Take note(s)—an important reminder for advisors

It is a long-standing best practice for advisors to keep notes of material conversations with their clients, especially those that relate to KYC, suitability and risk disclosure. Contemporaneous notes are persuasive evidence that an advisor has met their KYC and suitability obligations, including that clients are informed of investment risk. In Re White, 2024 CIRO 67, the panel relied upon the advisor’s notes as a credible record of what occurred during the advisor’s discussions with his clients. Based on those notes, the panel preferred the advisor’s recollection of what occurred over the complainant’s and decided in favour of the advisor.

What you need to know

Investment advisors should:

• Take timely and detailed notes: Notes can provide convincing contemporaneous evidence of an advisor’s interactions with their clients over time. Ensuring that notes cannot be modified after they are taken can help to neutralize allegations of alteration or back-dating.
• Consider civil and regulatory risk when faced with an allegation: Regulatory proceedings can lead to civil actions from clients and, equally, civil proceedings can give rise to a regulatory investigation. Whenever responding to allegations of wrongdoing, advisors and dealers should consider the risk of a follow-on civil and/or regulatory proceeding, and take steps to protect their defence, including by protecting privilege over analysis of the complaint.

Notes can win a case

In Re White, Canadian Investment Regulatory Organization (CIRO) Staff alleged that an investment advisor failed to use due diligence to ensure certain investment recommendations were suitable for some of his clients¹. Throughout the hearing, the advisor and his former clients told drastically different stories about what had occurred². The advisor characterized his former clients as individuals who chose high-risk investment strategies with knowledge of the potential consequences³. In contrast, his former clients tried to paint themselves as inexperienced investors who were not interested in high-risk investments and who did not understand that any of their investments were high risk⁴. These kinds of credibility disputes between a client and their advisor routinely occur in cases where investors make claims for investment losses and the suitability of the investments causing the loss⁵.

Historically, credibility has played a significant role in investor loss claims⁶. Due to the nature of the relationship between many advisors and their clients, a court or panel faced with conflicting evidence must weigh the investor’s and advisor’s credibility. Advisors speak with multiple clients a day and may have a high volume of client calls in any given week. In contrast, a client likely only speaks occasionally with their advisor. Against this backdrop, a court or panel may be inclined to accept a client’s recollection over an advisor’s since an investment discussion may be more “unique” (and thus memorable) to the client, whereas it may be routine to the advisor. Contemporaneous written documentation can be persuasive evidence of what actually occurred.

In this case, the panel preferred the advisor’s evidence, holding that the advisor’s notes corroborated his narrative. The panel rejected allegations that the advisor’s handwritten notes had been altered after the fact because they had been archived by the dealer and the advisor could not access them⁷. Further, the fact that his former clients had signed several documents over many years confirming the high-risk investment strategy demonstrated the individuals had multiple risk warnings and opportunities to not make the impugned investments⁸. As a result, the panel found that the advisor had not breached the regulatory obligations in issue in the case⁹.

Regulatory and civil allegations create symbiotic risk

Publication of regulatory investigations and decisions can lead to or influence civil claims by investors. Civil complaints and lawsuits can also influence regulatory processes. In Re White, the panel noted that part of the record before it was a detailed written complaint authored by the lawyer for one of the clients—who had also sued the advisor civilly—which was one of the foundations of CIRO Staff's prosecution of the case. The panel also permitted the complainant’s lawyer to make comments from time to time during the hearing¹⁰.

Overlap between regulatory and civil claims should be expected. Dealer members cannot put language in civil settlements that would prevent a client from initiating a complaint to CIRO or other securities regulatory authorities¹¹. They are also required by CIRO’s complaint reporting rules to notify CIRO if any advisor is named as a defendant in a proceeding alleging contravention of securities laws or SRO rules¹². Therefore, advisors and dealers faced with either regulatory investigations or civil complaints should take proactive steps to consider the potential for both kinds of claims. Taking steps to preserve privilege claims by avoiding waiver through disclosure should be top of mind, as should record-keeping of client education and instructions.