The Investment Industry Regulatory Organization of Canada (“IIROC”) is Canada’s self-regulatory organization that overseas investment dealers and equity market places. In its 2016 statement of key compliance priorities, IIROC sets out its ongoing efforts to strengthen the culture of compliance among dealer members (“DMs”).
As in prior years, IIROC’s focus will be on taking action against DMs that fail to address significant compliance findings and/or fail to demonstrate a commitment to the development of a strong compliance culture. In addition, IIROC will, through its new Consolidated Enforcement Rules (expected to come into force in 2016), have the ability to recommend and impose terms and conditions on the membership of DMs to ensure continuing compliance with IIROC’s requirements.
Set out below is a summary of where IIROC will focus its compliance review resources.
Financial and Operations Compliance
Cyber-security – IIROC will be adopting a multi-faceted approach to enhancing cyber-security at DMs including hosting webinars, conduct a cyber-security survey among DMs, advise DMs how their cyber-security practices compare to their peers, evaluate industry-wide practices for adequacy and advise DMs on ways to implement cyber-security systems to protect client data.
Outsourcing Arrangements – IIROC continues to remind DMs that outsourcing in no way diminishes a DM’s responsibility to comply with IIROC rules and securities laws and to supervise the service provider. IIROC will continue to monitor outsourcing arrangements closely. IIROC provided guidance on outsourcing risk management frameworks and industry best practices in a 2014 guidance note and in its 2014/15 compliance report.
Custodial Arrangements – IIROC continues to find DMs falling short of requirements for proper custody of client assets, particularly with respect to the holding of assets beyond the physical possession of the DM.
Debt Concentration Test and Capital Charge – IIROC will review compliance with recent amendments relating to client free credit cash usage and reporting on concentration of related debt issuer’s securities.
T + 2 Settlement – Global securities regulatory policy advocates the move to a shorter settlement cycle to reduce risk of failed transactions, improve liquidity, and decrease clearing capital requirements. IIROC will continue to monitor DMs to ensure readiness to move to a T+2 settlement cycle from the current T+3 settlement cycle in Q3 of 2017 in lock-step with the U.S. market.
Debt Transaction Reporting – IIROC will be monitoring DM compliance with the new Market Trade Reporting System that has been implemented to facilitate reporting fixed income trades to IIROC by DMs.
Expanded Scope of Trading Conduct Reviews – IIROC will continue to expand its trade conduct review exams to include not just trading in the equity markets but also in the fixed income and OTC markets.
Best Execution – IIROC plans to continue its focus on best execution practices of DMs including in respect of:
- access to lit and dark markets
- use of smart order routers
- best execution governance
- order handling practices
- treatment of marketplace fees and rebates
- compliance and supervision practices.
Electronic Trading – IIROC remains concerned that DM internal controls do not adequately minimize the risk of erroneous order entry that can result in disruptions of orderly trading and financial loss.
Third Party Access – IIROC has found that some DMs that provide direct market access to clients have inadequate routing arrangements.
Compliance with the Early Warning System – IIROC intends to more closely examine DMs to ensure that DMs that exercise control or direction of more than 10% of a class of voting or equity securities of a reporting issuer are complying with the early warning reporting requirements in securities legislation.
Business Conduct Compliance
KYC & Suitability – IIROC is enhancing its test procedures for reviewing the suitability of DM client positions. IIROC acknowledges that the wide variety of ways used by DMs to manage risk has made it challenging for IIROC to consistently assess whether DMs have adequately discharged the suitability requirement. This has been exacerbated by the near zero % interest rate environment that has existed for several years making traditionally conservative investments potentially less so.
Automated/Online Advice – IIROC will be developing testing procedures to assess the investor protection adequacy of the new online advisory (robo-adviser) business being conducted by some DMs.
Social Media – in an effort to keep up with the rapidly evolving social media platforms, IIROC proposes to clarify what social media content should receive pre-approval or post-use review.
Conflicts of Interest – IIROC business conduct survey revealed that, generally speaking, DMs have robust policies and systems to monitor conflicts of interest. In the coming year, IIROC will be assessing, via an industry sweep, compensation-related conflicts.
Limitation of Liability Clauses – IIROC has noted that some DMs use limitation of liability clauses that are too broad and violate IIROC Dealer Member Rules. IIROC will be having a closer look at how DMs use these clauses.
Late and Incomplete Filings on Disclosures Regarding Current Employment, Other Business Activities and Material Notices – IIROC notes that DMs frequently make untimely or incomplete submissions in respect of other business activities (OBA) of approved persons and other changes to Form 33-109F4 particularly with respect to criminal, civil or financial matters.
Exemption Requests from Proficiency Requirements – When making requests for relief from proficiency requirements, IIROC expects applicants to make detailed submissions as to how an individual’s experience represents equivalency to an educational requirement.
Late and Incomplete Filings – When making approval requests under section 5.4 of 6.3 of the IIROC dealer member rules, IIROC reminds DMs to allow for at least 30 days prior to closing of the transaction.