THE ONTARIO SECURITIES COMMISSION (OSC) has announced that it will begin contacting clients of registered firms directly as part of its routine compliance review process – and some financial advisors are worried that the new practice could send the wrong message to their clients.
In early June, the OSC had sent an email to registered exempt-market dealers, scholarship plan dealers and portfolio managers to alert them that during compliance reviews, the OSC will be contacting randomly selected clients to ask questions about their experience with their registered firm and advisor. For instance, the OSC email says, OSC compliance staff will ask clients about the accuracy of the “know your client” information the firm has on file, and about investment recommendations and advice provided to the client.
The purpose of this initiative is to verify the accuracy of information given to OSC staff about a firm’s relationship with its clients and, ultimately, to help the regulator get a more complete picture of the extent to which registrants are complying with the relevant regulatory requirements.
“This is going to be a very small sample [of clients], in order to do a bit of a random check in this area,” said Mary Condon, vice chairwoman of the OSC, at the Compliance and Risk Management Summit, hosted by the Strategy Institute in Toronto in mid-June. “We’re not expecting that this will be a broad-scale sweep across the entire client universe.”
Greg Pollock, president and CEO of Toronto-based Advocis, says he’s perplexed about why the OSC has decided to get clients involved in the review process rather than relying on client files, as has been done historically.
“I’m not sure what they’re trying to achieve by contacting the clients directly,” Pollock says. “The forms, if properly done, should address the concerns of the regulator. So, I do think it’s fairly aggressive and fairly extreme.”
In the past, the OSC has contacted clients only in exceptional cases – not as part of a standard compliance review process. But the regulator has found such contact to be an effective method of assessing firms’ compliance with securities laws and so has decided to rely on the practice more often.
“We’ve found [contacting clients] to be a valuable tool,” says Elizabeth King, manager of the portfolio manager team in the compliance and registrant regulation branch at the OSC.
Clients’ participation in the review process will be voluntary, and they will be informed that the OSC’s queries are part of a routine examination. Still, some advisors are concerned that clients who are contacted will interpret the regulator’s call as an indication that their advisor is being investigated for wrongdoing.
“I think it’s a reasonable assumption,” says Pollock, “that some consumers will initially think, ‘What has my advisor done wrong?'”
King, however, insists that the OSC will clearly communicate the routine nature of such a call.
“We don’t want to alarm [any] clients,” she says. “We will inform clients on those calls that this is a normal-course compliance review – unless we have reason to believe that regulatory action is warranted. We also will be explicit that the call should not be interpreted as a sign of any misconduct.”
Another concern of advisors is that a client who is disappointed with the dismal market performance in recent months, when contacted by the regulator, could point a finger at the advisor for any losses the client has experienced.
“It’s not uncommon, when there are poor returns, for clients to complain,” says Pollock. “So, one of the concerns I would have is that the timing of this review may lead to false positives in terms of consumers not feeling their advisor has properly assessed their suitability.”
It’s critical that advisors and dealers continue to have an opportunity to offer their input and to provide clarification during the compliance review process, Pollock says: “From my point of view, there has to be a lot more to the investigation than just relying on the word of the client.”
Indeed, Condon says, the OSC would regard the client input only as one component of the broader compliance examination: “We appreciate that we will have to treat with some caution the information that we get.”
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