The long-anticipated changes to the registration regime under Canada’s securities regulation have now been finalized with the release of National Instrument 31-103 Registration Requirements and Exemptions on July 17, 2009. The new registration regime will become effective on September 28, 2009 (subject to government approvals) and anyone applying for registration in any category on or after that date will need to comply with the new requirements. Industry participants already registered on September 28, 2009 will be expected to comply with the new regime, but will be given additional time to achieve compliance with some of the new requirements. Our July 2009 Investment Management Advisory entitled Canadian Securities Regulators Release Final Registration Rule [available here] outlines the scope of National Instrument 31-103, as well as provides an overview of the key changes (from the last published version) made by the Canadian securities regulators (CSA) in finalizing the various instruments.
Firms registered as investment dealers that are members of the Investment Industry Regulatory Organization of Canada (IIROC) and their representatives (Approved Persons) will not be as affected as other registrants by National Instrument 31-103, given the scope of regulation by IIROC. IIROC members have been exempted from some of the rules set out in National Instrument 31-103, in recognition that IIROC regulates the area and IIROC members must comply with IIROC rules. In other cases, even where National Instrument 31-103 applies to IIROC members, the rules are more broadly written and largely consistent with IIROC regulation, so that National Instrument 31-103 does not impose any greater requirements than what is currently required under IIROC regulation.
Amendments to IIROC Rules
IIROC published amendments to its rules on July 17, 2009 that are designed to bring those rules into conformity with National Instrument 31-103. The proposed IIROC rule amendments have not yet been adopted, and are subject to approval by the applicable securities regulatory authorities. If approved, the rule amendments are proposed to be effective on the same date that National Instrument 31-103 comes into force, being September 28, 2009.
The IIROC rule amendments are designed to
- Simplify the categories of Approved Persons. IIROC proposes to reduce the current 46 existing approval categories to 11 new approval categories, which will focus solely on functions. The various supervisor categories also will be merged into a new “supervisor” category (those approved to supervise the business activities of other approved persons).
- Have only those individiuals who exercise the “mind and management” of the IIROC member require approval (i.e. no longer basing required approvals on merely holding an officer position)
- Move toward a principles-based approach for registration-related requirements to allow IIROC members greater flexibility in developing compliance and supervision structures and processes that are applicable to their business
- Harmonize the IIROC rules with those of the CSA and Mutual Fund Dealers Association of Canada as much as possible.
IIROC members also will be required to comply with new IIROC rules proposed to implement the Client Relationship Model (CRM), which is a related parallel initiative of the Canadian securities regulators, including the self-regulatory organizations. The IIROC proposals regarding CRM include
- All IIROC members will have to provide their retail clients with certain prescribed information (relationship disclosure) regarding the relationship they are entering into with a client
- The relationship disclosure to be provided for order-execution only and for managed accounts is less extensive. Managed accounts must be monitored and supervised according to the specific standards imposed under IIROC rules and the relationship disclosure must include a statement that ongoing suitability reviews are provided as part of the managed account services.
IIROC does not propose to mandate a prescribed format for the relationship disclosure, however it must be provided to the client in writing at the time of account opening, written in plain language and included under a heading entitled “Relationship Disclosure”.
IIROC is also proposing to supplement its current rules relating to the management of conflicts of interest by
- Requiring that IIROC members develop and maintain policies and procedures to identify, avoid, disclose, and address all real and potential conflicts and
- Adopting a general rule to require that where conflict situations cannot be avoided, they will be disclosed and addressed in manner that is consistent with the best interests of the client (disclosure should occur at the account opening stage for a new client, as conflicts occur for existing clients, or prior to entering into a transaction with an existing client).
In addition to IIROC’s current suitability requirements for trades accepted and recommendations made on retail client accounts, it is proposed that IIROC members will also have to perform an account suitability review when the following “trigger” events occur
- a trade is accepted
- a recommendation is made
- securities are transferred or deposited into the account
- there is a change of registered representative, investment representative, or portfolio manager responsible for the account or
- there is a material change to the know-your-client information for the account.
The suitability review is intended by IIROC to occur within one day after the IIROC member or its representative becomes aware that one of the trigger events has occurred, and in any case should be completed prior to, or at the time of, any subsequent trade on the account.
IIROC is also considering requiring specified disclosures regarding account performance reporting, including security position cost disclosure, account activity disclosure and account percentage return disclosure. Account percentage return disclosure would not be required to be provided to clients, however, clients must be told at account opening whether they will be provided with this disclosure.
Recent IIROC Notices re Registration
IIROC notice 09-0192 released on June 26, 2009 sets out IIROC registration staff’s current approach when conducting suitability reviews for individuals seeking IIROC approval and/or registration and when evaluating termination, regulatory, criminal, civil or financial disclosures filed on NRD. This notice also provides guidance on “best hiring practices” that IIROC members are encouraged to adopt.
Impact of National Instrument 31-103
The following table focuses on certain provisions of National Instrument 31-103 and explains how they apply to registered investment dealers that are members of IIROC and their representatives.