If ‘client convenience’ is your rationale for keeping blank signed forms in the office for clients, the Mutual Fund Dealers Association has a very clear message: no matter your motivation, signature falsification is wrong, and will carry stiffer penalties in the future.
Falsifying a client’s signature may seem like a no-brainer way to land in trouble, but the issue and practice of collecting pre-signed forms, and other violations of MFDA Rule 2.1.1 remain so prevalent, the Mutual Fund Dealers Association updated Notice MSN-0066 earlier this year to remind firms about their conduct and reporting obligations.
The MFDA says the number of cases being reported is definitely higher than in past years, thanks to enhanced and improved detection efforts undertaken by Member firms.
Creates problem for dealers
Finding just one of these forms is a problem for dealers, who must then interview supervisory personnel and branch staff, contact and interview affected clients, conduct a branch-level review and recomplete affected forms – all of which is spelled out clearly in the MFDA staff notice. If a branch manager or other supervisor has engaged in the practice, the MFDA further states that the Member dealer should also review that person’s subordinates, and consider whether the individual should continue acting in a supervisory capacity at all.
It creates a big job,” agrees Susan Schulze, senior vice president, advisor service and compliance at Investment Planning Council. “Anytime you find a blank signed form you have to conduct a full-on, thorough investigation. For us, that means client call-outs, it means mailing all transactions from the last few years to clients for confirmation. Not only that, then we need to take it to the regulators.”
In its notice to members, the MFDA says an internal investigation “may be more or less comprehensive, depending on the situation,” but should consider a number of red flags that warrant a more stringent investigation, including:
- evidence of unauthorized or discretionary trading
- falsified KYC forms
- a large number or volume of forms
- that the conduct took place over an extended time period, or
- the conduct involved other individuals at the branch.
Whether a client simply forgot to initial one little change; or not, and the advisor’s instead kept blank signed forms as a matter of practice, client convenience – not wanting to make difficulty for the client – is usually the excuse provided.
“They think, in their business, they’re trying to help clients,” Schulze says. “They don’t want to cause any extra work for the client. Sometimes they don’t think they’ve done anything wrong,” she adds. “Advisors who are still running into these issues, I don’t think they actually think about it all the way through.”
In a clear rebuttal to the ‘client convenience’ argument, the MFDA points out that use of a Limited Trading Authorization form is a more appropriate way to create the same effect.
“When clients sign an LTA, they authorize the Member to execute a trade without the need to provide signed written instructions. Use of an LTA can assist Approved Persons in minimizing the number of trading-related forms where a client signature is required. Proper use of an LTA eliminates the “convenience to the client” rationale many APs use to justify their inappropriate use of trading forms.”
“In all registrant categories within the securities industry there are people who take shortcuts for themselves and for what they view as the convenience of their clients,” writes MFDA director of public affairs, Ian Strulovitch. “These are mainly the circumstances where we find cases of signature falsification.”
After outlining the issue and prescribing the solution, the notice goes on to list a number of circumstances under which more serious discipline should be a consideration. “Signature falsification has been identified by securities regulator authorities as being serious conduct,” it reads. “The level of internal discipline should be sufficient to address the seriousness of the conduct in the circumstances, including whether any of the following factors are present:
- client harm;
- high frequency of signature falsification;
- AP has been cautioned or disciplined for signature falsification in the past;
- AP has misled the Member during its investigation.”
Other factors on the list include false attestations, and instances where the Approved Person was previously told to destroy instances of signature falsification but did not.
Notably, the MFDA says it will seek enhanced penalties for any conduct that occurred after the release of Bulletin #0661-E in October 2015.
“We recently updated and reissued (the bulletin) to remind Members that they must continue to play their part in supervising, detecting, investigating and disciplining for cases of signature falsification,” Strulovitch says. “We hope through the combined efforts of our Members and the MFDA that we can deter signature falsification, and send a strong message that falsifying a client signature, even for the convenience of a client, is never acceptable and will have significant consequences for an advisor.”