Investment dealers frequently include in retail client account agreements clauses that seek to limit their liability to clients. In a recent Guidance Note, the Investment Industry Regulatory Organization of Canada (IIROC) identifies the following types of clauses as inconsistent with a dealer’s regulatory obligations to retail clients:
- Clauses that seek to relieve dealers from losses resulting from their recommendations which IIROC construes as an attempt to relieve dealers from their regulatory obligations, such as suitability
Example from Guidance Note: Customer agrees not to hold dealer responsible for losses incurred through following dealer’s trading recommendations or suggestions or those of its employees, agents or representatives.
- Clauses which purport to completely waive a dealer’s liability including from negligence
Example from Guidance Note: We shall not be liable to you or any third party for loss or revenue or profits, failure to realize expected profits or savings, missed investment opportunities or other items of economic loss, of any nature whatsoever, or any special, indirect, consequential, exemplary, or incidental damages arising out of the services, however caused, and whether arising under contract, tort (including negligence) or any other theories of liability, even if we have been advised of the possibility of such damages.
- Clauses which arbitrarily limit damages such as limiting damages to the fees paid by the client during a given reference period
Example from Guidance Note: Dealer’s total liability under the terms of this agreement will not exceed an amount equal to the fees paid by the customer to the broker for the one calendar month in which such damages first occurred.
IIROC notes that the following types of clauses are also inappropriate for retail client agreements:
- clauses purporting to limit liability for technology malfunctions within a dealer’s control
- clauses unreasonably limiting liability for malfunctioning automated or outsourced processes
- clauses that attempt to shift the dealer’s responsibilities to its clients
- clauses that purport to protect the dealer and the registered representative, portfolio manager or associate portfolio manager at the expense of the client.
IIROC acknowledges that some client losses can be attributable to events solely beyond the control of the dealer (e.g., power outages, careless use of systems by clients, etc. ) which should not be the responsibility of the dealer. However, when the loss is a consequence of an event within the dealer’s control such as the functionality of trading systems owned or outsourced by the dealer, it is not appropriate to disclaim responsibility for losses caused by such malfunction.
IIROC urges dealers to immediately conduct a self-assessment of their retail client account agreements to identify and, if necessary, revise any inappropriate limitation of liability clauses.
IIROC warns that in upcoming Business Conduct Compliance examinations, it may take a range of actions in respect of inappropriate clauses identified, which may include deficiency findings or, in egregious cases, enforcement referrals.
The Guidance targets retail accounts but does not specifically exclude institutional client agreements. IIROC reminds dealers that agreements with institutional clients must still be consistent with dealer regulatory obligations.
With the Guidance Note, IIROC is using its interpretation of a rule that governs general standards of conduct to, in effect, limit the ability of dealers to contract with their clients. Some observers may regard the imposition of such substantive limitations on the ability to contract as sufficiently material to have been effected by the adoption of a new specific rule after a comment period, rather than by way of interpretive guidance with respect to an existing broadly cast rule.