On October 3, 2019, the Canadian Securities Administrators (CSA) published its notice of amendments to National Instrument 31–103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and its Companion Policy, known as the “Client Focused Reform”.
The CSA says the final package balances improved investor protection against not overburdening the industry with compliance obligations. The animating principle is still that clients’ interests come ahead of the interests of firms and individuals that are registered to give investment advice and trade in securities”.
Changes to the Proposals
The most significant changes made are:
- the qualification of the requirement to resolve conflicts of interest in the best interest of the firm’s clients by a materiality standard and the addition of guidance to explain when a conflict of interest is “material”. Notably, whether the conflict may be reasonably expected to affect the decisions of the client in the circumstances, and / or the recommendations or decisions of the registrant in the circumstances, should be taken into account when determining whether a conflict is material;
- the recommendation to implement a Canada-wide statutory fiduciary duty when a client grants discretionary authority has been deferred for the moment;
- the removal of prescriptive provisions regarding the know-your-product (KYP) process and suitability assessment factors, which are replaced by guidance included in the companion policy, allowing firms to adopt a tailored approach depending on the nature and complexity of the securities involved and scale the Client-Focused Reforms to their particular operations;
- the removal of additional disclosure obligations to prospective investors such as disclosure of fee schedules;
- the reinstatement and expansion of the existing KYC exemption for permitted clients and the ability for non-individual permitted clients to waive suitability determinations for managed accounts; and
- the removal of prescriptive restrictions on referral arrangements, including proposed restrictions on referral fees. The existing requirements relating to referral arrangements remain, but will now be subject to an enhanced standard for conflicts of interests.
The Client-Focused Reform also now allows firms to scale the reforms to their specific business size and model.
Highlights of the Client-Focused Reform To advance the “client first” philosophy, the new rules:
- explicitly require firms to resolve material conflicts of interest in the best interest of their clients;
- explicitly require clients’ interests to be put first when determining suitability of an investment;
- introduce a new section (s. 13.18) that creates a prohibition against misleading communication regarding a registrant’s proficiency, experience, qualifications or category of registration, a person’s relationship, or potential relationship, with the registrant, and the products or services provided, or to be provided by the registrant;
- a registered individual who interacts with clients must not use any title, designation, award, or recognition that is based partly or entirely on that registrant’s sales activity or revenue generation, or a corporate officer title unless that registrant was actually appointed to that corporate office pursuant to applicable corporate law; and
- codifies certain best practices when it comes to KYC and KYP obligations, as well as client disclosure.
Self-regulatory organizations (SRO) are expected to propose their own reforms to adhere to the Client-Focused Reform. If that happens, the regulators will exempt SRO members from the CSA’s rules. The Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association both have announced that they will revise their rules to “ensure alignment” with the CSA’s Client-Focused Reform, “without creating unnecessary duplication or regulatory burdens.”
- Provided all ministerial approvals are obtained, the Client Focused Reform will come into force on December 31, 2019, with a phased transition period:
- refrms relating to conflicts of interest and associated relationship disclosure information provisions: December 31, 2020, and
- remaining changes taking effect n December 31, 2021.
- The SROs plan to amend their rules to meet the CSA’s phased transition period.
The CSA further specified that there are no grandfathering provisions and announced the establishment of an implementation committee to help guide the industry in implementing the changes. Further Reforms
The CSA also noted that they intend to develop and propose for comment additional reforms relating to some of the proposals discussed in the consultations leading up to the Client-Focused Reform, as separate, longer-term projects, such as: reviewing proficiency standards, imposing a statutory fiduciary duty when a client grants discretionary authority in those jurisdictions which do not currently have this provision, clarifying the role of ultimate designated persons and chief compliance officers, reviewing titles and designations, reviewing referral arrangements, and revisiting the provision, originally included in the Proposals, relating to publicly available information.
In addition, it is not yet clear how the reforms dove-tail with some pre-existing registrant obligations such as the duty of investment fund managers to manage conflicts of interest in the best interest of the client as contemplated by section 116 of the Securities Act (Ontario) and section 159.3 of the Securities Act (Québec) and an analogous duty for portfolio managers with discretion under the Civil Code of Québec.