Originally published December 2006
The self-regulatory organizations in Canada for securities industry participants — the Investment Dealers Association of Canada, the Mutual Fund Dealers Association of Canada, Market Regulation Services Inc. and Bourse de Montréal Inc. — recently released a Joint Regulatory Notice on the Role of Compliance and Supervision.1 The Notice highlights the increasing importance that SROs and other securities regulators place on instilling a "culture of compliance" in member firms and other registrants. The Notice is the most robust regulatory statement in Canada on this topic and responds to requests from the securities industry for additional regulatory guidance from the SROs concerning their expectations that member firms establish comprehensive compliance programs.
The SROs emphasize that compliance is a firm-wide responsibility that must be considered part of a firm’s general business activities. This responsibility is shared by the board of directors of the firm, its management, supervisors and compliance professionals, including the chief compliance officer. The SROs recognize that the board of directors of a firm is ultimately responsible for ensuring that the firm maintains a compliance program that identifies and addresses material risks of non-compliance and must act on reports from the firm’s management and compliance personnel.
The board and management of a firm are encouraged to "lead by example" and promote a culture of compliance. Among other things, the SROs encourage directors and management to ensure that the firm allocates sufficient resources to a compliance program, rewards compliant behaviour and provides compliance officers with appropriate authority and access to senior management. The SROs point out other features of an effective compliance regime:
- An emphasis on the importance of all staff being responsible for compliance, with on-going education and training on compliance-related subjects
- Internal whistle-blowing procedures to permit reports of "compliance, regulatory or ethical concerns"
- Properly trained, recognized and compensated compliance officers, with written descriptions of their responsibilities, including their access to information, their reporting lines on compliance issues and any responsibilities they may have for implementing corrective action
- Written escalation policies for compliance concerns, with a thorough understanding by compliance officers, management and governance bodies of that escalation policy
- Cooperation between the firm and its regulators
- Written compliance policies and procedures that are reviewed and updated as necessary to reflect changes in applicable rules and regulations and the firm’s business practices
- Testing of compliance policies and procedures to ensure that they are effective. The SROs give no guidance on how often testing should take place nor exactly what this testing would entail, although they suggest that compliance policies and procedures should be "constantly reviewed, tested and updated". In practical terms, this likely means that firms may wish to test their compliance policies and procedures on at least an annual basis, which would be consistent with the expectations of regulators in the United States.
The Notice emphasizes the high expectations the SROs place on the role played by chief compliance officers. Chief compliance officers must not only "identify, assess, advise on, communicate and monitor" compliance issues, these individuals must also report on compliance matters to appropriate management personnel and the governance body of the firm. The SROs suggest that a chief compliance officer must report at least annually on the results of his or her compliance monitoring to management and the board of directors of the firm.
In addition to identifying compliance issues, the chief compliance officer must also recommend how compliance concerns should be addressed and rectified and then monitor the corrective action. If the chief compliance officer believes that a compliance issue is not being dealt with appropriately, the SROs expect the chief compliance officer to escalate the problem to a higher level in the organization — ultimately to the board of directors.
Compliance officers are encouraged to document all steps taken to monitor compliance issues, to recommend corrective action and to escalate problems to various levels in the organization. The SROs explain that a chief compliance officer may be subject to enforcement action if he or she "fails to identify rule violations according to the standard of a reasonably proficient and diligent Compliance Officer or, if after identifying the violation, he or she fails to sufficiently escalate and follow up the issue with management" to the same standard. The SROs clarify that it will always be open for the individual compliance officer to demonstrate that he or she exercised due diligence to prevent any harm from occurring.
The Notice supplements specific SRO rules that deal with supervisory and compliance responsibilities, as well as earlier SRO notices on similar topics. However, in many ways the contents and tone of the Notice herald a new era for compliance and its importance for Canadian registrants and their directors, management and compliance professionals. With the prospect of the new CSA Registration Reform rule being published for comment in early 2007, we predict that we have not seen the last of this renewed regulatory emphasis on compliance.
1 IDA – MR 0435 November 30, 2006, MFDA – MR 0057 December 5, 2006, RS – MIN 2006-023 November 30, 2006, Bourse– Circulaire 196-2006 November 30, 2006.
For further information on the Notice or on your compliance responsibilities generally, please contact your usual lawyer in BLG’s Investment Management Group or one of the following Investment Management Group leaders.
John E. Hall (National Leader), Brad J. Pierce (Calgary Regional Leader), Richard W. Shannon (Montréal Regional Leader), Jeremy S. T. Farr (Ottawa Regional Leader), Lynn M. McGrade (Toronto Regional Leader) and Jason J. Brooks (Vancouver Regional Leader).