When a provincial regulator or self-regulatory organization (SRO) like the Mutual Fund Dealers Association (MFDA) or the Investment Industry Regulatory Organization of Canada (IIROC) alleges you committed an infraction, you should respond. Why? Because if you do not, the implications will be much more severe.
I read the IIROC and MFDA enforcement news releases almost every day. It breaks my heart that many of these decisions relate to advisors who didn’t respond to the SROs’ letters and didn’t show up for their regulatory hearings. As a result, they receive a harsh financial penalty and are permanently banned from the industry. These bans are not usually because of the alleged initial infraction, but only because the registrant didn’t show up.
In fact, many infractions may be explained away or result in a lesser financial penalty and not a ban. However, due solely to a respondent’s neglect or failure to appear at a hearing, panels will conclude in their written reasons that such registrants are “ungovernable” and should not be permitted back into the industry.
It makes me wonder why a registrant would choose this option when they might even have errors and omissions insurance that would pay for their legal representation — not to mention that ignoring the allegations is bound to attract the worst possible result.
Does a registrant take this approach because they are so ashamed that they are unable to face up to the infraction, and they just throw in the towel? Are they unable to deal with the matter due to depression and/or anxiety resulting from these or other circumstances? Are they under the mistaken belief that the infraction is already sufficiently serious that they will be permanently banned from the industry anyway? Have they decided the investment industry is not for them, so they are moving to another industry or job? Do they intend to take early retirement and therefore don’t want to deal with it?
For whatever reason they have for not responding, this is always a big mistake. Most infractions can result in negotiated settlements that are far less serious than a permanent ban and financial penalties that are less severe than those for undefended allegations.
A negotiated settlement can explain extenuating and mitigating circumstances. There could be extenuating circumstances, like a client giving verbal instructions but not signing the necessary documents. A mitigating circumstance could be that this was the advisor’s first infraction, she or he has admitted to it, shows remorse and knows not to do it again.
For those who believe that ignoring the regulator or SRO will make the matter disappear, they are wrong. Not only is the penalty harsher, but it follows the advisor beyond just the hearing date. The powers of the SROs now include the ability to pursue payment of a penalty through the courts. They can seek and obtain judgment, and this could potentially impact an advisor’s credit rating. Even if the registrant cannot afford to pay the imposed penalty, negotiated provisions may include payment over time.
The worst, however, is that these decisions remain on the web for years, which means that anyone who searches the name of the person will find the decision, which looks very serious if the penalty is a permanent ban.
An uncollected judgment coupled with the SRO’s decision being viewable on the worldwide web might impact an advisor’s ability to get a job outside of the investment industry, or a loan or even an apartment if their credit rating is reviewed.
I am sympathetic to advisors who don’t show up for their regulatory matters and thus receive a harsh and public penalty, because they just might not know their options. Even if a registrant has decided to cease working in the investment industry, they should be aware of the ramifications of not responding to allegations, as these decisions can ruin their reputation well beyond the scope of the investment industry. This is unnecessary and, frankly, very sad.