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Lessons from the regulator

Brad Brain

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Shortcuts and complacency can bring big fines. Make sure it doesn't happen to you by following these guidelines.

I SPENT NINE YEARS as an insurance regulator in Canada, and you might think I spent a lot of time dealing with shocking crimes, but that’s only partly true. From time to time, we’d hear of stories like the $30-million fraud, but that really doesn’t happen often. We rarely saw the outrageous.

What we saw were people trying to get away with little things. A lot of the stuff was crimes of stupidity. We saw people taking shortcuts. And when I was on an investigative review committee, that always made me want to dig deeper.

If people take shortcuts in routine things, where else in their practice might they be taking shortcuts? Maybe on something that matters.

While, on occasion, I would see bad people doing bad things, I would also see good people make avoidable mistakes. Totally preventable stuff. I would see good people have bad luck. And all these good folks also end up in front of a regulator and are asked to defend their actions.

Many a time I would come home with things I would want to immediately implement in my own practice to prevent something from going sideways.

I have been doing this work for a quarter of a century. I have all sorts of designations and credentials and experience. And on more than one occasion I found myself thinking, “That could easily be me on the other side of the table.” Some small, well-meaning, innocent-looking incident blows up into a big problem.

If I could see the potential for something to be misconstrued in my own practice, there likely could be something that could use attention in yours, too.

Many times it was the industry veterans who would drift offside. Maybe they get complacent, or maybe they don’t keep current and are still doing things the old ways. It’s not always the rookie who runs afoul of rules.

The reality is that not every story is a dramatic tale of clearly evil people doing obviously bad deeds. Here is an example of how an everyday event can go nuclear, as it appeared in the news media: An advisor agreed to pay a $10,500 fine and costs of $2,500 to the Mutual Fund Dealers Association (MFDA) after he processed three unauthorized trades in a client’s account. The client lost less than $10 as a result of the transactions.

In May 2014, a client asked Aubrey Reid Wallace to transfer the entire balance of his investment portfolio, which was worth $5,889.90. Wallace did so, and then used the proceeds to buy three mutual funds in the client’s account. He did so without notifying the client about the transfer, and without obtaining the client’s authorization for the trades.

When the client called the next month to ask about the status of the transfer, Wallace admitted he had forgotten they were supposed to meet before investing the funds. The client then asked Wallace to move the investments into a money market mutual fund.

Between the date Wallace made the unauthorized mutual fund purchases, and the date Wallace processed the switches requested by the client, the investments declined by a total amount of $6.26.

The client complained about Wallace’s conduct to his investment dealer. Wallace’s dealer sent a cautionary letter to Wallace and conducted a review of his files, but they found no other instances of unauthorized trading. The MFDA notes there is no evidence Wallace received any financial benefit from the transactions apart from the commissions and fees he would ordinarily be entitled to receive.

The advisor pays $13,000 and has a permanent black mark on his record. All for a $6 error. This is the world we work in.

 It seems to me that with good note taking and better client communication, it was a preventable situation. Clients are not always malicious, they just can’t remember. Then later a regulator says, “Did you talk about …?” and maybe the client says, “No, I don’t remember ever being told of that.”

Lessons to remember

Document everything.

  • Don’t do anything you don’t want to see on the front page of your local newspaper the next day, written by an informed and critical reporter, for all your friends, family and peers to see.
  • Act within your registration and your competence, and do not put your interests before the client’s interests.
  • Any product recommendation has to be suitable for the individual client. You can’t just mark down everyone as having the same situation and sell accordingly.
  • Avoid conflicts of interest altogether when you can. Anything that harms the client needs to be extinguished.
  • Disclose everything, and in a timely fashion.
  • Don’t put yourself out as something you are not.
  • Even little rules are still rules. Obey them or suffer the consequences.


Brad Brain, CLU, CFP, is a 10-year MDRT member from Fort St. John, British Columbia, Canada. He spoke at the 2019 MDRT Global Conference. Contact him at


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