Avoiding conflicts of interest has always been a concern for financial advisors, their firms and the regulators. Notices issued in recent months by the Investment Industry Regulatory Organization of Canada and the Canadian Securities Administrators indicate that those regulators want to clarify the rules surrounding the types of activities you may or may not pursue on your own time.
(The Mutual Fund Dealers Association of Canada published its guidelines on outside business activities in May 2005. That document focused on activities similar to those identified by IIROC and the CSA.)
These notices, directed at both advi-sors and the firms they represent, indicate a “need for more guidance on what outside business activities might impair or impede registrants from fulfilling their regulatory obligations, including the avoidance of conflicts of interest,” says Navdeep Gill, member of the CSA’s policy committee and legal counsel, market regulation, with the Alberta Securities Commission in Calgary.
Paul Riccardi, senior vice president of enforcement, policy and registration at IIROC in Toronto, explains: “As a self-regulatory organization, it is important for us to be proactive in providing guidance to our members while enhancing investor confidence.
“Like other professions, we recognize that some people employed in our industry may have other business activities or personal financial dealings that could lead to real or perceived conflicts of interest.
“Neither securities legislation nor self-regulatory rules prohibit advisors from participating in outside business activities. But such activities must be managed carefully to prevent potential conflicts.”
The rules prohibit personal financial activities that pose the risk that you might put your interests ahead of those of your clients. They require you to disclose to your firm and receive approval for any outside business activities before you begin those activities.
The rules will put the onus on your firm to determine whether any proposed activities pose a conflict before it approves them.
Deanna Taylor, consulting partner with ARA Compliance Support in Toronto, notes that according to the IIROC notice, an advisor who starts an outside business activity that has been approved by his or her firm must have that activity noted on his her registration profile within seven calendar days. Previously, you had 10 business days in which to note the change.
Failure to comply will result in a fine of $100 per day, to a maximum of $5,000, levied on the firm.
In its May 11 notice, IIROC has defined “outside business activities” as “any business activity conducted outside of the member firm by a registered advisor, for which direct or indirect payment or compensation is expected.”@page_break@This would include any activity through which a potential conflict of interest or client confusion may arise. For instance, sitting on the board of any organization is an activity that may give rise to potential conflicts of interest — and, therefore, must be reported.
Another important consideration, Gill says, is whether the outside activity will inhibit your ability to devote sufficient time to serve your clients properly.
The CSA bulletin, dated July 15, also points out that outside business activities must not place registrants in a position of power or influence over existing and potential clients, or provide “privileged, confidential or insider information relevant to their registerable activities.”
Says Riccardi: “We have codified the types of personal financial dealings that are prohibited and specifically identified unacceptable dealings. [IIROC is] clarifying what is and what is not acceptable behaviour, making the standard more transparent, which will enhance investor confidence and protect everyone’s interests.”
While conducting any outside business activities, registrants cannot use their dealers’ premises, records, logos, trade names, stationery, support staff, telephones, faxes or email.
Neither IIROC nor the CSA has offered a list of unacceptable outside business activities. “Providing a defined list of activities is, in reality, not possible,” says Garth Foster, partner with Fasken Martineau DuMoulin LLP in Toronto. “If advisors are engaged in any outside business activity or have a concern about what they might be doing, “they should raise it with their dealers, which would then review and examine the activity. [The dealer would] determine whether there are any conflicts, or whether such activity would bring the securities industry and their own registration into disrepute.”
You should be cautious about any outside activities you undertake — even those you may deem personal. For example, if you operate a farm as a side business and that business declares bankruptcy, your registration could be affected, according to Foster, based on “lack of good judgment.”
Outside business activity is not a new topic, Foster says. Heightened focus on the issue follows the implementation of National Instrument 31-103: Registration Requirements, Exemptions and Ongoing Registrant Obligations, which came into effect on Sept. 28, 2009. NI 31-103 aims to harmonize securities regulations across Canada.
The rules “should not be a major departure from the behaviour already expected of financial advisors and dealer firms,” Riccardi says. “To the extent that the rules provide greater clarity, there should be greater certainty of what is expected of the financial advisory community.”
Accordingly, you should not be overly concerned about these changes. Disclosure of such activities is not a major problem in the financial advisory industry, according to Taylor.
“We believe that there is substantial compliance among our members,” Riccardi says, “and that advisors are obtaining their employers’ pre-approval before engaging in outside business
activities.” IE