Introduction – A Matter of Investor Protection
The Canadian Securities Administrators (CSA) recently published Consultation Paper 33-403 (Paper) which invites comment on whether a statutory fiduciary duty should apply to registered advisers and dealers (collectively, Advisers). The comment period ends February 22, 2013.
Though undecided on the regulatory course ahead, the CSA appears to be amenable to the introduction of a qualified statutory fiduciary duty for Advisers.
The Current Standard of Conduct for Advisers and Dealers
Currently, the statutory standard of conduct under Canadian securities laws, with the exception of Québec, does not impose a fiduciary duty on Advisers. Rather, there is a duty on Advisers to act "fairly, honestly and in good faith" with their clients. The current standard also imposes certain suitability obligations ("know-your-client" rules) and various other principles-based and rules-based disclosure and conflict of interest avoidance requirements.
While a fiduciary duty for Advisers is not currently imposed by statute outside Québec, such a duty may nonetheless be found to arise from the Adviser-client relationship in question, taking into account the degree of vulnerability, trust and reliance of the client and the level of discretion enjoyed by the Adviser and the professional rules or codes of conduct to which the Adviser is subject.
A Look Ahead
After canvassing recent international regulatory developments in the area (Australia, the U.S., the U.K. and the E.U. have all implemented, or are considering implementing, a qualified statutory best interest standard), the Paper proposes for comment a qualified statutory fiduciary duty for Advisers providing investment advice to retail clients:
Every adviser and dealer (and each of their representatives) that provides advice to a retail client with respect to investing in, buying or selling securities or derivatives shall, when providing such advice,
- act in the best interests of the retail client, and
- exercise the degree of care, diligence and skill that a reasonably prudent person or company would exercise in the circumstances.
This standard, the Paper notes, would have the following features:
- a "retail client" would mean individuals with net financial assets of $5 million or less and companies with net assets of less than $25 million;
- a retail client would retain complete discretion whether to follow any advice received (an Adviser who disagrees with the investment decision of a retail client and who has so advised the client would have no further obligation to dissuade the client or to refuse to facilitate an order);
- the duty would apply only when an Adviser gives advice to a retail investor with respect to investing and would not apply to discount brokers who act only as order takers;
- the duty would be an ongoing duty in the case of Advisers other than exempt market dealers and scholarship plan dealers, and the duty would terminate only upon the termination of the client relationship;
- the best interest standard could not be waived by a retail client;
- a retail client would be entitled to enforce the best interest standard as a private law right of action; and
- the existing suitability requirement would continue to apply to Advisers and their representatives.
Under a new statutory best interest standard, clients could be entitled to full disclosure of any material information and Advisers might have to recommend investments that are in a client’s best interest, not only investments that are "suitable."
The introduction of a statutory best interest standard would also strengthen a client’s common law remedy for breach of fiduciary duty as it would eliminate the need to establish the fiduciary nature of the Adviser-client relationship on a case-by-case basis. The new statutory best interest standard is unlikely to include certain overly-prescriptive features of the common law fiduciary duty, such as the "no conflict" rule or the "no profit rule." Accordingly, under a new statutory best interest standard, conflicts of interest may continue to be dealt with as currently provided in securities laws, and the common law fiduciary principle that an Adviser cannot take advantage of an opportunity learned of as a fiduciary (even if the client cannot take advantage of that opportunity himself) would be of limited application.