IIROC Publishes for Comment Proposed Client Focused Reform Amendments

The Investment Industry Regulatory Organization of Canada (IIROC) has published for comment proposed amendments[1] to its rules in order to make IIROC requirements consistent with the Client Focused Reforms (CFRs) adopted by the Canadian Securities Administrators (CSA) by way of amendment to NI 31-103. The CSA CFRs focus on addressing material conflicts of interest in the best interest of the client, putting the client’s interests first when making a suitability determination, and providing clarity for clients about what they should expect from their investment advisors. Our previous blog post describes the CFRs made by the CSA.

IIROC CFRs Public Comment Amendments

The IIROC CFR Public Comment Amendments fall into three key areas:

  1. Account Appropriateness Amendments involve changes to IIROC’s account appropriateness requirement for greater consistency with the Suitability Amendments (discussed below) and the CSA’s CFRs. These amendments will require Dealers to put a potential client’s interest first prior to account opening and determine on a reasonable basis whether:
    • it is appropriate for the person to become a client, and
    • the products, services, and account relationships envisaged for the prospective client are appropriate.
      • IIROC is proposing to exempt direct electronic access accounts (DEA accounts) and order execution only accounts (OEO accounts) from this requirement.
  1. Suitability Amendments would require putting a client’s interests first when making a suitability determination.
    • Before Dealers recommend or take any investment action(s) for their retail clients, they will be required to determine on a reasonable basis that the action is suitable for the retail client and puts the retail client’s interest first based on an expanded list of factors, including:
      • the Dealer’s assessment and registered individual’s understanding of the security
      • the impact of the action on the client’s account, including its concentration and liquidity
      • the actual and potential impact of costs on the client’s returns
      • a reasonable range of alternatives available through the Dealer at the time the determination is made.
    • The Suitability Amendments would also enhance the list of trigger events that require Dealers and registered individuals to review a retail client’s account to determine compliance with suitability requirements. IIROC does not expect this amendment to have a significant impact on Dealer practices since the proposed triggers are fairly similar to IIROC’s existing
    • IIROC is also proposing that Dealers track the account appropriateness requirement after an account has been opened for retail and institutional clients.
    • In addition to the steps they currently take when addressing unsuitable retail client-directed trades, Dealers would also be required to recommend suitable alternatives to such clients.
  2. Exemptions would be available for certain account types, client types and service arrangements.
    • KYC Exemptions: Dealers with OEO accounts, DEA accounts, or institutional clients will be exempt from KYC provisions requiring Dealers to collect specific KYC information and periodically review it.
    • Account Appropriateness and Account Suitability Exemptions: Due to their sophistication and access to resources, Dealers, regulated entities, exempt market dealers, portfolio managers, banks, insurance companies, and trust companies would be exempt from the account appropriateness requirements prior to and after an account opening.
    • Product Due Diligence Exemptions: Dealers who offer OEO accounts will still be required to conduct product diligence on all products they make available on their product shelf.
    • KYP Exemptions: OEO and DEA accounts will be exempt from the know your product (KYP) requirement on the basis that these accounts do not provide clients with advice.
    • Portfolio Suitability Exemptions: OEO and DEA accounts will continue to receive an exemption from the suitability requirements discussed above.
    • Service Provider Dealers would be entitled to an exemption if they perform services for registrants which themselves would have KYC, KYP or suitability obligations.

IIROC CFRs Housekeeping Amendments

IIROC will also make Housekeeping Amendments[2] to its rules. The Housekeeping Amendments are necessary to conform IIROC requirements with the corresponding CFRs provisions that Dealers are subject to under NI 31-103. The Housekeeping Amendments mirror the equivalent CSA rules that were previously approved and do not add further material requirements for Dealers.

Proposed Product Due Diligence and Know-Your-Product Guidance

IIROC is also seeking comment on proposed Product Due Diligence and Know-Your-Product Guidance (the Guidance). The Guidance sets out how Dealers can tailor their processes to meet their product due diligence and KYP obligations. The Guidance applies to all investment products offered by Dealers, not only novel or complex securities.

Implementation

The CSA announced that the implementation of its conflicts of interest CFRs will be delayed to June 30, 2021 and the rest of the CFRs will take effect on December 31, 2021.

IIROC will follow a similar timeline. Its Housekeeping Amendments relating to conflicts of interest will be effective on June 30, 2021. The remaining Housekeeping Amendments, Public Comment Amendments and Guidance will be effective on December 31, 2021.

Dealers should now be amending their policies and procedures in anticipation of these reforms and planning for internal training for applicable staff.

We invite you to contact a member of our Securities Regulation and Investment Products Group should you have any questions regarding how the Client Focused Reforms may affect your business.

 

[1] Notice 20-0238 Client Focused Reforms – Proposed Rule Amendments for Public Comment.

[2] Refer to Notice 20-0239 Client Focused Reforms – Housekeeping Rule Changes  for additional information.

IIROC client focused reforms CSA NI 31-103

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