In the recently published Client Relationship Model proposal (the "Proposal"), the Investment Industry Regulatory Organization of Canada ("IIROC") examined the relationship between Dealer Members and their clients, and proposed requirements to reinforce the broader obligation for Dealer Members to deal fairly, honestly and in good faith with their clients. To that end, the proposed rules and amendments establish requirements addressing account suitability assessment, account performance reporting, relationship disclosure and conflicts of interest management and disclosure.
The expanded obligations are most pronounced in the areas of account performance reporting and suitability assessment. Under the Proposal, Dealer Members must now undertake suitability assessments upon the occurrence of prescribed events and must provide all retail clients with comprehensive account performance reporting. Compliance by Dealer Members with the proposed requirements will ensure that Dealer Members meet the "know your client", relationship disclosure and conflict of interest obligations currently contained in National Instrument 31-103, Registration Requirements and Exemptions. Parallel amendments will be proposed by the Canadian Securities Administrators to amend National Instrument 31-103. This is the third version of the Proposal, and it will be open for comment until March 7, 2011.
Account Suitability Assessment for Retail Clients
Proposed amendments to Dealer Member Rule 1300 (Supervision of Accounts) expand the obligation for the Dealer Member to undertake suitability assessments beyond assessing the trade suitability at the time a trade recommendation is made. The amended provisions require that a review of the account suitability must be conducted within one day of the Dealer Member becoming aware of any of the following trigger events occurring:
- a transfer or deposit of securities into the account;
- a change in representative on the account; or
- a material change to the "know your client" information.
A suitability determination will not be required following a trigger event if the trade is executed on the instructions of another Dealer Member, portfolio manager, exempt market dealer, bank, trust company or insurer. For both retail and institutional clients, suitability determinations will not be required if the account is an order execution service account.
Implementation of the Proposal would result in institutional clients undergoing more frequent account suitability reviews. When accepting an order, the Dealer Member need not assess the institutional client’s investment objectives or risk tolerance, but a suitability review to assess current investment portfolio composition and risk level would be required. Institutional clients continue to have the option to waive suitability determination requirements by providing notice in writing to the Dealer Member.
Account Performance Reporting for Retail Clients
IIROC continues to strongly support performance reporting despite the many comments received. Under the Proposal, all retail clients would receive the account performance reporting at least annually, either included with an account statement or sent separately. The account performance reporting consists of the following elements:
- Client account cost reports containing the original cost (not the tax cost) of all security and other investment product positions held by the Dealer Member for the client in nominee name or physically in the client’s name and all other client account positions for which the Dealer Member continues to receive compensation.
- Cumulative account performance information must include annual and cumulative realized and unrealized income and capital gains of all security and other investment product positions held by the Dealer Member for the client in nominee name or physically in the client’s name and all other client account positions for which the Dealer Member continues to receive compensation. The Dealer Member has the option of providing this disclosure at the portfolio level (a consolidation of all account positions and money balances of the same client) and may delineate the disclosure on an advised / non-advised account position.
- Account annualized compound percentage return information may be determined as either a dollar amount or dollar amount per share based on all security and other investment product positions held by the Dealer Member for the client in nominee name or physically in the client’s name and all other client account positions for which the Dealer Member continues to receive compensation. The account annualized compound percentage return information must be calculated in accordance with a method acceptable by IIROC (dollar-weighted and time-weighted methods) including the Dietz and modified Dietz methods, daily valuation and any method permitted under the Global Investment Performance Standards endorsed by the CFA Institute.
- Where the client account has existed for more than one year, account annualized compound percentage return must be provided for the past one, three, five and ten year periods and for the period since inception. If the client account has existed for less than one year, account annualized compound percentage return need not be provided to the client.
IIROC has proposed that upon opening an account, all retail clients receive a separate document containing all disclosure pertaining to the relationship the client is entering into with the Dealer Member. The relationship disclosure document must contain:
- a description of the products and services offered;
- description of the account relationship;
- a description of all fees, charges and costs associated with the account;
- a statement outlining material Dealer Member conflicts of interest and that unresolved future conflicts will be disclosed; and
- a description of account reporting including the obligation to provide account performance information.
Where applicable, the client must be provided with a description of the process used to assess the "know your client" information and investment suitability. The client should also be provided with a statement of when account suitability will be reviewed.
Conflicts of Interest Management / Disclosure
IIROC also proposes a general rule with separate obligations for Approved Persons (defined in IIROC Dealer Member Rule 1 as an individual who is a partner, Director, Officer, employee or agent of a Dealer Member who is approved by the Corporation or another Canadian Self Regulatory Organization to perform any function required) and Dealer Members to supplement the existing rules dealing with the management of specific conflicts of interest. Under the Proposal, all material conflict situations between the Approved Person and the client, or between the Dealer Member and the client, are addressed either by avoiding the conflict, disclosing the conflict or otherwise controlling the conflict of interest situation.
Dealer Members would be required to provide institutional clients with conflicts of interest disclosure. These disclosures would also need to be provided to subscribers of alternative trading systems.
Account Suitability Assessment — Dealer Members will be required to comply with the new suitability determination requirements within six months of the amendments coming into force. A draft guide to assist Dealer Members in complying with suitability requirements is contained in the Proposal.
Account Performance Reporting — Client account cost reports and cumulative account performance information must be provided to the retail client within one year of the Proposal’s implementation date. If the percentage return information is currently provided, the disclosure must be provided within six months of the Proposal’s implementation date. All retail clients must receive the account annualized compound percentage return information within two years of the Proposal’s implementation date. A draft guide to assist Dealer Members in complying with account performance reporting is contained in the Proposal.
Relationship Disclosure — Within six months of the Proposal’s implementation date the Dealer Member must provide the relationship disclosure to new clients when a new account is opened. The disclosure must be provided to all existing clients within three years of the Proposal’s implementation date.
Conflicts of Interest Management / Disclosure — The provisions relating to conflict identification and avoiding and addressing conflicts will take effect upon implementation of the Proposal, as will provisions relating to conflict disclosure prior to opening an account and prior to entering into a transaction. Within six months of the implementation date, the information must be included in the relationship disclosure provided to new clients. Dealer Members have three years from the implementation date to provide the disclosure to existing clients.