50 Shades of Compliance from a Chief Compliance Officer
By: Kathleen Black
The Chief Compliance Officer (CCO) is an operating officer who is responsible for the monitoring and oversight of the Exempt Market Dealer (EMD) firm’s compliance system, according to National Instrument 31-103 CP Companion policies section 5.2. This includes establishing or updating policies for the firms’ compliance systems.
The role itself seems so simple. So why are there over seventy-five monthly advertisements on the recruiters’ websites for qualified Chief Compliance Officers and Compliance officers for financially regulated firms? Firms are looking to strengthen their organizational charts with compliance. Essentially if you are an exempt market dealer; compliance secures longevity in both today’s and tomorrow’s, business world.
The Past (Pre NI 31-103)
Today’s CCO is responsible for a lot more than meets the eye. Try explaining principle based regulation to a Board of Directors pre NI 31-103. They would have voted you tarred and feathered. I personally fielded the following comments when I found myself looking for a career in risk management in 2010:
“I can’t believe a dealer would be required to pay a six figure salary to a compliance officer to simply tell me how to run an already profitable business.”
“Hiring a CCO is simply a money grab. I may as well hire a police officer to run my business.”
“Why should we have to pay for the Ponzi schemes of past?”
“We will have our CEO fulfill the role of CCO and UDP.”
“When the regulators knock on my door I will have a clear discussion with them on how things work at our organization.” or my favorite;
“The CCO need only complete the PDO course to work in compliance for an EMD, we will appoint our assistant to take the course and qualify.”
Would EMDs, Dealing Representatives (DRs) and Issuers respond differently today? I think so. We will continue to have challenges with regulators in terms of overzealous ‘over-regulating.’ Ambiguity caused by lack of national harmonization certainly still exists and provincial differences still seem to plague multi-jurisdictional dealerships.
The Present: Fast forward from September 2010
Today we observe some small ill-equipped EMDs leaving the market or regrouping partnerships with prior non-regulated groups of capital raisers. Issuers who have had cease trades invoked are re-equipping, ‘passing high school’ and, moving towards the new proverbial college requirements. Start-up EMDs are awake and aware of quickly finding their differentiating niche, timing their back door exit before the regulators see their flag and request a deep dive review. DRs are forced to decide if their outside activities are in conflict with their enforced registration requirements. DRs are confused about suitability referencing what the regulators view as a high risk product. Significant differences in Ontario private markets (namely the lack of offering memorandum (OM) exemption) continue to challenge EMDs and Issuers processes.
Historically, DRs rushed to complete an EMD course and registered with various commissions in 2010 meeting NI 31-103 minimum requirements. However, some presented with inadequate financial training. This rush increased knowledge risk within the EMD environment. Provincial regulators continue to request independent reviews tasking compliance resources. The EMD is forced to educate and address differing guidelines from provincial regulators’ concerns regarding their business models.
Consequently, EMD and Issuers are taking the financial brunt while the regulators continue their efforts to understand our business. All in the process of protecting clients best interests. For example; Increased Regulation, Increased Compliance…Increased Costs
- New business cards with DRs holding out requirements increase printing expenses.
- New signage and marketing deficiencies force issuers to increase their marketing budgets or take a look at alternatives.
- OM reviews are forcing Issuers to seek legal opinions affecting their bottom lines with increased legal fees.
- EMD’s have increased operating budgets addressing client statement requirements along with growing compliance supervision staffing requirements.
- Dealers engaged in multi-jurisdictional reviews continue to address conflicting provincial interpretations of 31-103 increasing costs and affecting bottom lines.
- E & O insurance premiums increase with past peril claims new knowledge, along with Directors Insurance.
- DRs are forced to pay for office overhead and client meeting signage. Travel and continuing education expenses are also rapidly increasing.
The Future: Is this the Dawn or Dusk of the Exempt Market?
Other CCOs have shared some of their sentiments with me in the NEMA CCO committee: EMDs compliance departments are challenged with educating and providing adequate regulatory supervision to a brooding group of overwhelmed DRs. Boards come in conflict between distributions and challenge their compliance departments. DRs who feel they are the best source for protecting their clients’ interests, and would prefer to resort to their own methodologies. DRs are shouldering more costs, so they anticipate moving to another EMD for small increases in their commissions and/or perceived lighter reins on compliance.
Where is the perfect balance? Clients have the right to be protected. DRs have the right to earn an income, capital markets must prevail maintaining economic growth, and Issuers must be able to bring the issue to market. Dealers must be able to adequately staff, train, and supervise while remaining both compliant and profitable. Investor protection comes at a cost. In the middle of it all, a CCO sits answering questions for the regulator. Representing and safeguarding a firm, and reporting to a board of directors who govern and protect shareholder interests. A CCO accepts the oath to protect client interests. Are CCOs part of the ambiguity inherent in their role? There are multiple Issuers, multiple EMDs, an increasing number of registered DRs, complex products, provincial differences, language differences and multiple business models.
The solution calls for collaboration of all our talented industry CCOs, many of whom come from varied financial services regulatory regimes. It is now essential to come together and continue to discuss these issues at the CCO committee level; where we can share and create best practises, learn from past mistakes in other sectors of financial services, and create the best market we can for clients to attain their financial goals, anywhere in our great nation. The mist must clear the sun must shine and inevitably at the end of the rainbow you will find a CCO protecting your clients ‘pot of gold.’