The Canadian Securities Administrators (CSA) have published Consultation Paper 33-403: The Standard of Conduct for Advisers and Dealers: Exploring the Appropriateness of Introducing a Statutory Best Interest Duty When Advice is Provided to Retail Clients (the Paper), a discussion paper on the potential benefits and drawbacks of imposing a statutory best interest standard on advisers and dealers that provide investment advice to retail investors. The CSA emphasize that the Paper is the CSA’s first step in soliciting comments on this issue and that they have made no decision on the issue to date.

The Paper is out for a 120-day comment period, with comments being due on or before February 22, 2013.

What is a Statutory “Best Interest” Standard?

Under the current statutory regime in Canada, registered advisers and dealers are required to deal fairly, honestly and in good faith in all dealings with their clients, without there also being a general fiduciary obligation to act “in the best interests” of the client. The Paper proposes, for the purposes of discussion, the following formulation of a statutory standard that would add this element:

“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,

  1. act in the best interests of the retail client, and
  2. exercise the degree of care, diligence and skill that a reasonably prudent person or company would exercise in the circumstances.”

The best interests or fiduciary standard creates an obligation on the person subject to that standard that goes beyond the “fair, honest and in good faith” standards. In particular, the CSA identify five aspects of the fiduciary duty to which a dealer or adviser would be subject, consisting of:

  • the necessity of making client interests paramount over those of the dealer or adviser;
  • avoiding conflicts of interest;
  • not “exploiting” the clients;
  • providing clients with full disclosure of relevant facts;


  • performing services reasonably prudently.

For purposes of this initial discussion and the specific questions that the CSA set out in the Paper, the CSA assume that the standard articulated above would include the following terms:

  • the duty would only apply with respect to ‘retail clients’, meaning individuals with net financial assets of C$5-million or less and companies that have net assets of less than C$25-million;


  • CSA seek public comment on statutory best interest standard for advisers and dealers that provide investment advice to retail investors
  • Best interest standard would place a greater duty on advisers and dealers in their dealings with retail investors than currently exists in Canada
  • The United States, United Kingdom, Australia and the European Union have all either recently implemented or are proposing to implement a qualified statutory best interest standard
  • Comments are due on or before February 22, 2013
  • an adviser or dealer that has advised a client that he/she disagrees with the client’s investment decision would have no further obligations to dissuade the client or to refuse to facilitate an order;
  • the duty would only apply to advice from an adviser or dealer to a retail investor with respect to investing in securities or derivatives and, for example, would not apply to discount brokers who act as mere order takers;
  • the duty would be an ongoing duty which would terminate only upon the termination of the dealer/adviser relationship;
  • the best interest standard could not be waived by way of an agreement between the client and his/her adviser or dealer;
  • the best interest standard would be enforceable at common law by a retail client as a private law right of action;
  • a non-retail client would still be entitled to pursue a private law right of action based on the common law and the Civil Code of Québec; and
  • the existing suitability requirement would continue to apply to advisers and dealers.

What are the Current Standards?

As mentioned above, the “best interests” requirement does not generally apply to the obligations of dealers and advisers dealing with their clients. No court or regulatory decision has concluded that the current requirement creates, or is equivalent to, a fiduciary duty and similarly many commentators believe that it falls short of a best interest standard. Nevertheless, four provinces – Alberta, Manitoba, Newfoundland and Labrador, and New Brunswick – have enacted a statutory “best interests” requirement that applies to advisers or dealers but only if they have discretionary authority over their clients’ investments, and a fiduciary duty exists in Quebec. A suitability obligation also exists for advisers and dealers whereby they must take reasonable steps to ensure that the purchase or sale of a security is ‘suitable’ for their client. In addition, a common law fiduciary duty may also exist in Canada between an adviser or dealer and his/her client depending on the nature of their relationship.

As a result, there is currently no single standard that applies to advisers and dealers and, in the CSA’s view, this has led to some confusion and a disconnect between clients’ expectations that dealers and advisers must act in their best interests at all times.

Key Investor Protection Concerns

Based on the CSA’s review of the current standard of conduct applicable to advisers and dealers in Canada, the CSA identified five key concerns with the current regime, including:

  • the underlying principled foundation for the standard of conduct owed to clients which, as with other business transactions or interactions, relies on principles of “buyer beware”, supported by prescriptive prohibitions and key disclosure requirements, is not sufficient to protect investors. According to the CSA, advice about investing in securities is arguably not just like any other business transaction due to, among other things, the existence of investor trust in and reliance on the advice of advisers/dealers, financial asymmetry between advisers/dealers and their clients and the increasing complexity of financial products;
  • the current standard of conduct which relies on more detailed disclosure to investors may be less effective at narrowing the knowledge and information gap between dealers/advisers than initially intended;
  • the gap between clients’ expectations that dealers/ advisers must always act in their best interests and the actual standard applicable to advisers/dealers;
  • the suitability standard may result in advisers/dealers recommending suitable investments which are not necessarily investments that are in the client’s best interests; and
  • the application of the current principle-based conflicts of interest rules might be less effective than intended and might not address certain concerns of the CSA.

The Paper invites comments regarding these five concerns including specific questions regarding whether stakeholders agree or disagree with these key investor protection concerns, if there are any other concerns that have not been identified and if imposing a statutory best interest standard on advisers and dealers is the most effective way of addressing these concerns.

The five concerns set out above appear to be critical in this discussion as these seem to be the main drivers behind the CSA’s assessment of, and will likely be key factors in, any reform that the CSA propose on this issue. Therefore, stakeholders who are considering providing comments to the CSA, specifically if such comments propose an alternative to the standard set out in the Paper, should consider these concerns and address how an alternative better addresses these concerns.

What are the Concerns about a Fiduciary Standard?

The CSA have recognized in the Paper the complexities and implications associated with a best interest standard. The complexities include the difficulties of defining the nature of the duty, the costs and effects on existing business of the imposition of such a standard and the extent to which such a standard should be applied. In connection with these and other issues, the CSA have set out a lengthy list of questions on which they are seeking comments. The following is a sample of those questions:

  • What criteria should be used to identify that an investment is in a client’s best interest?
  • Should breaches of a best interest standard give rise to civil liability at common law?
  • Can the concerns identified by the CSA be adequately addressed by increased enforcement or additional guidelines other than by way of a statutory best interest standard?
  • Would the implementation of the statutory best interest standard increase ongoing costs for advisers and dealers in Canada?
  • Would the statutory best interest standard have a negative, positive or neutral impact on retail clients including choice, product access, and affordability of advisory services?
  • How should a statutory best interest standard apply to mutual funds dealers, exempt market dealers and scholarship plan dealers?
  • Are there any adviser or dealer business models that could not continue if the best interest standard was adopted?
  • Are there any specific qualifications required to the best interest standard described in the Paper?
  • Would a statutory best interest standard affect capital raising?
  • Would the statutory best interest duty affect the current compensation practices of advisers and dealers and should the duty expressly address adviser and dealer compensation?
  • Are there any advisory relationships between an adviser or dealer and a retail client where a fiduciary duty would not be appropriate or would require the introduction of new rules or amendments or repeal of existing rules?
  • Should a best interest standard apply only to advisers and dealers when dealing with ‘retail clients’ and, if so, is the proposed definition of ‘retail client’ appropriate?
  • Should advisers and dealers be permitted to modify or negate the best interests standard by contract with their clients?

Recent International Developments

The CSA also point to the recent developments on this topic in the United States, United Kingdom, Australia and the European Union. The Paper points out that all four jurisdictions have either implemented or are proposing to implement a qualified statutory best interest standard. The Paper states that international developments should not determine Canada’s policy direction in this matter but also points to these developments as supporting the CSA’s conclusion that a public review of the Canadian framework on this topic is required. Nevertheless, it is likely that these developments will have some influence on the CSA’s view on this topic and may encourage the CSA to adopt a similar standard in order to harmonize Canadian regulations with what appear to be developing international standards.