IIROC Announces Dealer Sweep on Compensation-Related Conflicts
On April 6, IIROC published Notice 16-0068 - Managing Conflicts in the Best Interest of the Client (the 2016 IIROC Notice). IIROC intends to strengthen compliance by Dealer Members (DMs) with IIROC’s conflicts of interest rules, with a particular focus on the management of compensation-related conflicts.
Specifically, IIROC announced that it will take the following actions:
- Immediately enhance its compliance test procedures to more closely examine compensation grids, supervisory oversight of advisors recommending products with high commissions, and the monitoring of advisors approaching compensation thresholds;
- By June 2016, conduct a comprehensive survey to gather more detailed information on the oversight and monitoring of compensation-related conflicts by DMs to ensure that IIROC can accurately and completely assess the quality of the controls being used;
- Conduct follow-up targeted examinations of DMs where concerns arise from the results of the survey; and
- Use IIROC’s survey and examination results to inform the appropriate regulatory response. This may include rule amendments and/or additional guidance on conflicts of interest that clearly articulate IIROC’s best interest requirements.
The upcoming 2016 sweep is the latest in a series of measures by IIROC in recent years to assess and monitor conflict of interest compliance.
DM examinations in 2014 and targeted surveys in 2015 identified several areas for improvement. Specifically, IIROC examinations of DMs in 2014 found weaknesses in the oversight of the conflicts of interest management process used by some DMs and also showed deficiencies in:
- Policies and procedures concerning conflicts of interest;
- Documentation concerning the analysis of specific conflicts; and
- Disclosure of conflicts to clients.
Targeted surveys conducted in June 2015 of a sample of IIROC regulated firms regarding conflicts of interest identification and management found improved policies and procedures among DMs for dealing with basic conflicts, but concluded that most firms lacked a meaningful process to identify, address, monitor and supervise compensation-related conflicts. IIROC also determined that there was confusion at some firms regarding IIROC’s best interest standard in its conflicts of interest rule (DM Rule 42) and related guidance. Little documentation on compensation-related conflicts was found to support DM responses that the best interests of clients are always prioritized.
The 2016 IIROC Notice comes only a week after the CSA’s recent announcement of their intention to publish later this month CSA Consultation Paper 33-404 – Proposals to Enhance the Obligations of Advisers, Dealers and Representatives Toward Their Clients which will follow the CSA’s 2013 consultation on the appropriateness of introducing a statutory best interest standard when advice is provided to retail clients. IIROC agrees with the CSA that regulatory action is required to better align the interests of registrants to the interests of their clients.
best interest standard compensation compensation-related conflicts conflict of interest CSA Consultation Paper 33-404 – Proposals to Enhance the Obligations of Advisers Dealers and Representatives Toward Their Clients examination IIROC policies and procedures Rule 42 surevey