The Canadian Securities Administrators (CSA) recently published guidance for registered firms as to when they are required to engage a compliance consultant (Consultant) to assist them in addressing compliance deficiencies and improve their compliance systems or systems of control and supervision.
When Does a Firm Need a Consultant?
A Consultant is generally hired by a firm to assist the firm with securities law compliance. As highlighted in CSA Staff Notice 31-356 Guidance on Compliance Consultants Engaged by Firms Following a Regulatory Decision (the Notice), firms are typically required to hire a Consultant either as part of the terms and conditions placed on the firm’s registration, an order that the firm submit to a review of its practices and procedures, or as an order approving a settlement agreement with a firm.
Who Can Be a Consultant?
The Notice outlines key considerations when identifying and evaluating appropriate candidates to act as a Consultant. Where a Consultant is required, it is usually at the firm’s expense and, in certain circumstances and depending on the jurisdiction, the consultant must be approved or accepted by CSA staff. A firm should perform sufficient due diligence on proposed Consultants using the criteria the CSA staff use when approving the Consultant taking into account the following:
- Educational and employment history and background. A lawyer, public accountant, experienced compliance professional, former securities regulator, management or risk consultant, or experienced industry person would all qualify.
- Any past experience providing professional advice and services in respect of compliance with securities law, relevant industry rules, industry best practices, identifying compliance issues and the development of systems regarding controls and supervision.
- The timely availability of sufficient resources and staff to properly evaluate compliance systems and controls and supervision structures at all locations, and to support and address weaknesses and deficiencies appropriately.
- The Consultant should be independent of the firm despite being a paid advocate and should be able to demonstrate no conflicts of interest, including acting in a previous advisory role when the deficiencies took place.
- The Consultant should be able to demonstrate, through prior experience, the ability to effectively persuade and influence the firm to enhance a culture of compliance and mindset and improve practices and procedures.
What is A Consultant Responsible For?
The CSA expects that a Consultant will:
- Understand the firms’ business by meeting with key representatives and visiting key business locations.
- Review identified compliance deficiencies issued by the regulator or CSA staff.
- Review the firms’ processes, records, policies and procedures, system of controls and supervision.
- Engage in an open dialogue with the firm and CSA staff and provide ongoing progress and final reporting to CSA staff.
- Create a comprehensive written compliance plan that includes a timeline of practical, tailored and effective recommendations.
- Monitor and assist the firm as it implements recommendations.
- Provide training to the firms’ representatives as needed.
- Test to ensure that implemented recommendations are working effectively.
The Notice outlines the CSA’s expected involvement in the engagement agreement between the firm and the Consultant. Although the Consultant is engaged by the firm and the engagement agreement is between the Consultant and the firm, the CSA must be satisfied that the firm has demonstrated compliance with the terms of the regulatory decision prior to ending the engagement. The CSA may terminate the Consultant if the Consultant is found to not be adequately fulfilling its mandate at any time. Typically, the firm cannot terminate the engagement without prior approval of the CSA.
There are also special considerations if the selected Consultant is a lawyer or law firm. The CSA expects a firm to provide unrestricted permission for the CSA staff and the Consultant to communicate regarding the firm which may be inconsistent with solicitor-client privilege. Furthermore, ethical barriers need to be in place if other lawyers at a law firm counsel the firm on other matters.