On May 11, 2017, the Canadian Securities Administrators (the CSA) published CSA Staff Notice 33-319 Status Report on CSA Consultation Paper 33-404 Proposals to Enhance the Obligations of Advisers, Dealers, and Representatives Toward Their Clients (the Notice). The Notice provides a high level summary of the CSA’s consultation process to date and outlines next steps in respect of a proposed set of regulatory amendments to National Instrument 31-103 (the targeted reforms). The targeted reforms relate to know your client (KYC) and know your product (KYP) requirements, the suitability obligation, conflicts of interest and the use by registrants of business titles and proficiency (among other things).
In addition to the targeted reforms, which are discussed below, the Notice also states that only Ontario and New Brunswick have decided to continue to work toward articulating a regulatory best interest standard. The provinces of Quebec, Alberta, Manitoba and British Columbia have decided not to continue to work on the best interest standard.
The CSA will be coordinating policy considerations on this initiative with other efforts currently underway relating to CSA Consultation Paper 81-408 Consultation on the Option of Discontinuing Embedded Commissions, which was published January 10, 2017 and is open for comment until June 9, 2017. It is expected that rule proposals will be published for comment later this year. Development of a regulatory best interest standard by Ontario and New Brunswick is to continue on a parallel path.
Highlights of the Targeted Reforms
The Notice reiterates the CSA’s intention to proceed with reforms in each of the targeted reform areas in order to “better align the interests of registrants with the interests of their clients, improving outcomes for clients and clarifying the nature of the client-registrant relationship.” However, it also acknowledges concerns expressed by industry in the consultation process that certain elements of the proposals were impractical, inflexible and overly prescriptive and could produce unintended negative consequences for clients.
In response to industry concerns, the Notice states that, in the next phase of the process, the CSA will consider changes that would refine or eliminate a number of the prescriptive elements in the targeted reforms. Specifically, the CSA plans to reconsider:
- the mandatory collection of basic tax information as part of the KYC reforms;
- the element of the KYP proposal that would require the market investigation of a “reasonable universe of products”;
- the differentiation of KYP requirements based on whether a firm has a proprietary or mixed/non-proprietary product offering;
- the requirement for representatives to understand and consider the structure, product strategy, features, costs and risks of each security on their firm’s product list (in this case, the CSA will consider modifying the requirement to understand and consider all securities in a firm’s product list);
- the default requirement to perform a suitability assessment at least once every 12 months absent a triggering event; and
- the requirement to perform a suitability assessment if there is a significant market event affecting capital markets to which the client is exposed.
The CSA will also reconsider some of the language in the proposed targeted reforms. One example is the proposal that would require a registrant to ensure that any 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”.
Finally, the CSA will also look for ways to address concerns about excessive prescriptiveness and “one-size-fits-all” inflexibility in the recommended approach by “incorporating a concept of scalability” that might, for example, make some requirements related to suitability or KYC depend on the relationship between the registrant and the client.
Proposed amendments in the following areas will be prioritized, as the CSA view them as “fundamental to addressing the harms identified in the Consultation Paper”: conflicts of interest, suitability, KYC, KYP, relationship disclosure and titles and designations.
The CSA plans to work with industry SROs as it continues to refine the proposals. We will follow these developments and provide updates as further information is released about the revised proposals.