On May 21, 2017 the Canadian Securities Administrators (“CSA”) released CSA Staff Notice 33-319
Status Report on CSA Consultation Paper 33-404 Proposals to Enhance the Obligations of Advisers, Dealers, and Representatives Toward Their Clients (“Staff Notice”). The goal of the Staff Notice was to provide an update of the consultation process on the Consultation Paper.
The Consultation Paper sought comment on proposed regulatory action designed to enhance the obligations of registrants towards their clients. The Consultation Paper dealt covered two general areas of reform:
- a proposed set of regulatory amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and potential guidance (“Targeted Reforms”); and,
- a proposed regulatory best interest standard, accompanied by guidance, that would serve as an overarching standard and governing principle for all other client-related obligations (“Regulatory Best Interest Standard”).
Targeted Reforms:
The Consultation Paper proposed a set of Targeted Reforms to NI 31-103 and potential guidance that increases the obligations of all registrants, including advisers, dealers and representatives, IIROC and MFDA members. This includes the following areas:
- Conflicts of interest
- Know Your Client (KYC)
- Know Your Product (KYP)
- Suitability
- Relationship disclosure
- Proficiency
- Titles
- Designations
- Role of the Ultimate Designated Person (UDP) and the Chief Compliance Officer (CCO), and;
- Statutory fiduciary duty when client grants discretionary authority.
The CSA has considered the feedback received from stakeholders regarding the targeted reforms outlined in the Consultation Paper. It remains committed to addressing the issues identified in the client-registrant relationship and raising the bar on what is required of registrants. This includes better aligning the interests of registrants with the interests of their clients, improving outcomes for clients and clarifying the nature of the client-registrant relationship. To achieve these outcomes, the CSA will reconsider some of the proposed targeted reforms, including:
- the mandatory collection of basic tax information that was proposed as part of the KYC reforms;
- the element of the KYP proposal that would require the market investigation of a reasonable universe of products, and the differentiation of KYP requirements based on whether a firm is proprietary or mixed / non-proprietary in terms of its product offering;
- considering adding an element of reasonableness or other modification to the requirement for representatives to understand and consider the structure, product strategy, features, costs, and risks of each security on their firm’s product list; and,
- the default requirement to perform a suitability assessment at least once every 12 months absent a triggering event, and the requirement to perform a suitability assessment if there is a significant market event affecting capital markets to which the client is exposed.
The CSA will also reconsider certain wording expressed in some of the proposed targeted reforms in light of comments received, as well as looking for ways to address concerns about a one-size-fits-all approach by incorporating the concept of scalability, where appropriate. It will also consider changes to refine or eliminate a number of the number of elements of the deemed prescriptive by some stakeholders.
Regulatory Best Interest Standard:
The Consultation Paper also set out a Best Interest Standard which was designed to:
- act in the best interest of the client;
- avoid or control conflicts of interest in a manner that prioritizes the client’s best interests provide full, clear, meaningful and timely disclosure;
- interpret law and agreements with clients in a manner favourable to the client’s interest where reasonably conflicting interpretations arise; and
- act with care.
While the revised set of Targeted Reforms received unanimous support, only the securities regulators of Ontario (OSC) and New Brunswick (FCNB) supported the proposed regulatory best interest standard and will pursue it on a parallel path. The securities regulators of British Columbia (BCSC), Alberta (ASC), Manitoba (MSC) and Quebec (AMF) have rejected outright the proposed standards; those of Nova Scotia (NSSC) and Saskatchewan (FCAA) are taking a wait-and-see approach to see the results of Ontario and New Brunswick’s work.
Next Steps:
In response to the feedback, the CSA will prepare a revised set of Targeted Reforms to NI 31-103 as well as draft guidance over the 2017-2018 fiscal year. The CSA has identified certain reforms that should be given higher priority in the next phase of work. Proposed amendments in the following areas will be prioritized as they are fundamental to addressing the issues identified in the Consultation Paper:
- Conflicts of interest
- Suitability
- Know Your Client
- Know Your Product
- Relationship disclosure
- Titles and designations
The revised rule proposals will be published for comment, providing further opportunity for meaningful input from stakeholders. As noted, work on the Regulatory Best Interest Standards will continue by the regulators in those jurisdictions who have expressed an interest in it, albeit on a parallel track.
CSA Staff Notice 33-319 is available for download from the websites of participating jurisdictions.
For more information, please call Barbara Hendrickson at BAX Securities Law (416) 601 -1004.
This publication is not intended to constitute legal advice. No one should act on it or refrain from acting on it without consulting with a lawyer. BAX does not warrant or guarantee the accuracy or currency or completeness of the publication. No part of this publication may be reproduced without the prior written permission of BAX Securities Law.
