‘Conduct unbecoming’ silences dissent

“It seems to me that staff often appears to treat member regulation notices like rules,” said Brush. “They hold out the MR notices as interpretive guidelines as true. I see them applying the red flags in MR-69 like it’s a rule.”

The MR-69 notice provides guidelines to members on how to establish a suitability framework to comply with their obligation to ensure each order accepted or recommendation made is in keeping with clients’ know-your-client (KYC) information.

It provides further guidance on assessing suitability where borrowed funds have been used to invest and advises of MFDA staff’s view when assessing suitability as part of a compliance examination or enforcement case.

Brush said there is a bit of confusion in terms of treatment.

“Here is the thing, though, after Questrade it might be nice to be able to point that single line in a single panel decision saying ‘MR notices are not rules,’ but it’s ‘conduct unbecoming’ to refuse to follow staff’s interpretation,” said Brush.

He was referring to a recent decision against Questrade Inc., an online brokerage, where the enforcement panel fined the member for failing to follow the direction from enforcement staff, an act that was deemed ‘conduct unbecoming’. “That is the implication of that decision,” he said.

Brush stressed the need for a process to get a ruling without having to actually go against staff’s direction. “Currently that process doesn’t exist at the self-regulatory organization (SRO) level,” he said. He encouraged those looking for a cause to agitate for to start the process. “One really excellent change would be some kind of interlocutory process to take these issues to the panel.”

Until that is achieved, he said, there is the ability to appeal staff’s interpretation to the commission. “I don’t know whether you’d actually get the commission to rule on it,” he said. “Self-regulatory organizations are voluntary associations. They regulate themselves. However, they are recognised by Securities Act.”

He said the recognition gives the members who belong to an SRO the ability to seek a review of matters that affect them. “And you seek the hearing review from the securities commission,” he added.

“If you are directly affected by the administration of a rule or a direction, you could potentially appeal that to the commission,” said Brush. He proposed it was the right course of action, as opposed to refusing to follow staff’s direction which could attract a ‘conduct unbecoming’ charge.

Brush frequently underscored the value of the compliance department as he navigated the regulatory maze.

“CEOs have got to understand that if you get slack with compliance you are going to end up with huge expenses in terms of dealing with the regulators: your time, client judgements against you, and legal expenses.”

He said the job of the compliance department is tricky. “You are important not just because you can protect investing public, but (also because) you save the firm a lot of money,” he said. “It’s a tough job, a challenging job, but a good job.”

Brush also took a moment to allay concerns arising from the sensitive nature of the job of a compliance officer. He said “the good news is that 99% of the time staff views you as their front line. It is a very rare for you to actually be a target.”

He said although a compliance officer will always be interviewed by enforcement staff, they will hardly ever be pursued. “If you do everything in good faith, you have got nothing to worry about. Just stay the course.”

(05/12/10)