Industry Spotlight: Culture of compliance

Jim Middlemiss
Lawyers working the investment management industry face an onerous regulatory environment that can change by the day. Success hinges on an ability to make business happen within that tight confine.


Talk to many in-house lawyers and you find what drives them is being part of a global company and participating in its growth worldwide.

That’s certainly the case for lawyers working at investment management firms. After all, capital knows no boundaries and perhaps few industries are as global as money management.

Take AGF Management Limited, one of Canada’s largest independent investment management firms, which is celebrating its 50th anniversary this year. It’s a multi-faceted business, featuring mutual funds, private wealth management, institutional money management, and a trust subsidiary.

AGF has gone from managing a few million dollars in mutual fund assets back in the 1950s to more than $50 billion in assets today, including retail mutual funds, institutional assets, private wealth management holdings, and mortgages. Along the way, it has built a business that operates in Canada, Japan, Ireland, the United Kingdom, China, and Singapore.

Judith Goldring, general counsel at the firm her father started, says, “One of the things that is of great interest is the opportunity to do things internationally as well as in Canada. There’s a lot of development from a regulatory perspective here in Canada and internationally. As well, it adds a whole other level of intrigue when you get into what those regulatory environments are about when you are looking at new products and new opportunities.”

It’s that international focus that Nick Cardinale finds attractive. Cardinale is general counsel and executive director, legal, risk and compliance at UBS Bank (Canada), whose parent company is a large European bank that manages money for high net worth clients.

Globally, the firm operates in 60 countries, manages $3 trillion in assets, and has a law department that comprises 2,000 people around the world, making it comparable to one of the large global law firms.

While the Canadian legal department comprises six people, Cardinale says there’s that “interesting mix of being part of a global powerhouse.” That means integrating within the large Swiss-based operation to “ensure consistent messages are being passed downstream.”

When it comes to the legal issues investment management firms face, there are the usual, such as contracts, employment law, intellectual property, and leases. However, because money is at the centre of the business, a whole raft of additional legal issues arises, and operating in a culture of compliance is critical to success, the lawyers say.

Battling terrorism and money laundering
Cardinale notes that two of the most pressing issues facing lawyers in the investment management business are also issues that are on the front pages of newspapers — anti-terrorist financing and anti-money laundering.

“Anti-money laundering and anti-terrorist financing are very important issues in the wealth management business. You have to know you client. You have to know their source of wealth.”

Launching new products
Martin Guest, long-time senior vice president and corporate counsel at Fidelity Investments Canada, who recently stepped aside, says Canada’s demographics present an interesting challenge for the industry.

As baby boomers age and enormous amounts of wealth are passed down through generations, there “is going to be a demand for new and innovative products focused on income in a way that, historically, we haven’t seen.” That will result in a demand for legal advice, he says.

“The retirement wave is going to force us and other industry participants into providing different kinds of products and that may entail different kinds of regulation and we will face more scrutiny.”

He says “Canadians are generally becoming more sophisticated about investment and retirement planning. The individual investors are paying more attention and regulators are paying more attention as the investment management industry becomes more important.”

Independent review committees
Guest says another hot-button item in investment management these days is the development of independent review committees in the mutual fund business.

Securities regulators have mandated in National Instrument 81-107 that each mutual fund must have a review committee, which is independent of the fund manager and it must monitor potential conflicts of interest.

“Fidelity is spending a lot of time developing and launching our independent review committee,” Guest said in an interview shortly before he stepped aside as general counsel.

Increase in regulation
Goldring says AGF is “a highly regulated and highly competitive business. And there’s a need to stay on top of the regulation and how it can be applied within our business framework.

“In Canada, there are ongoing new issues that are constantly coming forward from the regulator, which keeps us on our toes.” In addition to the need to establish an independent legal committee, she cites the recent announcement of a new registration reform initiative, National Instrument 31-103, as another example of continued regulatory change.

It is designed to tackle the growing issue of when an investment company must be registered and what activities it can or can’t carry out. It’s an issue that is blurred in a world driven increasingly by unregulated hedge funds and derivative products.

“That’s a huge initiative in terms of registration. We’re going through the analysis of how it may or may not impact us and in what capacity in terms of our different areas of business.”

Also floating around is the proposal by some securities regulators to create a “passport system” that would make it easier for market participants to deal with the 13 provincial and territorial securities dealers. Added to the mix is the continued call for a national securities regulator.

Cardinale says, “It would be nice if we could move towards a national securities regulator that will make things easier for firms not just within Canada, but from outside. We do see a challenge for our affiliates outside of Canada when trying to do business in Canada. It becomes very complicated.”

He says there have been instances where UBS has elected not to launch a new product here because of the regulatory burden, so he welcomes more harmonization among regulators.

Rising litigation
Like most industries, investment management is facing increased litigation and Goldring says AGF is going through a “disclosure review internally” to ensure the company is meeting its obligations as a publicly traded entity.

She adds that “In this wave of litigation, it is important to have a reliable source of documents and have good management of them. That’s a very challenging role for people to manage in this day and age. I am very keen on getting ahead of the curve on document management and e-mail retention policies, which are not really sexy at all, but they are critical to a successful risk-management business practice.”

The fiduciary challenge
Guest says if there is one thing that general counsel from other industries can learn from the investment management business, it’s the compliance culture. Most of the in-house counsel running legal departments have more compliance people reporting to them than lawyers.

“I think one of the things about this industry that people can learn from is there is a very strong fiduciary culture in investment management. We work among the most complex of regulatory environments. It’s a very highly technical legal environment. A lot of our work covers how we can ensure that we are acting in the best interest of our clients.”

Goldring says that in order to succeed in such an environment, lawyers have to be very business focused. “I think it’s important to understand how the regulatory framework interacts with the business. The in-house role is to really apply that knowledge and do it in a way that protects the business and doesn’t derail it or slow it down.”

Cardinale adds, “We’re running a business here and you always have to take a practical business-minded approach to the problems and come up with solutions and not just quote the CEO the provision of the legislation. The lawyers who have succeeded the most and moved up the ranks the quickest are the ones who understand the business and are able to sit in a room with legal knowledge in the background and be able to advise the business on solutions and answers to the problems.”

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