In a manner often reserved for best-selling novels and blockbuster movies, the Canadian Securities Administrators (CSA) recently issued advance notice of the upcoming publication of CSA Consultation Paper 33-404 – Proposals to Enhance the Obligations of Advisers, Dealers, and Representatives Toward Their Clients (Consultation Paper) expected in late April 2016. CSA Staff Notice 33-317 Next Steps in the CSA’s Work to Enhance the Obligations of Advisers, Dealers and Representatives Toward Their Clients states that regulatory action is required: the CSA will be seeking comment on specific proposals to enhance the obligations of registrants towards their clients. The comment period will run for a period of 120 days, extending through the summer holiday season.
This marks the reactivation of the comment process on the proposal for a statutory best interest standard that the CSA signalled in its December 17, 2013 status report following consultation on CSA Consultation Paper 33-403 (Prior Consultation Paper). In the Prior Consultation Paper, the CSA proposed for comment the standard that 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.
The CSA has concluded that imposing a statutory duty on an adviser or dealer to “act in the best interests” of clients constitutes imposing a fiduciary duty.
The context for the Consultation Paper includes the fact the U.S. debate on a uniform fiduciary duty for broker-dealers and investment advisers remains unsettled. Staff of the U.S. Securities and Exchange Commission (SEC) in 2011 recommended that the standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers should be to act in the best interest of the customer, but no regulatory action has been taken. Under a separate initiative, the U.S. Department of Labor this week released a finalized fiduciary rule defining who is a "fiduciary" of an employee benefit plan under theEmployee Retirement Income Security Act of 1974 (ERISA).
In Canada, as any investment fund manager (IFM) that has gotten into a serious dust up with the CSA will know, an IFM has the singular distinction of being subject to a statutory best interest standard or fiduciary duty. Every IFM must (i) exercise the powers and discharge the duties of their office honestly, in good faith and in the best interests of the investment fund, and (ii) exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances.
There is a clear overlap between the policy concerns that the best interest standard seeks to address and the recent CSA guidance on “captive dealers” in CSA Staff Notice 31-343. As the CSA and other regulators seek to achieve standards that are “business model neutral”, principles from the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) may inform the debate on the captive dealer business model. Section 913 of Dodd-Frank provides that the sale of only proprietary or other limited range of products by a broker or dealer shall not, in and of itself, be considered a violation of the applicable standard of care. In a study on the fiduciary duty of investment advisers and broker-dealers, SEC Staff conclude that Section 913 and other provisions of Dodd-Frank “also make clear that the implementation of the uniform fiduciary standard should preserve investor choice among such services and products and how to pay for these services and products” including by preserving the ability to offer only proprietary products to customers.