Most advisors would like to say they learn from the best. A former regulator speaking at a fintech conference in Toronto on Thursday took a different approach.
Colette Arcidiacono, from compliance consulting firm Conformité 101, provided a room full of advisors at the Croesus Finnovation event with a list of the most common infractions in Investment Industry Regulatory Organization of Canada (IIROC) enforcement cases from the last decade.
She changed the names of those implicated, lest anyone feel uncomfortable. But the point was also that some transgressions may be easier to commit than some advisors think.
Arcidiacono, who spent 16 years at IIROC, also made it easy to brush up on the most relevant sections of the self-regulatory organization’s 534-page rule book by providing the sections to review.
The most common infractions, according to Arcidiacono, are as follows:
- unbecoming and detrimental conduct (unsuitability);
- unauthorized and discretionary trading;
- personal financial dealings with clients;
- outside business activities;
- conflicts of interest;
- theft, fraud, forgery;
- manipulative or deceptive activities; and
- off-book transactions.
With those in mind, she proceeded to run through the 10 most important rules for advisors to review, with notable examples of how they’ve been broken.
- 3702, in the new version of the IIROC rule book, effective June 1, 2020 (Rule 3100 in the expiring version): Reporting and record-keeping. Forward any complaints to your supervisor, Arcidiacono said, and don’t try to negotiate a settlement with your client. Hiding anything from your firm could mean you end up facing disciplinary action on your own.
- 1402-03: Standards of conduct. “Ask yourself, ‘Would my mother be proud of what I’ve done?'” she said. An advisor in one case filled out the same know-your-client information for 364 clients, stored the client files in Dropbox, and then lost control over that information. Another requested and accepted 32 tickets to events worth $32,000 from two mutual fund companies, and then tried to back-date a reimbursement cheque when the Ontario Securities Commission investigated.
- 3102-03: Know your client and suitability. Too often, Arcidiacono said, regulators come across cases where compliance departments tell advisors that a product’s risk level doesn’t fit with a client’s profile. Advisors then adjust the risk profile to fit the investment product, rather than the other way around.
- 3221-3275 (Rule 1300.4 in the expiring version): Discretionary and unauthorized transactions.
- 3603 (Rule 29.7): Misrepresentation.
- 3115 (Rule 43): Personal financial dealings with clients. The general rule is just don’t engage in personal financial dealings; if there’s a specific case you’re unsure of, seek out your compliance officer.
- 3110 (Rule 42): Conflicts of interest. Arcidiacono described an IIROC case where an advisor purchased securities for clients while selling those securities at the same time in his own account. “It’s not an infraction to sell securities you recommend to your client but you have to disclose that to your client,” she said. The advisor received a $250,000 fine and a five-year ban.
- 3115(2), 2551(7) (Rule 18): External gratuity, remuneration or benefit.
- Universal Market Integrity Rules 2.2 (2): Manipulative and deceptive activities. Arcidiacono described cases of market manipulation using practices known as “layering” and “spoofing” that garnered significant penalties. “Don’t try,” she said. “IIROC has such great tools now to detect this. You won’t have a chance.”
- 8104(3), 8107. Obligation to cooperate with enforcement staff. Arcidiacono stressed the consequences of not cooperating with IIROC. In one example, an advisor serving a one-month suspension for manipulative activities changed firms and traded while suspended. When he refused to cooperate with that investigation, he was permanently banned. “He had a one-month suspension and now it’s a permanent ban. That’s so stupid,” she said.