By Phil du Heaume
As a registered dealing representative in the private capital market there is no shortage of compliance acronyms that get thrown at you on a daily basis. When a ‘DR’ gets told by their ‘CCO’ and ‘UDP’ that they need to keep their ‘OBA’ updated on ‘NRD’ for compliance with ‘NI 33-109,’ it’s little wonder that their eyes glaze over and they long for something that makes sense – like ‘KYP.’ Securities regulatory compliance is complex. It’s full of principles masquerading as rules that can be hard to understand because they aren’t always obvious. Other business activity (OBA) requirements for registered representatives fit squarely in this category. But confusing or not, compliance is mandatory and is almost always there to help protect your clients (I promise). So, grab a coffee and find a comfortable chair - this is going to get boring but it should help make sense out of a confusing area that can put your business at risk if you ignore it.
During day-to-day business, exempt market dealing representatives spend a lot of time making sure that their activities comply with the core responsibilities of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). Meanwhile, National Instrument 33-109 Registration Information (NI 33-109) gets dismissed as the instrument you only need to worry about while getting registered, but it actually has significant impact on a dealing representative’s responsibilities to the regulator, their compliance department, and their clients.
When a dealing representative first gets registered, they submit something called a Form 33-109F4 (a Form F4) to their principal regulator via the National Registration Database (the omniscient ‘NRD’ mentioned in the first paragraph). Item 10 of the form asks for information from every applicant relating to current business and employment activities, including all officer or director positions and any other equivalent positions held, as well as positions of influence. This creates a comprehensive list and forum of analysis for your OBA’s. Don’t let the term ‘business activity’ fool you, you have to disclose this information “whether or not you receive compensation for such services, and whether or not any such position is business related.” That’s a really important first lesson: Outside business activities need to be disclosed even if they aren’t business activities at all.
NI 33-109 isn’t a ‘one and done’ instrument. One part (Part 4 for my fellow regulation nerds) is dedicated entirely to changes to a registered individual’s information and requires continued vigilance by both the CCO of your firm and each registered individual. In other words, as your own personal life changes, you and your firm have an obligation to keep the regulators informed and updated about those changes. For updates to your OBA’s, the EMD must update your Form F4 within 10 days. Keep in mind that this isn’t 10 business days and there is some work that needs to go into the update, so it’s important to communicate with your compliance team as soon as possible when something changes. If you fail to update your OBA within the allotted timeframe, regulators will levy fines for non-compliance and these can really add up. In Ontario, the fines are $100 per business day to a maximum of $5000 per late document (s. 8 of NI 13-501 Fees). That’s the second lesson you need to take away from this article: Keep your compliance team informed within 10 days of changes to your OBA or be prepared to pay heavy fines.
Managing your OBA’s takes more than just updating the regulator about what’s going on in your life. You also have to perform a conflict of interest analysis to make sure that your OBA’s aren’t negatively impacting your ability to discharge the core duties you owe to your clients to act fairly, honestly and in good faith. If disclosure is the rule, then conflict assessment is the principle. Under s. 13.4 of NI 31-103, the EMD has to take reasonable steps to identify and respond to material conflicts of interest. Utilizing the information you have disclosed in your Form F4 is an obvious way to do this because it allows the CCO to monitor and assess compliance on an ongoing basis. That’s the third, and most important lesson: You have to assess and respond to any conflicts of interest caused by your OBA’s by disclosing and/or controlling them with restrictions supervised by your CCO.
In the EMD space, where many dealing representatives maintain businesses that are independent from their firms, keeping tabs on the OBA disclosure and supervision rules is extremely important. Some dealing representatives are also licensed insurance agents, offer financial planning services, maintain real estate licenses, provide bookkeeping services, or offer general business consulting services as a way to give their clients access to more holistic financial solutions. Others have completely unrelated businesses ranging from real estate investment and management to operating small businesses like bakeries or landscaping companies.
But remember - not all OBA’s need to be business activities! So-called “non-business” activities can lead to high risk conflicts for clients because their relationship with you shifts from one of trusted investment dealer to one of power and influence over other aspects of their life. Obvious examples come from cases like the one of Marlon Gary Hibbert in Ontario, an unregistered advisor whom the OSC sanctioned for several violations. Investors lost significant amounts of money and many “were persuaded to invest with him because of his seemingly impeccable credentials as a pastor” - something that really should have had no bearing on his ability to sell investments (April 24, 2012 decision of the OSC at para 39). The principle can be expanded to seemingly innocuous and well-intentioned activities like coaching a minor league sports team or sitting on the board of a charitable organization. All of these OBA’s must be disclosed on your Form F4 so that your CCO can assess potential conflicts and put processes in place that ensure client protection.
It’s easy to dismiss the disclosure responsibility by claiming that a securities regulator has no jurisdiction over non-securities activities, but that’s not actually true. Securities regulators (and your firm’s compliance department by extension) have jurisdiction over conflict of interest protection and your responsibility to deal fairly, honestly and in good faith with your clients. They also need to make sure that you’re satisfying your base proficiency requirements under NI 31-103 by dedicating sufficient time to exempt market activities to be good at your job. After all, a part-time dealing representative will have a hard time keeping up with all of these acronyms and requirements, let alone dedicating the necessary time it takes to keep to perform core responsibilities like KYP, KYC, and suitability.
OBA’s are not inherently bad, and in some cases can even lead to a better overall investing experience by your client. Nonetheless, it’s important to remember that even confusion is a type of conflict, because clients need to know who they have a relationship with for every activity that you perform. If it’s not the EMD, then they need to know this. In many cases, a simple disclosure form can help protect everyone and ensure that the DR-client relationship is understood by all parties involved. In order to do that, it all starts with making sure you’re up-to-date with your Form F4.
So, to re-cap:
Lesson No.1: Outside business activities need to be disclosed even if they aren’t business activities at all.
Lesson No. 2: Keep your compliance team informed within 10 days of changes to your OBA or be prepared to pay heavy fines.
Lesson No. 3: You have to assess and respond to any conflicts of interest caused by your OBA’s by disclosing and/or controlling them with restrictions supervised by your CCO.
Your firm’s compliance specialists are there to help you navigate this complex regulatory environment. If you keep them updated, they’ll keep you on the right side of the regulation.
Phil du Heaume is a practicing lawyer in the Province of Alberta through his professional corporation and can be reached through his website www.duHeaumeLaw.com. He’s been heavily involved in the exempt market space since the creation of the modern registrant oversight regime in 2009 and currently sits as a member of the Alberta Securities Commission Exempt Market Dealer Advisory Committee (EMDAC). He maintains a legal consulting role with Raintree Financial Solutions - one of Canada’s largest independent EMDs – in the position of Independent General Counsel and provides external, confidential legal advice to dealers, portfolio managers, fund managers and issuers. Phil is available for training and speaking engagements with compliance and registrant teams to help them better understand dealer compliance and the regulatory environment.