Several provinces have amended their securities laws to permit the Mutual Fund Dealers Association of Canada and the Investment Industry Regulatory Organization of Canada (the investment industry’s self-regulatory organizations [SROs]) to collect their fines in court. This will have serious implications for advisors who have left the industry following a significant infraction.
Although only some of the provinces have passed such legislation — namely, Prince Edward Island, Quebec, Ontario, Alberta, British Columbia and, most recently, Manitoba — I expect that the remaining provinces will follow suit shortly. So, what does this mean to advisors?
To those remaining in the industry, there are virtually no implications because you must pay the penalty imposed in a settlement or from a regulatory panel after a contested hearing to remain an advisor in good standing. As most regulatory matters conclude with a negotiated settlement rather than a contested hearing, you and your lawyer would negotiate a settlement that you can afford to pay. If the penalty challenges your cash flow, a line of credit can come in handy. If that’s not available, payment terms allowing you to pay the penalty over time can usually be negotiated with the SRO.
In contrast, the implications to advisors leaving the industry are significant and serious. In the past, SROs had no powers to enforce their penalties in court. So, if an advisor committed a serious infraction and subsequently was terminated by his or her dealer or resigned, then the advisor would have no reason to concern him- or herself with any penalty an SRO imposed because it would be unenforceable against them as a non-registrant.
As a result, the advisor would not need to retain a lawyer to represent the advisor through the SRO’s investigation, enter into a settlement, or appear at the contested hearing to defend him- or herself. This is common when advisors committed such serious infractions that they would likely be banned permanently from the industry — even if they did contest the hearing or attempt to settle the matter.
If neither the advisor nor his or her lawyer attends the hearing, then a hearing proceeds only with the SRO’s counsel and the SRO’s witnesses. No one presents the advisor’s side of the case. For example, if the infraction was as a result of certain circumstances that may reduce the seriousness, none of these facts will likely be presented to the hearing panel.
As the advisor is not present and doesn’t have a lawyer challenging the evidence (usually, the investigator who was collecting the evidence related to the infraction is the main witness), there are no contrary facts for the hearing panel to consider. As you would expect, the hearing panel’s decision on the merits is usually the worst possible for the advisor.
The penalty hearing follows the hearing on the merits; again, as there is no one representing the advisor, the financial penalty is also the most serious, sometimes in the hundreds of thousands of dollars, along with a permanent ban and the SRO’s legal costs.
Until the passing of new powers permitting the SROs to enforce these penalties in court, there was no reason for an advisor leaving the industry to co-operate with the investigation and appear at the hearing. Now, advisors leaving the industry need to change their approach. They must co-operate with the investigation, preferably with competent counsel, to negotiate the best settlement possible, or attend a hearing to adduce evidence to attempt to reduce the culpability and penalty. If these advisors are unable to pay a penalty commensurate with the seriousness of the infraction, then they need to adduce evidence that they are unable to pay and negotiate terms that they can fulfil.
So, these new powers have a significant effect on advisors departing the industry. I used to tell advisors leaving the industry that the implications of not responding to the regulator were of no serious consequences. Now, my advice is different as the playing field has changed.