What is the standard expected of a dealer employee who is tasked with pricing securities for client reporting, and the compliance standard for reviewing that work? Can seniority affect the standard expected by regulators?
Sutton was the CFO of First Leaside Securities. Sutton was tasked personally to price certain unlisted securities issued by entities related to the Dealer Member, for client reporting. IIROC held that the prices set by Sutton did not reflect the value of those securities. As a result, IIROC held that in his role as CFO, Sutton breached Dealer Member Rule 38.6(c), which requires a CFO to monitor adherence to firm policies and procedures as necessary to provide reasonable assurance the Dealer Member is in compliance with IIROC’s financial rules. Sutton appealed to the OSC, which reviewed IIROC’s decision.
The OSC found that IIROC erred in its decision, but reached the same conclusion: in his role as CFO, Sutton breached his obligations under Rule 38.6. The OSC ordered sanctions of a $50,000 fine, a three-year prohibition on being a CFO for an IIROC dealer and $50,000 for costs.1
What You Need to Know:
Higher Standard Applies When a Supervisor is Performing Tasks. The OSC rejected the submission that the CFO’s obligation under Rule 38.6(c) was to ensure only “reasonable compliance” with First Leaside’s policy to price securities in circumstances where the CFO personally did the pricing. The Commission contrasted the CFO’s direct obligation under First Leaside’s policy with the obligation to monitor adherence to that policy: “Sensibly, an individual in an oversight role is typically afforded some latitude, because that person is not expected to be a guarantor of perfect compliance by the person whom she or he oversees…The imposition of such an expectation could cause a significant and unnecessary burden and duplication of effort.” The OSC made a “pronounced” distinction between someone in a compliance function and an individual “who is actually carrying out the task,” subject to compliance and supervision by another. In his role of pricing securities to reflect their true value, the CFO was obliged to do just that, and did not have the latitude of a compliance officer to only ensure pricing was “reasonably compliant.”
Experience and Seniority Will Affect Standard. The OSC confirmed that “registrants are held to a higher standard of conduct than are non-registrants, given the level of trust that is placed in registrants by investors,” and went on to note that the CFO’s 37 years in the capital markets, including numerous senior positions, put “a greater burden on him than would apply to a non-registrant or to a new entrant” and required him to meet a “high standard.” The CFO’s seniority and experience were deemed to be an “aggravating factor” when considering the appropriate penalty.
Regulators expect dealer employees who are charged with tasks that relate to client-facing financial reporting will complete those tasks in strict adherence to firm and regulatory rules. While compliance officers can take some comfort that they will be expected to be reasonable (and not perfect), all dealer employees should know the more seniority and experience they have, the higher the standard regulators will expect of them.
1 The OSC increased the sanctions imposed by IIROC, which were limited to a fine of $25,000 and a reprimand.
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