Risk Management and Crisis Response Blog

CIRO outlines first steps in bulletin on priorities for FY2024

Aug 30, 2023 7 MIN READ
Authors
Lawrence E. Ritchie

Partner, Disputes, Toronto

Ankita Gupta

Associate, Disputes, Toronto

City

Having closed the transaction which saw the amalgamation of Canada’s two self-regulatory organizations effective January 1, 2023, the Canadian Investment Regulatory Organization (CIRO) is open for business and moving to promptly establish a coherent post-amalgamation workplan and vision. In June 2023, the new organization published its Fiscal Year 2024 Annual Priorities. CIRO is the Canadian national self-regulatory organization that oversees all investment dealers, mutual fund dealers, and trading activity on Canada’s debt and equity marketplaces. CIRO’s annual priorities expand upon and integrate the priorities held by its two legacy organizations: the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA).

In the context of post-amalgamation, CIRO’s priorities are centered around integrated compliance and enforcement that will allow CIRO to achieve its core mandate of investor protection and market integrity.

Overview of CIRO’s annual priorities

CIRO is focused on eight priorities:

  1. Determine mission, vision, values, and brand for CIRO, and develop three-year strategic plan.
  2. Promote the investor perspective through the Office of the Investor and Investor Advisory Panel.
  3. Harmonize regulatory approach.
  4. Articulate the plan for an integrated fee model.
  5. Maintain an engaged, empowered, and unified staff.
  6. Continue to deliver on the regulatory mandate and support investors through industry and regulatory transformation.
  7. Strengthen stakeholder relationships.
  8. Demonstrate progress on the integration of corporate systems and processes.

Key Priorities

Priority 3: Harmonize regulatory approach

One of CIRO’s 2024 priorities is to align investment dealer and mutual fund dealer compliance processes by aligning its approach with the Canadian Securities Administrators’ (CSA) for the second phase of Client Focused Reforms (CFR) compliance exams. The CFRs were introduced in 2021 to enhance registrant conduct obligations, including reforming the know your client, know your product, suitability and relationship disclosure information requirements. CIRO has not announced how it will align the investment dealer and mutual fund dealer compliance processes with CFRs, but it has identified compliance alignment as a key priority.

CIRO has also stated that it plans to align its enforcement processes through establishing uniform sanction guidelines and a centralized complaint intake process for investors. Previously, to file a complaint, investors had to direct it to either IIROC or the MFDA. Each organization had its own complaint forms and complaint and inquiries teams. In the interim, CIRO’s complaint intake process is not yet centralized and requires complaints to be directed to their respective Investment Dealer (ID) or Mutual Fund Dealer (MFD) divisions. In 2024, CIRO has announced that it plans to introduce a uniform complaint intake process and enforcement guidelines to replace the existing bifurcated framework.

Most significantly, CIRO will begin consolidating investment dealer and mutual fund dealer rules. In 2024, CIRO will focus on the first phase of consolidation, which will consist of publishing proposed rules for public comment, and revising the rules accordingly. Subsequently, CIRO will announce the final proposed approach on directed commission/personal incorporation to be made available to an expanded group of registered individuals.

Priority 4: Finalize fee model

In 2024, CIRO also aims to finalize a fee model and ensure its compliance with the requirements set out in the Recognition Orders and Memorandum of Understanding. CIRO and its legacy organizations will bear the costs and expenses incurred relating to the amalgamation and start-up of CIRO. However, the balance of integration costs after the application of approved funds from these organizations will be recovered from dealer member firms through the Integration Cost Recovery Model. Fees will be charged quarterly as a percentage of the dealer member firm’s annual membership fees, subject to a 10% cap. The percentage will be set annually starting with fiscal year 2024, which will be set at an amount not to exceed 8% of annual membership fees. Integration cost recovery fees will be charged over three to five years until the balance of integration costs are recovered.

Priority 6: Deliver on regulatory mandate

Another one of CIRO’s key priorities in 2024 is to continue delivering on its regulatory mandate. CIRO will enhance its assessment of its members’ operations through strengthened business continuity testing. CIRO also aims to bolster compliance with the Continuing Education Program to ensure individuals approved to do retail business and give advice are current on industry and regulatory developments.

To deliver on its regulatory mandate unimpeded by malicious lawsuits targeted at CIRO’s enforcement efforts, CIRO seeks to pursue legislative authority for protection. Specifically, CIRO aims to obtain enforcement authority in Canadian provinces to exercise the ability to enforce fine collection against individuals who engage in misconduct and to collect and present evidence during investigations and disciplinary hearings.

CIRO is also working on updating key rules. The organization is finalizing an amendment to modernize dealer member rule requirements for derivatives that are materially harmonized with the implemented version of National Instrument 93-102 Derivatives: Business Conduct. One of the primary objectives of the Derivatives Rule Modernization project is to more clearly specify which of the core regulatory obligations apply to securities, listed derivatives and OTC derivatives. Moreover, CIRO seeks to extend the requirement to establish a risk limit (i.e., cumulative loss) to all types of derivatives accounting offering other than hedging accounts. Additionally, CIRO proposes revamping the consolidated derivatives risk disclosure statement. CIRO is also finalizing the implementation of rule amendments to support the industry’s move to T+1 trade settlement (Notice 23-0054).

Simultaneously, CIRO will be undertaking efforts to develop several new rules. CIRO plans to develop harmonized rule requirements to facilitate more timely transfers of an expanded group of account assets. Most significantly, CIRO has announced it is committed to working with the CSA to build a regulatory framework for the trading and offering of crypto assets to institutional and retail clients. The regulation of certain crypto assets, like tokens, has been a topic of discussion and deliberation for some time. In 2018, the CSA released a Staff Notice in June 2018 – CSA Staff Notice 46-308: Securities Law Implications for Offerings of Tokens – in which it acknowledged that tokens could be considered securities, but left it up to market participants and consumers to determine the risk of potential enforcement following token-related transactions. In December 2022, the CSA reaffirmed its position regarding stablecoins, stating that stablecoins or arrangements involving stablecoins could be considered securities and/or derivatives. However, no further guidance was provided on when stablecoins would be classified as securities. CIRO’s commitment to building a regulatory framework for the trading and offering of crypto assets is an important development that will bring much-needed clarity and consistency to the process of creating and distributing crypto assets.

Summary

The following trends are identified within CIRO’s 2024 priorities:

  • Focus on increasing oversight in Québec: CIRO is pushing towards increased oversight by concerning fund dealers in Québec. They plan to do this by operationalizing authorities in Québec with respect to mutual fund dealer representative registration and compliance examinations. Moreover, they plan to smoothen the integration of new MFD members in Québec.
  • Plans to create a regulatory framework for crypto: In Canada, the regulation of the trading and offering of crypto assets remains a “work in progress”. CIRO’s announcement that it plans to make proposals to address challenges of regulating crypto activity will hopefully inject a desired degree of certainty, but will no doubt demand coordination with others, including CSA members, as well as other financial regulators.
  • Focus on strengthening compliance with CFRs: In 2024, CIRO will emphasize strengthening compliance with CFRs, as this is key to ensuring financial advisors and their firms provide a high standard of care to clients. CIRO is finalizing a joint report with the CSA on the results of a compliance sweep conducted last year. Moreover, CIRO is aligning its approach with the CSA for the second phase of CFR compliance exams.
  • 2024 is mostly about planning, not executing: Many amendments, regulatory frameworks, rules, and policies are in the planning stages. CIRO is collaborating with the public and relevant stakeholders to form plans. These likely will be executed after CIRO is well-integrated and informed.

CIRO is welcoming comments from dealer members, investors, and the public on CIRO’s current and upcoming policy initiatives, particularly on their plan to consolidate investment dealer and mutual fund dealer rules. CIRO has also stated that it plans to continue industry engagement through discussions on modernizing rules around back-office arrangements and subordinated debt financing. To further reinforce industry engagement efforts, CIRO will be conducting a cybersecurity table-top exercise with dealer members to improve their cybersecurity resilience. Finally, CIRO has advised that it will be conducting an investor survey to help inform the future priorities of the Office of the Investor.

We will continue to monitor and provide updates regarding CIRO’s progress and regulatory approach. Please contact us if you have any questions regarding how the amalgamation of CIRO and the consolidation of IIROC and MFDA rules may impact your operations.