Branch managers can be

(May 11, 2004) Mutual fund dealers need to take the same aggressive approach toward education for their branch managers as the regulators take toward investor education, according to Ellen Bessner, partner at Gowling, Lafleur and Henderson and specialist in defending advisors.

“I think transparency is a good thing generally, but there’s this whole push on client education and there’s no push on advisor education,” Bessner said, speaking at IFIC’s third annual Compliance Forum. “These supervisors, in my humble opinion, are sitting ducks! They don’t understand their obligations.”

“The securities commissions have drafted these beautiful brochures telling clients 50 ways to sue their advisor,” said Bessner. “I don’t see the securities commissions coming out with a glossy brochure or assistance for supervisors on how to supervise.”

Bessner points out that the statutory obligations represent the bare minimum standard of care, but this is of little help since most managers are unfamiliar with the requirements anyway.

Managers must start managing and stop worrying they will offend their star producer by contacting their clients, because the “hands-off” approach can leave them exposed to a lawsuit.

“Advisors cannot monitor themselves — that’s not their job, that’s the branch manager’s job to supervise the advisors,” says Bessner. “[Managers] cannot delegate their responsibilities, they can delegate only tasks. They can delegate all they want, but if somebody drops the ball, it falls back in their court.”

Managers must not be afraid of offending their advisors by contacting their clients, Bessner explains. They can establish a relationship with the clients from the outset, making initial contact when the client comes on board and tell them they can call you if they ever have a question.

Bessner says it is important to keep a record of this initial contact because if clients ever file complaints, the manager will be able to ask why they didn’t contact him first. Her advice for managers is the same she has been offering to advisors: Be sure to leave a paper trail.

“On the trade blotters, don’t just initial the bottom — that’s not evidence [the manager] reviewed it. All that is is evidence of having initialed it,” she says. “If they don’t make circles around stuff and question marks and have memos following up, they do not have evidence of having fulfilled their supervisory obligations.”

She says too often she hears managers are signing documents they haven’t even read, or even worse, fail to print from their computer in the first place. When reading the know-your-client forms, they have to inquire into any questionable aspects and make sure they document their inquiries. Contact the clients to confirm curious information on the documents.

“Without complete information, it’s impossible to supervise,” says Karen McGuiness, vice-president of compliance for the MFDA. “Some of our members downplay the importance of keeping adequate books and records — they’re the building blocks of an effective supervisory system and they really should be taken seriously.”

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“Some of our members incorrectly assume we mean trade supervision and quite frankly it’s a lot broader than that,” says McGuiness. “There should be a system that’s designed into an overall strategy.”

McGuiness says one firm the MFDA had reviewed had separated the roles of trade reviews, complaints and branch reviews, failing to tie the three issues together into an overall compliance strategy.

“It’s not a question of whether they’re hauled in, but a question of when,” says Bessner. “When they terminate advisors, or there’s an advisor complaint, there’s an automatic review of supervision, both on the MFDA side and on the IDA side.”

When they are eventually called before their regulatory body, they will realize the importance of the compliance department. To many on the sales side, the compliance officer can seem to be a nuisance, nitpicking over the minutiae of transactions.

“If they don’t value compliance, they don’t understand the system. What they don’t understand is that the MFDA is auditing every firm,” Bessner told the audience of compliance officers. “If you guys catch the mistakes before the client does, or if you guys catch the mistake before the audit comes in, then they’re in great shape.”

Branch managers need to recognize that the compliance department is not out to get them, but that their role it to protect the advisor, the manager, the firm and the client. Branch managers must start valuing their compliance departments, because they are not the enemy, they protect the manager and the firm’s reputation, Bessner points out.

She says branch managers should be thanking the compliance department for every mistake they catch.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(05/11/04)