New record-keeping requirements raise compliance concerns
It’s becoming more important for advisors to leverage technology to maintain an audit trail showing compliance that you’re doing the right thing
Ontario’s provincial government quietly amended the Ontario Securities Act a few weeks ago, paving the way for even greater compliance measures imposed on dealers and their financial advisors. In fact, the new record-keeping obligations will place more of an onus on all dealers, advisors and other market participants to present “books, records and other documents” to prove their compliance with Ontario’s securities laws.
Although few within the financial services sector have sounded the alarm — and may not yet be fully aware of these new obligations — the changes will add to organizations’ compliance costs. The changes will also make firms more vulnerable to investor complaints, should advisors breach the new securities laws.
The new record-keeping requirements state that every market participant shall keep the following records:
- Such books, records and other documents as are necessary for the proper recording of its business transactions and financial affairs and the transactions that it executes on behalf of others
- Such books, records and other documents as may otherwise be required under Ontario securities law
- Such books, records and other documents as may reasonably be required to demonstrate compliance with Ontario securities law
As a result, there’s no longer any excuse for a dealer or advisor to say, “Yes, we comply, but no, we have no records that demonstrate compliance.”
In fact, Susan Han, senior legal counsel with AUM Law in Toronto, suggests that with this new record-keeping responsibility, dealers and their advisors should be asking themselves: “What are my core securities law obligations and how can I document and demonstrate that those obligations have been met?”
There are some activities that dealers are already doing fairly well, such as collecting and recording know-your-client information for determining suitability. However, there are other areas, particularly surrounding disclosure and transparency, in which challenges remain. This is where technology can really help out.
Although a hand-written note on the back of a napkin is better than no documentation when it comes to proving the advisor’s word over the disgruntled investor’s word, an automated system for maintaining an audit trail of investor communications is vastly superior. Tools such as a customer relationship management (CRM) system for the advisor to capture client interactions or a document delivery platform that records that the appropriate disclosure document was delivered to the investor, will help keep the advisor out of trouble.
Specifically, a system that can record the disclosure event in every case without the advisor having to take any extra steps is even better from a compliance standpoint. In fact, electronic records, if done properly, are time-stamped automatically and are harder to lose, misplace, alter, destroy inadvertently or misfile.
An area in which some mutual fund dealer firms especially may be lacking in is being able to demonstrate that the Fund Facts document was delivered to the purchaser on a timely basis. And few things are more “core” to the securities laws that apply to dealers than the obligation to deliver a prospectus or similar disclosure document, such as Fund Facts.
Disclosure to investors lies at the very heart of the securities regulation. In Han’s perspective, it’s impossible to overstate the centrality of delivering Fund Facts to retail investors in the investor protection scheme as envisioned by regulators.
So, from now on, when a dealer is examined by securities regulators, there will be two separate offences to worry about: the failure to effect delivery of the Fund Facts document in accordance with the delivery requirements, and the failure to make and maintain records demonstrating the delivery.
It may not be that an absence of records will always, and in every case, lead to an inference that the delivery did not take place. However, just the failure to be able to produce the records that demonstrate delivery will be a breach of securities legislation, in and of itself.
Things will only get more complex and onerous once the pre-trade delivery of Fund Facts becomes reality in May 2016. And it’s also likely that an ETF Facts document will have to be delivered to retail purchasers of exchange-traded funds. So, taking a good, hard look at your record-keeping systems now would be time well spent.
Published in Investment Executive.