Investment dealers, mutual fund dealers and investment advisors find themselves squarely in the regulators’ spotlight. The economic downturn has razed the financial performance of many industries, and the impact on the financial services sector has been particularly harsh. Globally, billions of dollars in market capitalization have evaporated, wiping out many investors’ savings and uncovering a spate of financial scandals and frauds.
As enforcement activity rises, organizations must take steps to protect themselves from potential regulatory investigation. To help you prepare, Deloitte and Fraser Milner Casgrain LLP hosted a seminar on May 26, 2009, to explore the latest securities enforcement trends. Speakers from two of Canada’s top regulatory organizations joined a distinguished group of panelists to discuss how companies can mitigate the risks of regulatory breach. Here’s how you can respond:
Investment dealers must comply with a host of regulatory requirements including: knowing your client, customer due diligence, ensuring suitable investment recommendations, gatekeeper obligations, capital requirements and financial reporting. To avoid becoming the subject of regulatory investigation, regularly assess the effectiveness of your overall compliance program by:
- Conducting an enterprise-wide risk assessment to identify high-risk areas
- Strengthening internal practices to prevent inappropriate or unauthorized trading activity and unsuitable investment recommendations
- Enforcing policies that prevent employees from engaging in financial transactions with clients, thus compromising independence
- Designing enterprise wide anti-money laundering or anti-fraud programs
- Enhancing compliance training programs
If your organization is subject to investigation, rapid response and cooperation are critical. “In some cases, respondents can mitigate regulatory enforcement and penalties by acknowledging they understand the severity of the breach,” explains Michael Schafler, Partner at Fraser Milner Casgrain. Many enforcement actions are settled when respondents take immediate remedial steps, such as submitting reports to all relevant regulators to explain how they plan to improve the situation and, where possible, reimburse clients for their losses.
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When investment dealers and advisors are charged with a regulatory infraction, they are required to submit a report, produce copies of their books, records and accounts for investigation. Failure to provide the requested information or respond to questions can result in disciplinary action. It’s critical to quickly assemble and retrieve any documents or data that may be subject to investigative review.
To pinpoint the specific documents you need amid the mass of data dispersed throughout your enterprise, forensic imaging of your computer systems may be necessary. “Computer data is critical in responding to regulatory investigations, but its integrity can be compromised if it’s not properly retrieved,” explains Corey Fotheringham, national leader of Deloitte’s Computer Forensics practice. “Computer forensics, data mining and electronic discovery can help you safely identify, collect and preserve electronic data while demonstrating to regulators that you have nothing to hide.”
While a regulatory investigation is cause for concern, it need not be cause for panic. By acting quickly and decisively, you can display your commitment to cooperating fully. The key is to get the right advice early on. Consulting with specialists can do more than help you preserve the privilege of your information and maintain the integrity of your electronic evidence. It can also help you minimize, and potentially avoid, serious enforcement consequences.
Complaints to enforcement agencies, such as the Mutual Fund Dealers Association (MFDA) and Ontario Securities Commission (OSC), are on the rise. The Investment Industry Regulatory Organization of Canada (IIROC) expects to receive high-quality tips through its recently established whistle-blowing service for industry insiders. In today’s climate, penalties for breach of regulatory compliance can be harsh. IIROC member firms can face fines as high as $5 million per contravention, while registered employees can be fined up to $1 million per contravention. Firms and individuals can also temporarily or permanently lose their trading licences.
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To learn more about how Deloitte and Fraser Milner Casgrain LLP can help you mitigate the risks of regulatory investigation, please contact us at email@example.com.