on him and his practice if it were caught by his dealer or regulator. If he had, he would have sent the documents back to the clients for initialing. Rather, all Jack thought about was that he didn’t want to inconvenience Mr. and Mrs. Smit.
Jack then received a letter from his regulator advising him that there was a regulatory audit that has taken place, which suggests that Jack may have inserted his own initials instead of his clients’. Jack needs a lawyer and hires me to represent him.
Jack is really stressed, and asks me the same question that most advisor clients ask: “What is the worst-case scenario?” I learn the essential facts of Jack’s case: there were several client account documents that he initialled; and it was his regular practice to insert his own initials to avoid inconveniencing clients. I then answer Jack’s question and explain the worst-case scenario in his particular situation:
1. The investigation and enforcement process can take years, so Jack should continue working and try to put this matter aside until the regulator takes the next steps. This is generally very difficult for advisors as the waiting can be very stressful.
2. Some securities dealers will terminate their relationship with an advisor as a result of an investigation, which confirms an infraction. In such cases, the advisor needs to find a new dealer to move to — and this can be challenging. Even if the advisor finds another dealer, the regulator’s registration arm may not agree to transfer the advisor’s registration either immediately or at all, depending on how serious they view the infraction.
The approval to transfer an advisor’s registration can take days or months. If that were to happen, Jack would not be able to work as an advisor in the interim period and he risks losing his entire client base as those at the regulator responsible for registration determine Jack’s future.
I inform Jack that I have had several conversations with the regulators about the risk of advisors losing their clients the longer they are out of the business, but the regulators’ registration groups don’t seem to be disturbed by this even though the advisors may have worked several years to build up their client base and they face the risk of losing these clients to other advisors while the regulators consider the matter. Furthermore, in Jack’s situation, it would not be good for his clients to be required to start working with a new advisor when they would really prefer to work with Jack instead — regardless of the allegations he is facing.
3. Once the regulator completes its investigation, which may include an interview with Jack, the regulator ultimately will send us a letter advising whether it will close the file with a warning letter, or whether it will pursue this publicly with the circulation of a Notice of Hearing, which would include allegations setting out the particulars of the alleged infraction in detail. If a settlement can be entered into, then the Notice of Hearing is a Notice of Settlement Hearing. If approved by the regulator’s three-member panel, then the settlement, along with the detailed allegations, will go public and be available for both existing and prospective clients to read for many years.
4. Once a settlement is public, Jack may have other problems. In his particular case, he is also licensed to sell insurance and has agreements that permit him to sell insurance products. Jack also has his certified financial planner (CFP) designation. The insurance company’s compliance staff monitors the regulatory notices and may terminate Jack’s licence on notice under his contract. As well, the Financial Planning Standards Council may conduct its own investigation to determine whether Jack is entitled to continue to hold the CFP.
All of this is a tough pill for Jack to swallow given that all he set out to do was to avoid inconveniencing his clients. But in doing that, Jack forgot to ensure he was operating in a manner consistent with his regulatory and legal requirements. Jack had his heart, but not his head, in the right place. Surely, Jack regretted the choice of not inconveniencing his clients ahead of protecting his licence and his reputation. I am certain Jack will think through these issues differently next time — and I hope you will too.