Regulation appears to be moving increasingly toward a progressive “two-way communication” environment, as the self-regulatory organizations are increasing their efforts to reach out to member firms for feedback on key compliance issues during audits and rule reviews.
Although some dealer firms recognize the collaborative approach that regulators are taking, others say the review process is still conducted the regulator’s way — feedback given at the front lines falls by the wayside.
Of the 17 categories in the 2011 Regulators’ Report Card, ratings for “the extent to which members and approved persons are involved in a regulator’s review” category saw significant improvement. The Toronto-based Mutual Fund Dealers Association of Canada‘s rating in the category rose to 7.6 from 6.8 in 2010; the Toronto-based Investment Industry Regulatory Organization of Canada‘s rating rose to 7.8 from 7.2; and provincial regulators saw their collective score increase to 7.6 from 7.3.
This across-the-board increase in scores underlines the fact that how regulators and dealer firms interact has changed. In fact, in the past, chief compliance officers have described the regulatory process as a game of cat and mouse in which CCOs felt they were being pounced upon instead of having a chance to explain themselves. But with every passing year, the two sides are working more as partners. Several CCOs now say that regulators are “involving members more than they used to.”
As one CCO with an Ontario-based dually-licensed firm states: “[IIROC and the MFDA] engage your head office to get a clear picture of your processes.”
A CCO with a Quebec-based IIROC-licensed firm offers similar thoughts: “IIROC comes in very often. They are fair and transparent. There’s a good dialogue.”
But there are still many dealer firms out there that say they should have a bigger say in how they are regulated — and that the process could be “more collaborative.”
A CCO with an Ontario-based investment dealer states: “They have to be open-minded and listen to dealers because [the dealers] have more hands-on experience.”
A CCO with a mutual fund dealer in the same province cites regulators’ lack of involvement with dealers as the source of his frustration: “It’s very rushed. They don’t have a lot of time for the representative to explain, then they put the problem under ‘deficiency.’ They should have more discussions with dealers.”@page_break@Regulators take such dealer feedback seriously, as it helps them stay abreast of the key issues that affect compliance in the financial services industry.
IIROC has been working “very hard” to improve its communication process with firms, says Susan Wolburgh Jenah, the SRO’s president and CEO, especially when it comes to audits and when IIROC is seeking comments on guidance notices. This dialogue gives IIROC auditors and staff a better idea of how rules can affect each member firm’s business differently, as well as lets firms know what IIROC’s compliance priorities are. “We have been engaging in more of a dialogue with members,” she says, “because we want to ensure that rules are balanced and reflect today’s realities.”
IIROC ensures it’s responding to feedback from member firms through the dialogue that occurs between an auditor and a firm during a compliance review. After reviewing a firm’s books, the auditor will issue a report highlighting any deficiencies or areas of concern. The firm then has a chance to respond and ask questions. “Most firms want to be compliant,” says Wolburgh Jenah. “They know what the risks are. And if we believe a process has material risks, they want to know what those are.”
This dialogue is especially important for new firms that are still in the process of setting up their books, says Sandy Jakab, director of capital markets regulation with the B.C. Securities Commission. The BCSC performs an “early check-in,” in which an auditor will visit a new firm within six months to nine months of the firm opening its doors to get a feel for the compliance climate. “The purpose of those meetings is to get a quick read, from our perspective,” she says, “and to give [the firm] a chance to bring up any compliance issues [it has] encountered.”
The MFDA also has made member involvement and communication a priority by expanding the comment periods on proposed rules, says Larry Waite, the SRO’s president and CEO: “We have member regulation forums and workshops. We have also extended comment periods. They used to be 30 days, but now they are either 60 days or 90 days.”
The MFDA also has an informal “pre-comment period” for proposed rule changes and amendments, in which MFDA staff will casually ask for member firms’ opinions on the proposals before proceeding to a more formal comment process. Says Mark Gordon, executive vice president of the MFDA: “It’s not something regulators have done before.”
This increased flexibility is a testament to how the MFDA’s relationship with dealer firms has evolved to the point at which the two sides now work collaboratively, says Karen McGuinness, the MFDA’s vice president of compliance: “It’s the maturing of the relationship. Members now come to us proactively all the time whenever they want to implement something new.” IE