Chapter 11 - Client Complaints.pdf

Client Complaints 11 CONTENT AREAS Overview of Client Complaints Preventing Complaints Handling Complaints Alternative Dispute Resolution Civil Litigation LEARNING OBJECTIVES...

Client Complaints 11 CONTENT AREAS Overview of Client Complaints Preventing Complaints Handling Complaints Alternative Dispute Resolution Civil Litigation LEARNING OBJECTIVES 1 | Identify the various types of client complaints and how they might arise. 2 | Explain how client complaints can be prevented. 3 | Explain how to address client complaints. 4 | Discuss Alternative Dispute Resolution. 5 | Explain court proceedings and the concept of privileged information. © CANADIAN SECURITIES INSTITUTE  CHAPTER 11      CLIENT COMPLAINTS 11 3 INTRODUCTION In this section, we have been exploring the various activities at an investment dealer for which a chief compliance officer is responsible. So far, we have discussed the key issues and processes involved in the opening and maintenance of client accounts. In doing so, we focused in detail on recordkeeping requirements. The essential nature of dealer member’s records becomes most apparent when a client is unhappy about some aspect of their dealings with the firm. Those records are an integral part of the processes and procedures that every dealer member must have for handling client complaints. In this chapter, we discuss the types of client complaints that investment dealers can encounter, and we provide a checklist of actions they can take to reduce or prevent them. We then explain the internal complaint handling processes that a firm should have in place, as well as the requirements issued by CIRO for handling complaints. We also discuss the alternative dispute resolution systems available, and, finally, we explain the details of court proceedings in cases where complaints go to litigation. OVERVIEW OF CLIENT COMPLAINTS 1 | Identify the various types of client complaints and how they might arise. Dealer members should understand the causes of complaints and prevent them, where possible, in accordance with certain rules issued by CIRO. Prevention measures include appropriate policies and procedures, education of staff and registrants, monitoring of all personnel, and periodic detailed reviews. Dealer members must have written policies and procedures in place to ensure that complaints are dealt with promptly, fairly, and effectively. They must undertake a full and timely review, report their findings to the regulators and the client, review their policies and procedures (revising if necessary), and maintain proper records. By tracking and monitoring complaints, and by dealing with their root causes effectively, the firm can learn from complaints so that future problems can be avoided. Complaints are costly and time consuming, and lawyers must often be engaged. Clients have many options to resolve their complaints, so a dealer member may have to respond to more than one organization when dealing with a complaint. When the client is seeking restitution, a dispute can be resolved directly with the firm or it may be settled through arbitration, the Ombudsman for Banking Services and Investments (OBSI), or the courts. Disputes regarding regulatory breaches are reviewed by the commissions and the self-regulatory organizations for possible disciplinary action. TYPES OF COMPLAINTS The chief compliance officer at a dealer member should be able to identify the most common types of complaints and should understand how and why they arise. Both CIRO and provincial securities commissions publish annual enforcement reports that provide a statistical analysis of complaints in the industry. Based on this analysis, they set enforcement policies around the most commonly occurring types of complaints, as well as expectations as to where dealer members should devote their resources. These publications should be reviewed by all staff, not just compliance. In particular, investment advisors can benefit from a greater understanding of the additional risk related to certain dealer member activities. © CANADIAN SECURITIES INSTITUTE 11 4 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 4 Client complaints typically involve one or more of the following issues: Service issues Service-related complaints are typically about fees and commissions, as well as customer service issues such as unreturned phone calls. Administrative issues Complaints about administration involve errors in client records, which should be resolved by the head office administrative staff. Performance issues Performance-related complaints occur when clients are unhappy with the performance of their portfolio. Trading disputes Trading disputes arise from a difference of opinion regarding instructions given about a specific transaction. Regulatory This type of complaint typically involves issues such as churning, unauthorized trading, contraventions unsuitable recommendations, misappropriation of funds, or investments away from the dealer member. A regulatory contravention that stems from poor judgment, such as an unsuitable recommendation, rather than conscious misconduct, may still result in the same degree of civil and regulatory liability. PREVENTING COMPLAINTS 2 | Explain how client complaints can be prevented. A dealer member’s first focus should be on preventing complaints. The firm’s CCO should provide clear directions to registrants and staff in the operations and trading departments, as well as in the securities cage area. These employees should know how to detect and correct errors, and how to deal with other situations that may cause clients to file complaints. The dealer member must have adequate policies and procedures in place to prevent complaints. All employees must be trained in their duties and responsibilities in this regard. Registrants and employees must maintain adequate records of each client transaction and any instructions regarding clients’ business. Client accounts must be updated regularly to ensure that dealer members and registrants have the most current information regarding clients and their affairs. After adequate controls to prevent complaints have been implemented, a system for processing and handling complaints must be established and clearly communicated to all personnel to ensure that the complaint handling process is managed in accordance with regulatory expectations. PRECAUTIONARY MEASURES Many problems and complaints can be avoided if advisors, management, and clients understand and carry out their respective duties and responsibilities, as described in this topic. DUTIES OF ADVISORS Registrants can reduce client complaints and mitigate potential damages by taking the following precautions: Maintain accurate and up-to-date KYC documentation. Comply with and enforce rules and policies. Deal fairly, honestly, and in good faith with clients. © CANADIAN SECURITIES INSTITUTE  CHAPTER 11      CLIENT COMPLAINTS 11 5 Avoid conflicts of interest with clients. Provide accurate information and reasonable advice. Make and file accurate notes of client conversations on a regular and continuous basis, and maintain such notes in an organized manner that can be easily searched, retrieved, and disclosed. Obtain clear instructions and carry them out properly. Determine the suitability of each transaction. Monitor changes in circumstances that may affect suitability. Make reasonable efforts to advise clients when a requested transaction is unsuitable. Identify clients who complain frequently and reach out to supervisors or compliance for guidance. Maintain regular and frequent contact with all clients. When complaints do occur, advisors must transfer them to supervisors or compliance staff. They must never attempt to settle disputes with clients on their own. MANAGEMENT DUTIES The dealer member’s management can reduce client complaints by making sure that the following responsibilities are carried out: Staff must use appropriate due diligence when hiring. Supervisors must have proper training and resources to perform their responsibilities competently. Advisors must communicate regularly with clients and review accounts periodically, not just during trading. Management must initiate and maintain a program of contact with clients. Management must deal decisively with advisors who receive repeat complaints from multiple clients. CLIENT RESPONSIBILITIES Advisors should educate their clients about their responsibilities to ensure that they receive the best possible service. Clients should be clearly advised about the following responsibilities: Give clear instructions to the advisor. Review the transactions and account records carefully. Advise promptly of changes in circumstances, risk tolerance, and investment objectives. Notify the firm promptly of any errors or account irregularities. Act reasonably to reduce or avoid losses. HANDLING COMPLAINTS 3 | Explain how to address client complaints. Despite all precautionary measures, investment dealers will likely be subject to some complaints at some point. When retail complaints occur, the firm must handle them according to the requirements set out in IDPC Rule 3700, Reporting and Handling of Complaints, Internal Investigations and Other Reportable Matters, including timely complaint resolution, record retention, internal discipline, and reporting requirements. This section discusses complaint handling from a retail perspective. © CANADIAN SECURITIES INSTITUTE 11 6 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 4 IDENTIFYING COMPLAINTS CIRO defines a complaint as either of two types of client communications: A recorded expression of dissatisfaction with a dealer member, employee, or agent alleging misconduct A verbal expression of dissatisfaction with a dealer member, employee, or agent alleging misconduct, where a preliminary investigation indicates that the allegation may have merit Registrants must understand that clients complain in different ways, and that the substance of a complaint is unrelated to the form it takes. They should err on the side of assuming that the client has complained, and therefore seek guidance from the compliance department. Although this approach may lead to false-positive results, it will ensure that all matters are brought to the attention of the designated complaints officer, who is in a better position to adjudicate whether the matter raised is in fact subject to the complaint handling rule. In addition, registrants should be reminded that they are prohibited from entering into any form of settlement agreement with a client without the prior written consent of the dealer member. DESIGNATED COMPLAINTS OFFICER Dealer members are required by CIRO rules to appoint an individual to act as a designated complaints officer (DCO) for the firm. The DCO must have the requisite experience and authority to oversee the complaint handling process and to act as a liaison for the firm. The person in this role may be a supervisor or other registrant in the compliance department. COMPLAINT HANDLING PROCESS Dealer members must have written policies and procedures to ensure that complaints are dealt with effectively, fairly, and expeditiously. Such policies and procedures must address the following aspects: The fair and thorough investigation of the complaint The process by which the merit of the complaint is assessed Where the complaint is deemed to have merit, the process of determining what offer should be made to the client The appropriate remedial actions to be taken with the firm Policies and procedures must not allow for any complaint to be dismissed without due consideration of its facts. The dealer member must take a balanced approach to dealing with complaints that objectively considers the interests of the complainant, the firm, the advisor, employee or agent of the firm, and any other relevant parties. Dealer members must make sure that advisors and their supervisors are made aware of the complaint files of their clients. Senior management must be made aware of all serious allegations of misconduct and of all legal actions. The dealer member must also have policies and procedures designed to monitor the general nature of complaints. Internal policies and procedures must be reviewed in either of the following cases: When the firm reasonably determines that the number or severity of complaints is significant When the firm detects frequent complaints about the same matter, which may cumulatively indicate a serious problem Recommendations must be submitted to the appropriate management level to address any such systemic or recurring matters. Other components of a dealer member’s policies and procedures in regard to the complaint handling process are described below. © CANADIAN SECURITIES INSTITUTE  CHAPTER 11      CLIENT COMPLAINTS 11 7 CLIENT ACCESS TO THE COMPLAINT PROCESS At the time of account opening, dealer members must provide new clients with two documents: A written summary of the firm’s complaint handling procedures, which is clear and can be easily understood by clients A copy of a CIRO-approved complaint handling process brochure The written summary of the dealer member’s complaint handling procedures, including the name of the DCO, must also be made available on a regular basis, so that clients can easily find out how to file a complaint. This information can be provided on the firm’s website. In addition, the dealer member must describe its complaint handling process in its relationship disclosure document, which is provided to clients by virtue of the client relationship model and related rules. COMPLAINT ACKNOWLEDGEMENT LETTER Dealer members must send an acknowledgement letter to the complainant within five business days of receipt of his or her complaint. The letter must include the following information: The name, title, and contact information of the person handling the complaint A statement indicating that the client should contact that person to enquire about the status of the complaint An explanation of the firm’s internal complaint handling process, including the role of the DCO A reference to an attached copy of an approved complaint handling process brochure and a reference to the statutes of limitations contained in the document The timeline (90 days) within which the firm must provide a substantive response to the complaint A request for any information reasonably required to investigate the complaint COMPLAINT SUBSTANTIVE RESPONSE LETTER Dealer members must send a substantive response letter to the complainant, with a copy of CIRO’s complaint handling process brochure and an explanation of the firm’s complaint handling process, no later than 90 days from the date the complaint was received. If the firm requires more time to address a complaint, it must write to the complainant to explain the delay and to provide an estimated time of completion. The substantive response letter must be presented in a manner that is fair, clear, and not misleading to the client. It must contain the following information: A summary of the complaint The results of the dealer member’s investigation The dealer member’s final decision regarding the complaint and an explanation of the firm’s decision A statement describing the following options available to clients who are not satisfied with the firm’s response: Arbitration A reference to the ombudsperson service available through OBSI and the terms of its availability Submission of a regulatory complaint to CIRO for an assessment of whether disciplinary action is warranted Litigation Any other applicable options If an internal ombudsperson process is offered by an affiliate of the dealer member, the firm must disclose in the letter that the use of it is voluntary. The firm must also give an estimate of how long the process is expected to take, based on historical data. © CANADIAN SECURITIES INSTITUTE 11 8 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 4 DID YOU KNOW? Institutional Clients For complaints involving institutional clients, the dealer member must acknowledge all written and verbal complaints and convey the results, if any, of its investigation to the institutional client in due course. The dealer member must also ensure that all allegations of serious misconduct are reported to an appropriate executive. DUTY TO ASSIST IN CLIENT COMPLAINT RESOLUTION When Approved Persons move to a different member firm after events or activities result in a client complaint, they must cooperate with the dealer member where they were employed or where they acted as an agent. Dealer members must also cooperate with each other if events relating to a complaint took place at more than one firm, or if the Approved Person who was employed at the firm that received the complaint later becomes an employee or agent of another member firm. SETTLEMENT AGREEMENTS A release entered into between a dealer member and a client must not impose confidentiality or similar restrictions aimed at preventing the client from pursuing further action with other authorities. Specifically, the client cannot be prevented from initiating a complaint to a securities regulatory authority, CIRO, or any other enforcement authority. The client must also be free to continue with any pending complaint in progress and to participate in any further proceeding by such authorities. COMPLAINT RECORD RETENTION Dealer members must maintain a complaint file for seven years that is retrievable within a reasonable period. Each dealer member must keep an up-to-date record in a central and readily accessible place for two years from the date the complaint was received. That record must include all recorded submissions and follow-up documentation received relating to the conduct, business, and affairs of the firm, its employees, and agents. The following information must be kept for each complaint: The complainant’s name The date of the complaint The nature of the complaint The name of the person who is the subject of the complaint The materials reviewed in the investigation The name and title of everyone who was interviewed for the investigation and the date of each interview The date a decision was rendered in connection with the complaint and the substance of the decision INTERNAL DISCIPLINE Each dealer member must establish procedures to ensure that breaches of CIRO rules, and any securities legislation, are subjected to appropriate internal disciplinary measures. CIRO has also published a consolidated enforcement guideline which describes disciplinary measures that CIRO may seek, based on conduct reviewed. This document can provide guidance when a firm seeks to impose internal discipline. © CANADIAN SECURITIES INSTITUTE  CHAPTER 11      CLIENT COMPLAINTS 11 9 ADDITIONAL STEPS Dealer members should also consider implementing the following eight-step procedure to deal with complaints: 1. Report the complaint to the firm’s insurance company, if appropriate. 2. If the complaint is received by one of the firm’s business locations, head office supervisory or compliance staff should be advised immediately, and a copy of the complaint should be sent to head office. If the business location performs the review, copies of all documents should be sent to head office. 3. Provide the registrant with a copy of the complaint and request a written response. 4. Determine a preliminary course of action, keeping in mind that some allegations of noncompliance require an immediate response. For example, a complaint alleging unauthorized discretionary trading should prompt an immediate discussion with the registrant. Depending on the registrant’s response, it may be necessary to review his or her other accounts to determine whether there are similar complaints. It may also be necessary for the firm to place temporary internal terms and conditions on the registrant, including stricter supervision. 5. Determine how to continue to provide service to the client during the investigation process. (For example, it may be appropriate to assign the account to a different advisor. Consider applying service rules to the account stating that all trading requests must be in writing.) 6. Determine whether it is necessary to consult with counsel. If so, make sure that all participants in the complaint handling process understand the importance of privileged communications with the dealer member’s legal department. 7. Make sure that the dealer member completes any undertakings made to the client. 8. Review and revise policies and make any necessary amendments. COMPLAINTS ANALYSIS Ongoing analysis of client complaints is necessary for effective compliance. Repeated complaints about the same advisor might be evidence of ongoing compliance issues with that advisor. Similarly, repeated complaints in a particular business location or region might indicate a serious problem with business practices or supervision at that location or in that region. MINOR COMPLAINTS All employees should be trained to distinguish between minor and serious complaints, and they should know the dealer member’s procedures for dealing with both types. Minor complaints are often verbal and can be dealt with at the business location. Serious complaints must be dealt with at a higher level. The procedures must identify the person to whom each type of complaint should be referred and the records that must be kept. A staff member at head office and at each business location should be assigned to handle service-related complaints. Clients who complain by telephone or in person should be asked to submit their complaints in writing as well. A reporting mechanism for minor service complaints, even if it is not required, can help to reveal patterns of poor service. DIFFICULT CLIENTS Difficult clients are clients who complain frequently about minor problems. Clients of this type require an inordinate amount of staff time and are likely to make unfounded complaints about larger issues. Sometimes the best option is to ask them to move their accounts to another firm, in which case the transfer fees can be waived. Advisors and business location supervisors should use due diligence when opening accounts to identify and reject such undesirable clients. © CANADIAN SECURITIES INSTITUTE 11 10 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 4 UNRESOLVED COMPLAINTS When complaints are detected early and investigated fully, they are more likely to be resolved quickly. If a complaint cannot be resolved within the firm, the complainant is likely to turn to a third party. The dealer member then loses control of the process and is at risk of adverse publicity and reputational damage. Clients with unresolved complaints have the options of alternative dispute resolution or civil litigation. Depending on the nature of the complaint, they can also bring their complaints to the attention of the applicable regulator (such as CIRO or a securities commission), the privacy commissioner, an investor advocacy group, the police, or the media. ALTERNATIVE DISPUTE RESOLUTION 4 | Discuss Alternative Dispute Resolution. All dealer members must participate in alternative dispute resolution programs offered through either of the following channels: National arbitration programs OBSI’s complaint resolution services Mediation as an alternative method of dispute resolution is voluntary. Dealer members in Quebec may choose to participate in the mediation program of the Autorité des marchés financiers (AMF). CIRO has presently designated two independent arbitration organizations for resolutions of disputes between dealer members and clients. ARBITRATION Before they can proceed to arbitration, clients must attempt to resolve their complaints with the dealer member on their own. The dealer member cannot compel arbitration. Dealer members must submit to arbitration at the client’s option when the claim does not exceed $500,000. The firm must participate in the arbitration and cooperate with the arbitrator. Arbitration can also be undertaken privately, if the parties agree to have an arbitrator settle their dispute according to criteria established by the parties themselves. Private arbitration can involve amounts larger than $500,000. During arbitration, an independent arbitrator listens to each party’s position and decides how the dispute should be resolved and what remedy, if any, should be imposed. The parties involved agree to waive all other rights and remedies and accept the arbitrator’s decision as binding. All parties may be represented by counsel. Enforcement proceedings by a regulator are separate from other proceedings that may have an economic impact (such as civil litigation, arbitration proceedings, or proceedings before OBSI). A decision in one enforcement proceeding does not affect the results of other proceedings. An enforcement proceeding can also take place at the same time as arbitration or litigation. Because CIRO cannot generally compel dealer members to pay restitution to investors, arbitration is an option for a client whose complaint includes a claim for compensation. ARBITRATION PROCESS Each provincial arbitration centre has its own rules under provincial legislation. In general, after documents are filed and a basis for a hearing is established, the case proceeds before an independent arbitrator with experience in securities industry issues. The arbitrator receives submissions from each party, either oral or written. At the hearing’s conclusion, the arbitrator provides written reasons for the decision, which then must be reported through ComSet. © CANADIAN SECURITIES INSTITUTE  CHAPTER 11      CLIENT COMPLAINTS 11 11 On average, the entire arbitration process takes 90 working days. The hearing usually takes half a day, with written reasons issued within 30 days of the decision. The hearing is private, and all matters relating to the arbitration are confidential. Information can be obtained from the arbitrator by a third party only through a subpoena issued by a court, or by a regulator with an Investigation Order. Each party contributes equally to the anticipated costs and fees, including arbitrator and facility fees. The cost of an arbitration hearing varies by province. OMBUDSMAN FOR BANKING SERVICES AND INVESTMENTS The Ombudsman for Banking Services and Investments provides assistance in processing securities-related complaints. As with arbitration, a client must attempt to resolve the complaint with the dealer member before OBSI will review it. The OBSI process differs from arbitration in the following ways: Its recommendations are not binding, although OBSI will publish the fact when a dealer member is noncompliant with its recommendations. There is no charge to the client for dispute resolution with OBSI. Disputes submitted to OBSI involve claims up to $350,000. As a general policy, OBSI requires investors to submit their complaints within 180 days of completing the dispute resolution process. It cannot investigate a complaint made to a participating firm more than six years after the time the complainant knew, or ought to have known, of the problem. MEDIATION As an informal method of dispute resolution, mediation is relatively quick and inexpensive. The mediation program of the AMF is free for residents of Quebec. Mediation can be an attractive alternative when both parties are eager to resolve the problem or when they want their relationship to continue after the dispute is resolved. Its value lies in the allowance it gives to the parties to clarify the issues and air their grievances. The mediator has no decision-making power; disputes are settled only if all parties come to an agreement. CIVIL LITIGATION 5 | Explain court proceedings and the concept of privileged information. In addition to the proceedings discussed above, a client pursuing restitution or an economic settlement may take legal action against the dealer member or the investment advisor within certain time limits. In situations where clients retain counsel instead of complaining to a dealer member or a registrant, it may still be possible to resolve the issue before it proceeds to litigation. Dealer members should be aware that these types of proceedings are typically subject to time constraints or limitation of actions. This type of provincial legislation requires the proceeding to commence within a certain time frame, depending on the residence of the complainant. If an action of this sort is received by the investment advisor, advice from the legal or compliance department should be immediately obtained. In most situations, external counsel is retained to manage the action, and one of the issues to be considered will be whether the action has been commenced in a timely manner. Various issues related to the civil litigation process are described below. © CANADIAN SECURITIES INSTITUTE 11 12 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 4 DEMAND LETTER OR CLAIM A demand letter is letter from a lawyer demanding restitution on behalf of a client for alleged breach of contract or other wrongdoing. A dealer member that receives a demand letter or other statement of claim from a client’s counsel should consult its lawyer. By involving a lawyer at this stage, the firm can help support a claim of solicitor- client privilege, if the matter goes to litigation. In some situations, advisors will need their own lawyer, separate from the firm’s. A business location that receives a demand letter or claim should immediately send it to the dealer member’s head office supervisory or compliance personnel. If a matter proceeds to litigation, all parties will usually retain counsel. The dealer member defending the lawsuit has the following obligations, among others: Filing a defence Producing documents (i.e., written communications) Attending discoveries Attending mediation or arbitration proceedings Attending at trial Attending possible settlement proceedings Responding to interlocutory motions and any appeals RETAINING COUNSEL Some dealer members do not have an internal legal department. In such cases, it is often the CCO’s responsibility to retain counsel for the dealer member. When retaining external counsel that specializes in securities litigation, CCOs should consider references from other dealer members prior to retaining outside counsel. During the course of dispute resolution, including litigation, the CCO must remain aware of any opportunities to settle and any information that might arise through document production, mediation, and discoveries. At a minimum, the CCO should receive quarterly written reports on the progress of litigation and review discovery transcripts and other materials to properly instruct counsel. Although is acceptable to rely on the advice of counsel, the CCO must remain informed about the progress of the litigation to direct it appropriately. PRIVILEGE A party to a lawsuit must produce for inspection every relevant document in its possession, power, or control to every other party to the action, unless privilege is claimed in respect of the document. Documents that are deemed privileged are confidential, and no regulator or court can order their disclosure. The term document generally refers to and includes the following written communications: Correspondence Internal memoranda Personal notes of employees Electronically stored communications, such as email Documents that are privileged can be withheld from adverse parties, regulators, clients (in the course of investigating a complaint), and judges. Because a party in a lawsuit often relies on incriminating or compromising memos or emails to advance its case, privilege should be claimed and preserved wherever possible. A claim of privilege is always subject to a determination by the court that privilege does not apply. It is therefore important, in particular with the use of email, that registrants and employees understand that what is written may not be subject to privilege, and it is therefore producible in a court action. © CANADIAN SECURITIES INSTITUTE  CHAPTER 11      CLIENT COMPLAINTS 11 13 TYPES OF PRIVILEGE There are three types of privilege: Solicitor-client privilege Litigation privilege Without prejudice communications in furtherance of a settlement SOLICITOR-CLIENT PRIVILEGE The purpose of solicitor-client privilege is to facilitate a client’s communication with a lawyer without fear that the communication will be disclosed. For a communication to attract solicitor-client privilege, it must satisfy all of the following criteria: It must be between a lawyer and client. It must either seek or give legal advice (whether or not litigation is pending). It must be intended to be confidential between the lawyer and client. Solicitor-client privilege continues indefinitely, until and unless it is waived. Privilege applies to both in-house and external counsel. Communications are privileged only when counsel is acting in a legal capacity. For example, communications are not privileged when in-house counsel is acting as an executive to the dealer member. A document does not attract privilege merely because it has been copied to counsel. To attract privilege, the document must address counsel in his or her capacity to provide legal advice, and counsel must be actively providing legal advice. Acts and facts contained within the document are not privileged; only the communication (i.e., the advice, the conclusions, and the document itself) is privileged. EXAMPLE Solicitor-client privilege covers only legal advice; it does not cover non-legal advice on business-related matters. This distinction is important, given that many CCOs are also lawyers. For example, if a compliance memorandum is circulated to RRs and supervisors by a CCO or solicitor acting in the capacity as CCO, it is unlikely to be considered privileged, regardless of whether it addresses legal or quasi-legal issues. LITIGATION PRIVILEGE Litigation privilege applies to communications between counsel and third parties, including expert witnesses. This form of privilege attaches to documents that meet both of the following criteria: The document or communication was made for the dominant purpose of use in litigation proceedings. At the time the document or communication was made, litigation proceedings were either pending or reasonably expected. A single document or communication may be made for more than one purpose. For example, an employee might provide a statement to meet business, regulatory, or compliance requirements in addition to preparing for litigation. In order for the document or communication to be privileged, litigation must have been the dominant purpose in making the document. For a report to be considered privileged, it should be structured so that it was clearly prepared in anticipation of litigation. Litigation privilege adds a layer of privilege to solicitor-client privilege. Therefore, once litigation is contemplated, all communications by counsel for use in that litigation are protected (not just communications between solicitor and client). © CANADIAN SECURITIES INSTITUTE 11 14 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 4 The following types of documents might be subject to litigation privilege: Memoranda between in-house counsel and management regarding the status of litigation or litigation strategies Witness statements prepared by employees with the assistance of counsel for use in litigation Internal investigation reports where litigation is reasonably expected The purpose of litigation privilege is to protect confidentiality during the litigation process, so that each party can build its case without fear of having to disclose material information to the other party. In some circumstances, it may be possible to rely on litigation privilege when investigating a client complaint. Litigation privilege does not apply to internal investigations undertaken to determine whether there has been a compliance issue. If an investigation is undertaken before litigation is contemplated, the report and other results of the investigation must usually be produced in any ensuing litigation. The following actions may help preserve privilege in an internal investigation: Using counsel to conduct the investigation Documenting the fact that the investigation is for the purpose of obtaining legal advice Documenting the fact that the investigation is in anticipation of litigation when litigation is likely WITHOUT PREJUDICE PRIVILEGE Without prejudice privilege applies to documents or communications used to settle a dispute. The purpose of this type of privilege is to encourage constructive settlement discussions. It reassures parties in a dispute that any disclosure made during such discussions cannot be used against them in proceedings if attempts to settle fail. For without prejudice privilege to apply, all of the following criteria must be met: There must be a dispute between the parties to the communication. The communication must be made for the purpose of settling that dispute. The communication must be made with the express or implied intent that the communication is without prejudice (therefore, it is advisable to mark offer letters “without prejudice”). It is not necessary that a lawyer be involved in the communication to assert without prejudice privilege. A response to a client complaint is subject to without prejudice privilege only if it contains a settlement offer. A refusal to pay compensation with an explanation is not privileged. WAIVER OF PRIVILEGE A waiver of privilege occurs where the party asserting privilege demonstrates an intention to forego the privilege. Privilege can be waived, inadvertently or otherwise, by failing to keep advice confidential. EXAMPLE Privilege might be considered waived in the following situations: A client provides a privileged document to someone outside the solicitor-client relationship. A lawyer provides advice to a client in the presence of a third party. A client talks to a third party about legal advice he or she has received. Common third parties are auditors, accountants, consultants, and affiliated companies or subsidiaries, in some cases. © CANADIAN SECURITIES INSTITUTE  CHAPTER 11      CLIENT COMPLAINTS 11 15 NON-PRIVILEGED COMMUNICATIONS The following documents are not necessarily considered privileged: A confidential or commercially sensitive document or communication A document or communication that is intended to be private A document marked with language stating that it is privileged A document sent or received by counsel PROTECTING PRIVILEGE Dealer members and parties representing a dealer member in a dispute should take care to protect privilege as far as possible. The following safeguards may help in its preservation: Documents that contain legal advice should not include business or policy advice; they should be circulated internally as legal memoranda, not as circulars or information bulletins. Communications including legal advice should be marked “privileged and confidential communication for the purpose of providing legal advice”. Employees who seek advice from counsel, either in-house or external, should be directed to mark communications in this way. Non-legal documents should not be routed through a legal department in an effort to claim that they are privileged. Courts are sensitive to this type of abuse. Documents containing legal advice should be disseminated selectively, and those people who receive them should not circulate them to others. Communications containing legal advice should be filed apart from other materials in a separate file marked “privileged and confidential legal advice”. Non-lawyers should refrain from commenting in writing on legal issues and exposure, particularly when using email. The firm should not make admissions when addressing or responding to client complaints. The firm should keep the following rules in mind when creating documents: Do not use inappropriate language that a judge, regulator, or client might find objectionable. Use facts, not speculation, which tends to reveal information unnecessarily. Use words in their ordinary meaning. Edit emails before sending them; email is often used casually, but it leaves a permanent record and can be retrieved even if deleted. Be cautious when leaving voice-mail messages; voice-mail messages can be recorded or transcribed. © CANADIAN SECURITIES INSTITUTE 11 16 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 4 SUMMARY In this chapter, we explained CIRO’s requirements for handling the complaints of dealer member clients. We discussed that dealer members must have written policies and procedures in place to ensure that complaints are dealt with effectively, fairly, and expeditiously. We also discussed that client complaints typically fall into one of five categories: service issues, administrative issues, performance issues, trading disputes, and regulatory contraventions. Dealer members must have controls in place to prevent complaints first of all, beginning with a clear delineation of responsibilities. They must also have policies and procedures to manage complaints when they occur. By tracking and monitoring complaints, the firm can learn the root causes of complaints and take steps to prevent similar problems in the future. A key point to remember is that the dealer member must describe its complaint handling process in the relationship disclosure document that is provided to clients as discussed in detail in Chapter 9: Opening and Maintaining Accounts. We also discussed CIRO’s guidelines regarding the complaint handling process, including rules related to client access to the complaint process, documentation and recordkeeping requirements, internal discipline, the handling of difficult clients, and next steps to take when complaints cannot be resolved. We discussed that, before a complaint goes to litigation, the dealer member must participate in alternative dispute resolution programs offered through arbitration or with the help of OBSI if requested by the complainant. Mediation is an informal and relatively inexpensive alternative through which complaints can sometimes be resolved. Finally, we discussed that clients may, within certain time limits, take legal action against the dealer member or the advisor for breach of contract or other wrongdoing. If an action of this sort is commenced, advice from the legal or compliance department should be immediately obtained. In the next chapter, we discuss in detail all aspects of registration, including the registration categories, proficiency requirements, and processes. © CANADIAN SECURITIES INSTITUTE