Mutual Funds And Scholarship Plans
As per securities regulations, when the advisor pursues an outside activity, the firm for which the advisor works must comply with restrictions and fill out a declaration. The firm must also follow certain rules to allow an advisor to pursue these types of activities. For instance, they need to have implemented policies and procedures that allow them to identify and resolve conflicts of interest and the material risks that arise from the outside activities in which their advisors may be involved. They must also implement a mechanism requiring their advisors to declare their outside activities.
Firms and advisors must determine if pursuing a specific outside activity constitutes a conflict of interest and if it is a material conflict of interest.
An advisor’s activities outside of their firm may impact the ability of the individual and their firm to deal fairly, honestly and in good faith with their clients and meet their obligations, and may give rise to risks in the following areas:
- These outside activities may create material conflicts of interest between an advisor and their clients. This is because the compensation they receive for these activities, or the nature of the relationship between the individual and the outside entity, may cause some advisors to put their interests ahead of their clients’ interests.
- These outside activities could interfere with the advisor’s ability to properly carry out the registrable activities. For example, if the outside activity requires the advisor to work full-time during day-time hours, this could lead to insufficient time to properly service clients or to properly carry out the registrable activities, including remaining current on securities law and product knowledge.
- These outside activities could lead to client confusion, particularly where the outside activity relates to financial services (such as financial and estate planning, tax preparation, insurance, mortgage brokerage). The client may view the outside activity as part of the firm’s activities. This may occur where the same premises, email address, business cards, mailing address or telephone numbers are used. The outside business activity could expose the firm to complaints and litigation.
- Where the advisor has outside activities, they may improperly use information obtained from the firm in the outside activity.
- When an advisor in a position of influence deals with or advises clients or potential clients who may be susceptible to that influence, investor protection concerns arise. For example, the advisor may use the position of influence to cause another individual to become a client or the other individual may be persuaded to purchase a security based upon their opinion of the advisor and not upon the merits of the security or the other individual’s investment needs and objectives. (Please note that advisors are prohibited from acting for another registered firm in some cases and that tied selling is also prohibited).
A position of influence is a position, except within a firm, occupied by the advisor whereby due to the nature, training or expertise it requires would place the advisor in a position considered by a reasonable person as having an influence on another natural person.
The following are examples:
- Leader in a religious or similar organization
- Teacher in an educational institution conferring degrees or awarding diplomas
The advisor in a position of influence cannot purchase, sell or recommend the purchase, sale or holding of financial products to:
- a natural person who has a relationship with the advisor stemming from their position of influence and who could be susceptible to their influence
- The spouse, father or mother, sibling, grandparent, or child of this natural person.
If the firm cannot properly address a material conflict of interest in the best interest of the client and manage the risks in accordance with prudent business practices, it should not permit the outside activity. Moreover, the advisor must promptly report to their firm any material conflict of interest between the advisor and their client. They must avoid taking part in an outside activity if the processes are insufficient to address conflicts of interest in the best interest of clients for as long as the firm has not approved the outside activity.
Before undertaking an outside activity, the advisor must:
- Remember that each case is unique
- Declare the outside activity to the firm to which they are attached, make sure it is possible to pursue this activity and obtain any authorization required
When the advisor is authorized to pursue an outside activity, they must:
- Comply with the ethics that apply to their situation
- Make sure to place their client’s best interest above their own
- Remain available and diligent for their financial services clients
- Keep any information obtained about a client in the course of their duties confidential
- Clarify any confusion between the two clienteles
- Promptly notify their firm of any change in the pursuit of this activity