By Dr. Cora Pettipas
Paradigms need to be rethought. This certainly applies to traditional compliance policies and procedures, and how they are implemented in our industry. There has been some buzz about the recently published ASC Exempt Market Dealer Sweep (ASC Notice 33-705). It detailed the audit results of sixty-six EMDs, a cursory read of the executive notes looks frightening: “We identified deficiencies in compliance with regulatory obligations in all areas tested.” That sounds bad. One firm’s registration was terminated, and another voluntarily ceased operations after seeing the terms and conditions imposed upon them. This assessment does not look positive for our industry, which is now six years post NI 33-103 adoption.
Unless you look closer - giving the paper a second glance with a more critical eye. The ASC placed best practices in the report, which was informative. However, to achieve the ideal compliance operations at the current traditional standards it would take a staff of about five full-time compliance employees. This is unfortunate, considering some agile small EMDs are only two to three people in total, and that kind of staff on even the largest EMDs would increase operational expenses that investors would inevitably have to pay. The regulators call the deficiencies outlined in the compliance sweep a ‘compliance gap’ – but it could be called an ‘expectations gap.’
How can this gap be closed to allow our industry to continue to flourish? Well, the first thing to be considered is that it may not be reasonable for regulators to assume that our industry’s compliance should look the same as larger dealerships or banks. There is not the same access to resources in these small businesses to be as robust, or as bureaucratic. In addition, compliance and regulatory systems in more evolved financial services industries are failing – they are costlier than ever with minimal substantiated positive impact on the investor. Investors ultimately just get more legal documents to read (which many tend to not bother reading), and more procedural hoops to jump through.
I am not blaming the regulators. It is not their job to be innovative. It is ours. Our industry is full of bright, talented people on the leading edge of capital raising and financial engineering. We need to come up with the solutions, and then demonstrate to the regulators that they work. Otherwise, we are a round peg being jammed into a square hole. The policies and practices just do not fit – they are not ‘right-sized.’ The traditional capital markets are broken – why would our industry want to emulate them? It is like soliciting parenting advice from your bachelor friend – all well-meaning, but completely off the mark.
Another solution to narrow the gap for our industry is the adoption of technology. If we cannot have a team of crack compliance people – how can we bridge the gap with one or two staff, and the utilization of technology? Technology is the only way our industry can bridge the perceived compliance gap by regulators. Having great technological tools and great compliance systems may be synonymous in the future. Our space has some great tools emerging, a technological ‘assistant’ that allows industry to focus on their core business instead of the tedium of paperwork and excel spreadsheets.
Our industry is very important; as we build investor wealth and efficiently allocate capital. This is not always easy. Technology can automate, and ideally simplify, processes. Sometimes we feel self-important when we communicate complex ideas that no mortal could understand. That is not good for business. True brilliance comes through a process, and a communication style, that is deceptively simple – that anyone can understand and use. A minimalism, or essentialism, in business practices is the future. Paperwork that one does not need a legal background to understand - and investment strategies that can be drawn out with a crayon. This is not to trivialize the work that we do – which is very important and effects livelihoods and the economy – it is just to say we should strive for openness and accessibility in all our business dealings and with investors.
Dr. Cora Pettipas Ph.D. FCSI CFP is currently the President and a Board of Director of the National Exempt Market Association (NEMA) in Canada. She also serves on the Board of Directors of Olympia Trust Company. Dr. Pettipas is also the editor of The Private Investor magazine and currently represents Canada on the Education Working Group for the Financial Planners Standards Board, and is a policy ambassador for the Financial Planners Standards Council. She was recognized by Wealth Professional magazine in 2016 by being placed on the national industry top 50 ‘hot list’ for her efforts related to the adoption of the OM exemption to Ontario. She holds a Bachelor’s degree from McGill University, and a Master’s and PhD in Finance from Swiss Management Center University, her research focused on the influences of fintech on financial services internationally. Dr. Pettipas has had tenures with several financial institutions in the capacity wealth management, retail banking, and financial planning. Her most recent previous position was as a Professor at Mount Royal University, where she taught Finance and Financial Planning. She has published and presented her work internationally.