The Canadian Securities Administrators (CSA) issued CSA Staff Notice 33-319 (the Notice) to provide an update on the “Best Interest Standard” and “Targeted Reforms” proposed last year in an important CSA Consultation Paper that we discussed in a previous post.
Most regulators have decided to abandon the Best Interest Standard which would have introduced a “client best interest” standard against which all registrant-client obligations would be interpreted.
The CSA will still proceed with a refined set of Targeted Reforms. Even in the absence of a Best Interest Standard in most jurisdictions, the Targeted Reforms would nonetheless significantly increase the obligations of all advisers, dealers and representatives, including IIROC and MFDA members (Registrants), including in the following areas:
- Conflicts of interest
- Know you client procedures (KYC)
- Know your product procedures (KYP)
- Relationship disclosure
- Business titles
- Use of professional designations
- Role of the ultimate designated person and chief compliance officer
- Statutory fiduciary duty when client grants Registrant discretionary authority.
The Notice provides the following key updates:
1. Best Interest Standard. Only Ontario and New Brunswick will continue to consider the Best Interest Standard. The other provinces will either no longer consider it at all (in the case of B.C., Alberta, Manitoba and Québec) or have concerns with its current form and will wait for Ontario and New Brunswick to complete their work before they decide whether to reconsider a Best Interest Standard (in the case of Nova Scotia and Saskatchewan).
2. Targeted Reforms. All CSA members have agreed to proceed with the Targeted Reforms, but will reconsider and revise some of the individual Targeted Reforms which were viewed by some stakeholders as impractical or overly prescriptive, including the following Targeted Reforms:
- the requirement to collect certain tax information as part of the KYC process
- the requirement to conduct a market investigation of a reasonable universe of products as part of the KYP process
- differentiation of KYP requirements based on whether a firm offers (i) only proprietary products or (ii) proprietary and non-proprietary products, or non-proprietary only
- scaling back the scope of the proposed requirement for Registrants to have understood and considered various aspects of every single product on their firm’s product list
- the default requirement to conduct a suitability assessment at least every 12 months absent a triggering event
- the requirement to perform a suitability assessment if there is a significant market event affecting the capital markets the client is exposed to
- wording changes will be considered to the proposal that a registrant must ensure a recommendation to a client is “most likely to achieve a client’s investment needs and objectives, given the client’s financial circumstances and risk profile, based on a review of the structure, features, product strategy, costs and risks of the products on the firm’s product shelf”
- proposed proficiency reforms may require a long-term project that will be advanced through a separate CSA project.
The Notice acknowledges concerns about a “one-size-fits-all” approach and the CSA will incorporate the concept of scalability going forward, where appropriate. For example, some of the proposals related to suitability or KYC might be made scalable based on the nature of the relationship between the client and the registrant.
3. Timing of Next Steps. Detailed notices will be published with draft proposed rule amendments and draft guidance. The work on Targeted Reforms will be prioritized over the 2017-2018 fiscal year. Ontario and New Brunswick will continue to undertake further work on the Best Interest Standard on a parallel path.
It is unclear how Ontario and New Brunswick’s support for the Best Interest Standard will be reflected once the Cooperative Capital Markets Regulatory System (CCMRS) becomes operational, possibly next year. British Columbia and Saskatchewan are also CCMRS members. The CCMRS draft uniform Capital Markets Act published for comment in 2015 revised the standard for Registrants to deal fairly, honestly and in good faith with clients to include “other such standards as may be prescribed”, apparently as a regulation-making placeholder in respect of the possible future introduction of a Best Interest Standard.
4. Coordination with Embedded Commissions Project. Given their interrelatedness, the CSA will continue to coordinate policy considerations on the Best Interest Standard and the Targeted Reforms initiative with the separate CSA project considering the discontinuation of certain investment fund embedded commissions.