Don’t rush out and get that 200-page compliance manual that you’ll never open. It will likely just collect dust, as 80% of it has little to do with the average advisor’s business.
That message for mutual fund and life insurance advisors comes from Julie Mansi, a corporate lawyer with Borden Ladner Gervais LLP (BLG).
“It makes more sense to just articulate and write down what you do and review National Instrument 31-103 to make sure you’ve got all the checklist points then to go and pull the compliance manual off the shelf,” said Mansi speaking at the Independent Financial Broker (IFB) Toronto Fall Summit. “You want to make sure it’s tailored to your business.”
Mansi was outlining the proposed amendments to National Instrument 31-103 Registration Requirements and its impact on life insurance and mutual fund advisors.
The implementation of new securities registration requirements under the Canadian Securities Administrator’s NI 31-103 have changed the way that exempt market products can be sold by mutual fund and securities representatives, and how life insurance advisors may refer to them.
After being in transition for a year, the new rules are now in full force and entail four categories of registration. The first category includes dealers, those who are in the business of trading or acting as an underwriter. Advisors, those who are in the business of advising, make up the second category. The third includes those who are holding themselves out as being in the business of trading and advising, while the fourth, an entirely new category of registrations, is for those who act as investment fund managers.
Mansi warned those impacted by the new requirements to be very clear about what constitutes trading. “Trading is a broad definition in the Securities Act,” she said. It gets rather vague, referring to “any acts in furtherance of the trade.”
“That is tremendously broad and it’s difficult for words to give black and white answers as to whether or not you are in the business of trading because of that definition.” However, she added that it is better now than prior to NI 31-103, when there was no concept of being in the business of trading.
She asked advisors to be cautious about the broad catch-all language that uses such phrases as “act in furtherance of the trade.” Instead of clarifying what exactly constitutes trading, “the regulators will rather rope you in.”
Registration categories for dealers saw the introduction of two new categories — exempt market dealers and restricted dealers — to the existing investment dealers, mutual fund dealers, and scholarship plan dealers categories.
There is also an entire section on conduct requirements, of which ‘conflict of interest’ is an important part. “Pretty much everybody has a conflict of interest,” said Mansi. “When you’re filling out that application form, you should be careful.” There must always be a section on conflict of interest in a firm’s policies and procedures manual, she added.
A big change that came about in NI 31-103 has to do with referral arrangements. The earlier condition in the securities legislation only allowed referral arrangements between securities licensed registrants, and has now been amended. A registrant can now enter into a referral arrangement with a non-registrant.
“This is a new area that people are really excited about,” said Mansi adding that “it also includes buying or selling client lists.”
Advisors registered with the securities commissions are now required to disclose all referral fee arrangements to clients. These arrangements include one-time fees, ongoing royalty fees and the relatively complex “brown dollar arrangements” which ties a successful lead to higher employee performance appraisal or bonus.
Brown dollar arrangements create a whole new set of compliance issues for cross-distribution selling arrangements. Under the new regime, these relationships will be closely examined by regulators.
“Be very careful as to whether or not something is a referral fee. You don’t want to get carried away with the (CSA’s) definition or you’ll have a thousand referral arrangements,” said Mansi. NI 31-103 unequivocally states that referral fees must be disclosed to the client and recorded on the books and records.
A referral agreement, she said, should include, among other things, the name of each company, the type of activity, the actual purpose of agreement, disclosure of conflict of interest, and the method of calculating the referral fee; widely considered a hypersensitive demand, but one that is applicable as part of the new securities registration requirements.
(11/08/10)