“It’s eating us up inside.”
That comment came from a long-time advisor awaiting a regulatory hearing for pre-signed forms — a perennial top allegation in the enforcement reports of the Mutual Fund Dealers Association of Canada (MFDA).
Advisors who use pre-signed forms — or who did in the past — typically do so for convenience, whether their own or their clients’. For some of these advisors, the regulator’s steep fines and perceived disregard for context are a disheartening affront after serving clients for decades with nary a complaint.
The regulator is “focusing on the good advisors, over a strict liability technicality,” said the business partner of the advisor cited above.
Zachary Pringle, an associate with Babin Bessner Spry LLP in Toronto who’s acted as legal counsel for advisors in pre-signed and altered forms cases, said the forms are indeed like a strict liability offence: you either used one or you didn’t.
When asked if an advisor’s notes — detailing their tech challenges, for example — have helped in these cases, he said they didn’t. “The MFDA ultimately doesn’t care if you can explain it,” Pringle said.
When a client signs a form that’s partially filled in or blank, that’s a pre-signed form. When a client doesn’t initialize a change on a signed form, that’s an altered form. While regulators have good reason for a strong stance against such forms — they could facilitate funds misappropriation, for starters — Pringle described most of the infractions he’s represented as administrative mistakes, such as the advisor leaving items blank.
Natasa Morfesis, chief compliance officer with Worldsource Financial Management in Markham, Ont., also described most pre-signed and altered forms as the result of administrative mistakes, often related to account maintenance.
Still, no one’s arguing against playing by the book when it comes to pre-signed and altered forms. John Fabello, a partner with Torys LLP in Toronto, said playing by the book means following regulatory first principles (e.g., dealing fairly, honestly and in good faith) and legal first principles pertaining to contracts (e.g., account forms are documents with legal impact).
By not populating the form ahead of the client signing it, “you’re leaving yourself open to an argument later that the client really didn’t agree to the terms,” Fabello said. “I can’t tell you how important [a properly signed form] is when I am helping defend advisors before the regulator and the courts.”
Advisors also leave themselves open to big fines. Both Pringle and Fabello said they’ve observed penalties rising over the years for pre-signed forms.
While higher penalties aren’t news, perhaps they should be. A review of recent settlement agreements shows advisors are regularly fined $25,000 and up, plus costs, for pre-signed and altered forms, depending on aggravating factors.
After warning registrants about signature falsification as far back as 2007, in 2015 the regulator said the penalties for the infraction, which largely includes pre-signed and altered forms, were increasing regardless of the acknowledged no-harm nature of most offences.
“The regulators have made clear that they want to ensure that the sanction […] acts as a real deterrent for advisors,” Fabello said.
“If you’re finding the existing penalties are not dissuading the activity, you have to do something,” said Ed Skwarek, member of the Financial Services Tribunal, lawyer and adjunct professor at Osgoode Hall Law School, securities specialist, in Toronto. “And one of the options is to increase the fines,” which is “the lesser of the panoply of penalties available to the regulator to address the issue.”
Deterrence has occurred (see table), whether the result of the regulator’s increased fines, e-signatures or perhaps fewer advisors taking care of business the old-school way — or a combination of such factors.
Table: Selected pre-signed forms statistics from 2017 to 2020
|Year||Proceedings commenced||Number of pre-signed forms* allegations||Pre-signed forms allegations as % of proceedings commenced**|
Source: MFDA enforcement reports
*Starting in 2017, “pre-signed forms” were reported separately from active signature falsification in the MFDA’s enforcement reports; pre-2016 reports reference “blank signed forms”
**Proceedings can involve more than one alleged violation
In an emailed statement, the MFDA said that, while forthcoming 2021 data show a similar proportion of pre-signed forms compared to 2020, it expects to see a continued downward trend in cases, given prevention by compliance departments and regulatory deterrence through prosecution, along with firms’ accelerated migration to e-signatures during the pandemic.
Anecdotally, Fabello said he’s seen “a significant evolution” over the last few years as fewer advisors use pre-signed forms, “even to make administrative changes, or minor changes, without the client signing [the change].”
Still, Fabello said a disconnect often exists between what the regulator thinks is a reasonable penalty and the penalty’s financial impact on the advisor.
“I am routinely arguing for lower sanctions, because I believe […] the regulator’s objective of deterring conduct can be achieved with more reasonable fines,” he said.
Pringle called higher fines unfair.
“Advisors are being penalized […] for past behaviour at a higher amount now than they would have been had the issues been initially caught,” he said.
Past behaviour can cover a lot of ground. An audit may involve looking at an advisor’s records from the past several years, depending on how extensive a dealer decides the audit should be. As a result, several of an advisor’s old forms could be flagged as pre-signed.
“I’ve seen the dealer go back 15 years through the advisor’s files,” Pringle said.
Morfesis said if a branch audit turns up one pre-signed form, “we’ll go back and do a full audit of all client files.”
Dealers have an obligation to report flagged forms to the MFDA. “Whether or not the MFDA wants to pursue contraventions in respect of forms that are 15 years old, that’s up to them,” Pringle said.
Age of misconduct is one of the factors in deciding to take a case forward, the MFDA statement said. And in determining penalties, hearing panels generally assess “the recency of the misconduct as opposed to when it was discovered,” it said. This includes whether the conduct occurred after the 2015 warning about increased penalties.
In addition to the high penalties, advisors face other pain points. During the course of an investigation, the firm contacts affected clients to ensure they authorized transactions; a period of greater supervision may be imposed at personal cost; the decision is a public record and often published by news outlets; and relationships may break down with clients and other regulators. In the Canadian Securities Administrators (CSA) registration database, the advisor’s record will show a violation for “Fraud and/or Forgery and/or Falsification” and include a link to the media release announcing the settlement agreement.
Fabello believes any generic reference to fraud when conduct was unintentional — for example, forms were considered pre-signed because some items were left blank — should be changed. “Fraud is a very loaded pejorative term” indicating intentional wrongdoing, he said.
The MFDA statement said conduct involving pre-signed forms in proceedings by other securities regulators is routinely described on the CSA disciplined list as “Fraud and/or Forgery and/or Falsification.” Also, the CSA list has direct access to any orders issued by the MFDA, so “readers can understand the precise misconduct which occurred.”
That may be expecting a lot from lay readers, however.
“In the event that the CSA modifies the violation categories in the future that apply to pre-signed account forms, this may result in a different violation description being applied,” the MFDA statement said.
Skwarek said advisors with good processes in place are frustrated with those who continue to use pre-signed forms. “We are in the modern age here,” he said, referring to solutions such as e-signatures.
Certainly, any advisor still offside with pre-signed forms should be implementing proper processes.
With regulatory notices and decisions being clear about pre-signed forms, “advisors have to acknowledge that and calibrate their practices to be consistent with that regulatory expectation,” Fabello said. “Otherwise, they’re going to be investigated and prosecuted, potentially.”
To mitigate pre-signed forms cases, Morfesis said her dealer has implemented e-signatures, internal communication and training. One of her tips: “You can’t date what is considered to be a contract [i.e., an account form] on behalf of somebody else who signed it.” In other words, clients must sign and date forms themselves; if you fill the date in next to their signature, the form has been pre-signed.
Pringle suggested that advisors avoid relying too heavily on their compliance department. “[Advisors] assume because something has been approved by compliance, there was no issue with the form,” Pringle said. “That’s regularly not the case.”
Specifically, advisors should triple-check that forms are 100% complete before they and their clients sign them, he said. And when a form is amended for any reason, the client must initial the change. Client initialization is required even if the client signs the form after the change is made.
When a client transaction requires timeliness and a change needs to be made to a form, get the client to acknowledge the change electronically in writing (e.g., by email), Fabello suggested — “not as an endgame but rather as a stopgap measure. Then, as soon as you possibly can, get the form changed.”
Finally, “Do not rely on staff to make sure the forms are filled out correctly,” Pringle said. “Ultimately, the buck stops with you.”
Contact the reporter, Michelle Schriver, with feedback and tips.