The recent decision of Marrone (Re) by the Capital Markets Tribunal (“CMT”), an independent division of the Ontario Securities Commission, provides an interesting example of the intersection between the professional conduct rules governing mutual fund dealers and estates law as it relates to conflicts of interest.
The facts in Marrone (Re) involved a financial advisor at IPC Investment Corporation (“IPC”) who was responsible for managing around $6 million in mutual fund investments for approximately 150 clients. Of these investments, $1.7 million belonged to “MU”, a long-time friend and client of the financial advisor. MU was an elderly widow dying of cancer. She had a grade school education and no financial experience to speak of. Ten days before her death, MU met with an estates lawyer to appoint the financial advisor as her power of attorney for property. Additionally, and much to the surprise of the client’s daughter, MU changed her Will to name the financial advisor as the alternate executor and sole beneficiary of her estate. The financial advisor was aware of the appointments and testamentary gift before MU’s death.
Though there were issues relating to MU’s testamentary capacity, the CMT was chiefly concerned with the financial advisor’s failure to report the appointments and testamentary gift to IPC. As a registered mutual fund dealer, the financial advisor was required to comply with the Rules set out by the Mutual Fund Dealers Association of Canada (“MFDA”). Among the MFDA Rules is the requirement that mutual fund dealers always report conflicts of interest, whether actual or potential (MFDA Rule 2.1.4). The purpose of this requirement is to allow conflicts to be addressed in an objective manner by the firm to which the mutual fund dealer belongs. In this way, the best interests of the client can be prioritized.
Clearly, the financial advisor in Marrone (Re) was in a conflict of interest in relation to MU. By accepting the appointment as MU’s power of attorney for property, the financial advisor had total control over MU’s assets—assets in which, under MU’s new Will, the financial advisor had a beneficial interest. By failing to report this conflict to IPC, the financial advisor violated MFDA Rules. In other words, the financial advisor had failed to act in the best interests of his client. He had instead acted unfairly, dishonestly, and in bad faith. Ultimately, the financial advisor was terminated by IPC.
The decision in Marrone (Re) serves as an important reminder to those of us who practise in Wills and Estates. Like mutual fund dealers, lawyers have a professional obligation to refrain from acting for clients where there is a substantial risk that a conflict of interest will arise (Rules of Professional Conduct, 3.4-1). The possibility of a conflict of interest may arise when drafting Wills for clients. For example, a client may instruct a lawyer to include a clause in their Will directing that the drafting lawyer be retained to administer the client’s estate. In such a scenario, before accepting the retainer, the drafting lawyer is expected to advise the estate trustee that the clause is non-binding and that they are free to retain other counsel (Rules of Professional Conduct, 3.4-38).
Estate planners must also keep in mind that a lawyer is prohibited from drafting a Will that gives the drafting lawyer or any of their associates a testamentary gift. The only exception to this prohibition is where the lawyer’s client is a family member, partner, or associate (Rules of Professional Conduct, 3.4-39).
The writer thanks Christopher Cook, student-at-law, for his sage assistance.