Since November 2011, the Canadian Securities Regulators (CSA) have carried on a review of relationship disclosure information (RDI) practices of registered portfolio managers (PM) and exempt market dealers (EMD) with their clients.
On July 18, 2013, the CSA published Staff Notice 31-334 providing its findings as well as guidance for best RDI practices. The CSA will apply this guidance in future assessments of registered firms. This guidance is also intended to be used by the firms themselves as a self-assessment tool of their own RDI practices.
In reviewing these RDI practices, the CSA focussed on assessing compliance with the RDI requirements of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), on acquiring a better understanding of current RDI practices and on developing a harmonized compliance approach across Canada.
The concerns of the CSA underlying this review were essentially based on the reliance of clients on insufficient disclosure by their registered firms resulting in a misunderstanding of the type of services and products offered, of the risks they carry and of the associated fees, costs and related conflicts of interest.
The main deficiencies identified comprised:
- incomplete disclosure of the nature of the account managed for the client and the capacity in which the firm managed it;
- a lack of specific information as to the securities used in the investment mandate;
- when provided in writing, lack of information on the specific risks associated with the investment strategy used for the client, and when given verbally, a lack of evidence in writing of the disclosure provided;
- reliance by the registered firms on disclosure by third parties to clients of the risks of the use of borrowed money;
- a lack of adequate disclosure to clients of existing or potential conflicts of interest in managing their accounts;
- providing general information only on applicable fees, but none about fees directly charged to the clients’ accounts;
- a lack of disclosure on compensation received for services and products provided regarding clients’ accounts;
- while disclosing the frequency of account reporting, firms provided no disclosure of the content of this reporting;
- no specific disclosure to clients about the availability of free independent dispute resolution services;
- no specific disclosure of the registered firm’s obligation to assess the suitability of a purchase or sale of a security for a client; and
- when preparing a KYC form for a client, failure to adequately explain the terms used in the KYC form and to mention that the information in the form will be used to assess a product’s suitability.
Among comments made in the notice, the CSA stressed that inadequate notes were taken in writing by the registered firms to record disclosure when given verbally to clients.
Also, the CSA raised certain misunderstandings of registered firms regarding certain obligations in NI 31-103, such as:
- an EMD’s obligation to provide RDI to clients even though their relationship is only transactional;
- a registered firm’s obligation to describe the risks associated with using borrowed money to invest in securities, even when the firm does not purchase on margin or recommend leverage to their clients or deal with clients using leverage;
- some registered firms did not consider that their relationship with clients could raise potential conflicts of interest when they actually did, or some did identify potential conflicts in internal documents, but failed to disclose them to clients;
- even though registered firms may be allowed contractually to raise the fees they charge without notice, they are nevertheless required by NI 31-103 to disclose a significant increase in charges to clients on a timely basis; and
- certain EMDs did not believe they had to provide quarterly account reporting on their clients’ accounts as their services were transactional only.
The foregoing is only a summary of some of the findings of the CSA. Please click on the following links to access the full CSA Staff Notice 31-334 CSA-Review of Client Relationship Disclosure Practices:
and for NI 31-103 with its latest proposed amendments:
Because these findings and guidance will serve as benchmarks for the CSA in their future examinations of PMs and EMDs, you may wish to initiate a close review of your firm’s current RDI practices, as well as its policies and procedures manual.
Particularly in view of the changes to NI 31-103’s regulatory regime that come gradually into effect over the next three years starting July 15, 2013, this internal review becomes essential. Our Investment Products and Wealth Management team at Fasken Martineau is well equipped to assist you in this respect and will be pleased to do so.