BCO Chapter 1.pdf

The Role of a Branch Compliance Officer 1 CONTENT AREAS The Branch Compliance Officer’s Role Physical Structure of the Branch The Relationsh...

The Role of a Branch Compliance Officer 1 CONTENT AREAS The Branch Compliance Officer’s Role Physical Structure of the Branch The Relationship with the Head Office and Regional Compliance Officer Staff Training LEARNING OBJECTIVES By the end of this chapter, you should be able to: 1 | Identify and perform the branch compliance officer’s responsibilities and duties. 2 | Describe the legal obligations of a mutual fund dealer when it operates within a branch of a financial institution. 3 | Establish a regular series of staff sales communication and briefing sessions. © CANADIAN SECURITIES INSTITUTE 1 2 BRANCH COMPLIANCE OFFICER’S COURSE KEY TERMS Key terms are defined in the glossary and appear in bold text when they first occur in the chapter. disclosure mutual fund dealer Know Your Client order mutual fund registered sales representative © CANADIAN SECURITIES INSTITUTE  CHAPTER 1 THE ROLE OF A BRANCH COMPLIANCE OFFICER 1 3 INTRODUCTION The purpose of this chapter is to provide an overview of the responsibilities, duties, and relationships of a branch compliance officer (BCO) and to examine the concepts and information a BCO should know, including the principles and sources of securities regulation. As BCO, you are responsible for ensuring that the mutual fund dealer activities at your branch are conducted properly. You must see to it that the accounting, audit, and communication systems are functioning properly and are adequately maintained; that the physical structure of the branch conforms to good business practices and applicable rules and regulations; and that all marketing materials contain the required disclosures. You are also responsible for explaining and implementing the policies and procedures that set out what non-registered staff may and may not do and say with respect to mutual fund sales activities. THE BRANCH COMPLIANCE OFFICER’S ROLE As BCO of a mutual fund dealer, you have two types of responsibilities: specific business (or operating) responsibilities and general compliance responsibilities. BUSINESS RESPONSIBILITIES Your business responsibilities may include the following specific duties: Carrying out the day-to-day administration of the mutual fund activities within the branch Overseeing and managing the branch to make sure that clients know they are dealing with the mutual fund dealer and not an affiliated financial institution when purchasing mutual funds Ensuring that sales representatives have received appropriate internal and external training, including product knowledge updates through sales meetings or other means Dealing directly with clients Handling client complaints COMPLIANCE RESPONSIBILITIES Your compliance responsibilities include the following duties: Ensuring that all sales representatives comply with the dealer’s policies and procedures, which should reflect applicable legal and regulatory requirements Enforcing internal control processes for client disclosure requirements Ensuring that only sales representatives conduct mutual fund transactions Enforcing and monitoring compliance with the Know Your Client (KYC) rule and suitability requirements Liaising with your head office and with your regional compliance officer (RCO), who is your immediate designated contact for compliance-related issues and problems The organizational structures of different mutual fund dealers may vary. Business and compliance responsibilities are described in detail later in this course. © CANADIAN SECURITIES INSTITUTE 1 4 BRANCH COMPLIANCE OFFICER’S COURSE DID YOU KNOW? A BCO is often referred to as a branch manager in securities legislation. The terms “branch compliance officer” and “BCO” are used to distinguish the role from that of a branch manager in the banking context, although a single individual might act in both capacities. The term “mutual fund sales representative” describes an individual who is registered with a securities regulator in a capacity that permits him or her to sell mutual fund securities, but no other types of securities. EFFICIENT TIME MANAGEMENT As the BCO, you are responsible for multiple, and often competing, daily and monthly tasks. You must be able to manage your time effectively so that you are in control of all the demands of your position, rather than controlled by them. The following guidelines will help you with time management: Set goals and plan your day. Determine your priorities. Eliminate low-payoff activities by making sure staff know where to go to get answers; it must not always be the BCO. Identify activities that may be eliminated, delegated, or reduced. Identify the few items that must always be done promptly. Compare experiences or challenges with other BCOs at similar-sized branch offices or in similar situations. DELEGATION OF SUPERVISORY TASKS As the BCO, and in accordance with your dealer’s requirements, you may designate, in writing, a qualified assistant or alternate BCO who will supervise during your absence or where branch size and volumes require it. The assistant must also be familiar with all policies and procedures, and his or her function must be communicated to all sales representatives. Written copies of the delegations should be kept on file for regulatory and head office audit purposes. Anyone designated as an assistant or alternate BCO must be qualified to perform the required tasks. It is expected that tasks will be delegated only to individuals with the same proficiency as the BCO. In certain limited circumstances, it may be acceptable to delegate certain tasks to someone who has not satisfied the equivalent proficiency requirements as long as they have sufficient training, education, or experience to perform the delegated function. Activities must never be delegated unless the designated person understands the purpose of and is fully qualified to handle the tasks given to them. There must be ongoing monitoring by the BCO to ensure that the designated person is performing the delegated activities correctly. Delegations of supervisory tasks must be in writing to avoid any misunderstanding between parties. Although a task may be delegated, the ultimate responsibility remains with the BCO. As BCO, you must take reasonable steps to ensure that all delegated tasks are completed promptly and thoroughly by the designated individual. MANAGING MAIN AND REMOTE BRANCH SYSTEMS The accounting, audit, and communication systems are normally installed or designed by the head office of your financial institution or mutual fund dealer. It is your job to ensure that they are functioning properly and are adequately maintained. Accounting and recordkeeping systems, account opening, client complaints, audit systems, audit trails, mail, communication systems, and electronic data processing systems all fall into this category. © CANADIAN SECURITIES INSTITUTE  CHAPTER 1 THE ROLE OF A BRANCH COMPLIANCE OFFICER 1 5 In addition, as BCO, you may have other branches to supervise, typically small branches with a limited number of sales representatives. Under MFDA Policy No. 2, mutual fund dealers with such arrangements must maintain detailed records of BCOs and the branches and sub-branches they are responsible for supervising. Where supervisory tasks and functions associated with a location are divided among two or more individuals at the mutual fund dealer, the division in terms of who is responsible for performing which supervisory tasks or functions must be clearly documented. For example, a mutual fund dealer may centralize trade reviews and new accounts approval at the BCO’s main branch while assigning responsibility for reporting complaints to head office to staff at the remote branch. As the BCO you should understand and acknowledge in writing your responsibility at your location and any remote locations you supervise. PHYSICAL STRUCTURE OF THE BRANCH As BCO, you are responsible for ensuring that the physical structure of the branch conforms to both good business practices and applicable legislation. Good business practice means that the branch should have the appropriate appearance and an image that instils confidence in prospective clients. Branch compliance officers and registered sales representatives must ensure that clients are made aware of the identity of the dealer they are dealing with through the use of signage, business cards, and other means. Clients must understand that, when they purchase mutual funds within a branch of a financial institution, they are dealing with a mutual fund or securities dealer that is separate from the financial institution. It must be made clear that the funds are not guaranteed by the institution or covered by deposit insurance and that they will fluctuate in terms of value and returns. To ensure that the clients understand, they must be advised in writing and must acknowledge having read the written disclosure. As BCO, you must also ensure that a sales representative in a shared office space does not make it a requirement for a client to purchase any other product or service or invest in any other investment as a condition of purchasing a particular product or continuing to receive a particular service of the financial institution. THE RELATIONSHIP WITH THE HEAD OFFICE AND REGIONAL COMPLIANCE OFFICER An important aspect of the client service process is the BCO’s close relationship with the RCO and the mutual fund dealer’s head office. You are the liaison with the dealer’s head office and are responsible for the registration of staff, mutual fund sales, order-taking and order-processing functions, client complaints, and the dealer’s compliance process. The compliance structure of mutual fund dealers varies from one institution to another. Typically, there is a head office compliance officer (HCO) who is a senior officer of the mutual fund dealer. You may communicate from time to time with the HCO, but only under special circumstances. Most of your communications will be with the RCO or district compliance officers. The RCOs are responsible for compliance with mutual fund regulatory requirements within the designated district or region. Branch compliance officers report to and assist the RCOs in their compliance responsibilities. National Instrument 31-103 requires dealers to establish a system of controls and supervision to provide reasonable assurance that the dealer and individuals acting on its behalf comply with securities legislation and manage risks associated with its business. Typically, once registered as BCO, you will need to ensure that any changes to your status or the status of sales representatives assigned to your branch location are immediately communicated to the RCO. NI 31-103 is discussed in detail later in this course. © CANADIAN SECURITIES INSTITUTE 1 6 BRANCH COMPLIANCE OFFICER’S COURSE STAFF TRAINING Staff training and briefing sessions should be held regularly to review important topics such as disclosure, sales communications, compliance, and behavioural issues and to check whether internal control systems are functioning properly. It is your responsibility as BCO to hold these sessions and make sure sales representatives are up to date with the latest information in the industry. The topics that can be presented for these regular sessions are as follows: Functions of registered Review the allowable and prohibited activities of non-registered and registered staff and non-registered at regular meetings. staff You may also periodically circulate a memorandum in which you set out allowable and prohibited functions for non-registered employees. Account Review account documentation requirements, including identity verification documentation requirements. Order-taking and Review the manner in which orders are collected and transmitted. transmittal Reiterate that orders must be transmitted immediately. Instruct your sales representatives to advise clients about the dealer’s policies on order executions and about the possibility that their order could be delayed. Review the rule restricting inter-provincial phone calls to purchase mutual funds. Review the order-taking process, including the requirement that your sales representatives repeat orders back to the client. Maintaining KYC Review factors that indicate a material change in the client’s circumstances, which information may include: Securities received into the client’s account by way of deposit or transfer Change of address or marital status change Employment change or retirement A change in the sales representative responsible for the account Confirm that the sales representative conducts periodic suitability reviews and uses the review discussion as an opportunity to ask the client whether there are any material changes in his or her circumstances. Ban on discretionary Make sure your sales representatives understand that unauthorized or discretionary trading trading is a forbidden practice that could (and probably will) lead to dismissal. Forward pricing of Make sure the sales representatives can clearly explain to their clients how the mutual funds forward pricing aspect of mutual funds works. Advertising and Remind the staff that all advertising and promotional materials, including promotions prospecting letters, must be approved by head office. Client complaints Discuss the process for dealing with client complaints. © CANADIAN SECURITIES INSTITUTE  CHAPTER 1 THE ROLE OF A BRANCH COMPLIANCE OFFICER 1 7 Leveraged trades Discuss the implications of clients using borrowed funds to make investments and the additional due diligence required. Discuss the need to ascertain a client’s full comprehension of the risks of a leveraged purchase of mutual funds. Performance Review mutual fund performance criteria, including the requirement that the criteria and sales standard performance data supplied to clients is current and that the use of past communications performance is appropriately disclosed. Discuss the fact that the only performance data model portfolios and portfolio mixes that may be used are those prepared at head office. Unacceptable trades Discuss the distinction between suitable, acceptable, and unacceptable trades. Review the procedure for giving cautionary advice on an acceptable trade, including the need to ascertain that the client understands the cautionary advice and has signed the caution form. Discuss the process for handling unacceptable trades. Discuss the analytical process to follow when a client’s request to switch mutual funds has no apparent investment benefit for the client. Disclosure Discuss the disclosure documents that must be provided to clients before they can purchase a mutual fund, and explain how to maintain evidence that these documents have been provided to clients. Fees and loads Clarify the distinction between no-load and load in conjunction with trailer fees (if applicable). Discuss the fees with clients before they purchase a fund, as required under the Client Relationship Model. This can generally be achieved by providing the fund facts document and reviewing the associated fees with the client at the time of the sale. Appropriate behaviour Review all aspects of appropriate sales representative behaviour, including the need to keep client information confidential. Approved mutual fund Review the approved product list with your sales representatives, and make sure dealer products they understand the product offering. Requests from non- Discuss the process for dealing with trade requests and requests for information residents from non-residents of Canada. Developments Discuss any new products, regulatory requirements, and developments applicable to your operations, along with any questions you have. © CANADIAN SECURITIES INSTITUTE 1 8 BRANCH COMPLIANCE OFFICER’S COURSE SUMMARY Now that you have completed this reading, you should be able to meet the following objectives: 1. Identify and perform the branch compliance officer’s responsibilities and duties. The BCO of a mutual fund dealer has two types of responsibilities: specific business responsibilities and general compliance responsibilities. The BCO may designate an assistant or alternate BCO who has the qualifications and required proficiency to perform the BCO’s tasks during the BCO’s absence. 2. Describe the legal obligations of a mutual fund dealer when it operates within a branch of a financial institution. Mutual fund dealers operating within a branch of a financial institution such as a bank or trust company must make it clear to clients of the institution that the mutual fund dealer is a separate entity. 3. Establish a regular series of staff sales communication and briefing sessions. Staff sales communication and briefing sessions provide an excellent opportunity for the BCO to review important disclosure, sales communication, compliance, and behavioural issues, and to check whether internal control systems are functioning properly. © CANADIAN SECURITIES INSTITUTE