Investment industry stakeholders argue that rules surrounding pre-signed forms are often not fully understood and non-intentional errors can land a firm and good advisors in trouble.nortonrsx/iStockPhoto / Getty Images
Pre-signed forms have long been among the leading enforcement proceedings by the Mutual Fund Dealers Association of Canada (MFDA) against dealers and their financial advisors. Yet, these violations have also been amid the most controversial as industry players have struggled to stay on side of rules that some allege are enforced too rigorously.
A form filled out in two different colours of ink or a signature that doesn’t show the bumps of a pen on the back side of the paper might seem trivial, but the MFDA considers these inconsistencies to be pre-signed forms.
“I could see that regulators might initially be concerned about advisors messing around with pre-signed forms to engage in fraud – I get the seriousness of that,” says Ellen Bessner, a lawyer and partner at Babin Bessner Spry LLP in Toronto, who represents dealers and advisors in regulatory proceedings. “Yet, I’ve been involved in multiple cases of pre-signed forms and I can’t think of a single example where it’s an issue associated with nefarious actions.”
According to the MFDA’s latest annual enforcement report, pre-signed forms have comprised a significant share of investigations and enforcement proceedings against licensed advisors and firms for the past five years. In 2019, the self-regulatory organization (SRO) opened 94 cases related to pre-signed forms compared with 38 for the second-leading cause, suitability of investments.
The potential for client harm – even resulting from seemingly minor transgressions – is why the MFDA enforces these rules so rigorously, says Ian Strulovitch, senior legal counsel and director, communications and public affairs, at the SRO.
“There are important issues that arise with pre-signed forms and other signature issues on forms, and this is why we continue to focus on these cases,” says Mr. Strulovitch in an e-mail statement.
For example, he says these transgressions can affect the integrity and reliability of documents adversely, destroy an audit trail and, more seriously, “facilitate other misconduct such as unauthorized trading, fraud and misappropriation of funds.”
Through this lens, strong enforcement appears warranted. Yet, other industry stakeholders argue rules surrounding pre-signed forms are often not fully understood and non-intentional errors can land a firm and good advisors in trouble.
“The industry would argue that we are over-policed, that an advisor should not be taken to enforcement with the MFDA because the client signed the form, after watching it all filled out … with, for example, a different colour ink,” says Sandra Kegie, founder of Kegie Consulting Corp. in Toronto. “That happens, and the MFDA … will say the advisor did something wrong and take them to task on it.”
The MFDA, by its own admission, reports that most cases of pre-signed forms or signature falsification – the latter is another transgression that accounted for 18 investigations in 2018 – “do not involve client complaints, an intent on the part of the approved person to harm the client, or results in financial harm to the client,” Mr. Strulovitch says in the e-mail, citing the MFDA’s annual enforcement report from 2016.
Of the 78 formal enforcement proceedings that the SRO commenced in 2019, 37 involved pre-signed forms and signature falsification, and only nine of those involved discretionary trading, unauthorized trading or misappropriation.
Yet, because the pre-signed forms remain problematic – occurring more often than the regulator deems fit –stringent enforcement is appropriate to stamp out all instances of this practice, he says. That includes times when they appear to be done out of convenience for the advisor and clients.
Matthew Latimer, executive director of the Federation of Mutual Fund Dealers, says he understands the regulator’s view of pre-signed forms – especially given the history of using them in the industry.
“Nobody today supports pre-signed forms as a way to circumvent or shortcut compliance,” he says.
Mr. Latimer explains that during the early days of the mutual fund industry in the 1990s, little oversight existed in this respect. And a common view at many firms was to “just get business done.”
Pre-signed forms offered convenience and expediency for advisors and their clients, he says, as having clients trek to the advisor’s office or having the advisor visit clients to sign every form is time-consuming and often logistically challenging.
“[But] the culture of compliance has changed,” Mr. Latimer says, adding that those types of pre-signed form issues – even if done for client convenience – open the door for more serious problems. “So, everybody has to be onside.”
Compliance has become increasingly burdensome for dealers and their advisors, who often have clients spread across large geographical areas. What’s more, the challenges of seeing clients in-person, going over forms with them, and then having them sign those forms, have been exacerbated by the pandemic.
Innovations like electronic signatures and e-documents that can be e-mailed to the client help address these difficulties, Mr. Latimer says.
The MFDA agrees that fintech advances are critical to reduce the incidence of pre-signed forms and signature problems, Mr. Strulovitch says.
Nevertheless, Ms. Bessner argues that these technologies still don’t fully address the problem she sees among advisors she represents.
The issue, in her view, is that the MFDA is enforcing the rules based on a “culture of perfection” that leaves little room for error.
“I wouldn’t even call it hyper-vigilance,” she says. “I would call it unfair treatment because these are good advisors.”
Many face enforcement, fines and a knock to their reputation because the process often involves a public news release.
“These professionals feel like failures; they feel embarrassed, and they feel worried,” she says. “Some dealers fire advisors with a bunch of [pre-signed forms violations], even if there was no bad intention toward clients.”
Ms. Bessner says that until regulators take a different tact, advisors and dealers should be extra cautious about staying onside of the regulations.
“You’re stuck with the rules until they change, so advisors need to be aware of what they are.”