What would happen to your firm and clients in the event your registered individuals are no longer able to perform their registerable duties? That is a question that is top of mind for regulators and one which staff is likely to ask about in the course of a regulatory audit, in particular for smaller firms. For example, firms with only one advisor with segregated accounts or proprietary pooled funds would face a significant business interruption in the event the sole advising representative were unable to perform the role.

Section 11.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations requires firms to establish, maintain and apply policies and procedures that establish a system of controls and supervision to ensure compliance with securities legislation and manage the risks associated with their business in accordance with prudent business practices. One such risk would be business interruption. For example, in CSA Staff Notice 31-350 Guidance on Small Firms Compliance and Regulatory Obligations, it provides that “in most cases of business interruption, there is a period where the client’s portfolio is not being managed, which could be a significant issue for clients who need to generate income to meet their cash flow needs”.

Registered firms should have a documented succession plan in place that contemplates ongoing management, transition or wind-down of client portfolios in the event the existing firm is no longer able to provide registerable services. They can, for example, consider reaching out to a friendly registrant who may be able to contact clients in the event the first firm is no longer able to provide services. Firms should also consider how a new registrant would be appointed in their absence to protect their clients. Note that while a registered person is usually prohibited from acting for two firms at once, in this case their role would be limited to acting in an administrative capacity and facilitating transition and communication. Note also that this issue may be something requiring explanation in relationship disclosure documentation, and that privacy concerns can arise in respect of sharing personal information of clients.

Please feel free to contact your usual lawyer at AUM to discuss these types of arrangements further.

June 30, 2022