Risk Management and Crisis Response Blog

CSA publishes harmonized response to concerns regarding client-registrant relationship

Jun 22, 2018 4 MIN READ
Lawrence E. Ritchie

Partner, Disputes, Toronto

Marleigh Dick

Associate, Disputes, Toronto

On June 21, 2018, the Canadian Securities Administrators (CSA) released two published notices concerning investor protection initiatives.  The CSA’s stated goals of these initiatives are to better align the interests of registrants and investors, improve investor outcomes, and raise the bar for registrant conduct.

As we have previously written, the CSA had released a status report on an earlier consultation paper (which we have previously written on) regarding a “best interest standard” and “targeted reform” proposals to enhance the obligations of advisers, dealers, and representatives towards their clients. The majority of provinces decided not to pursue a regulatory “best interest standard”, and the CSA prioritized work on targeted reforms which culminated in the proposed amendments.

Proposed amendments to National Instrument 31-103 and Companion Policy 31-103CP

The first notice [PDF] requests public comment over a 120-day comment period (ending October 19, 2018) on various client-focused reforms to obligations of registered firms and individual registrants. The proposed amendments are in respect of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (the Rule) and Companion Policy 31-103CP Registration Requirements, Exemptions and Ongoing Registrant Obligations (the Companion Policy). The CSA has encouraged self-regulatory organization (SRO) members to provide their comments as well, with the aim of incorporating final amendments into SRO member rules and guidance.

In proposing the amendments, the CSA cited the following investor protection concerns:

  • clients are not getting the value or returns they could reasonably expect from investing;
  • there is an expectations gap resulting from clients’ misplaced reliance on or trust in registrants;
  • the current rules are not effective enough at mitigating conflicts of interest;
  • the current framework is not effective enough at mitigating the consequences of information and financial literacy asymmetry between clients and registrants; and
  • clients are not getting outcomes that the regulatory system is designed to give them.

The proposed amendments will require registrants to promote the best interests of the client and put clients’ interest first, which is a fundamental change to the client-registrant relationship. Specifically, under the proposed amendments, registrants will be required to: 

  • address conflicts of interest in the best interest of the client;
  • put the client’s interest first when making a suitability determination; and
  • do more to clarify for clients what they should expect from their registrants.

The proposed client-focused amendments target the following provisions in the Rule, supported with detailed guidance:

  • know your client (KYC) – e.g., requiring registrants to take reasonable steps to obtain clients’ confirmation of the accuracy of their KYC information collected at account opening and when any significant change occurs; 
  • know your product (KYP) – e.g., setting out obligations for registered firms to take reasonable steps to: understand the essential elements of securities made available to clients, including how they compare with similar securities available in the market; approve securities which are made available; and monitor and reassess these approved securities;
  • suitability – e.g., explicitly requiring registrants to consider certain factors, including costs and their impact, in making suitability determinations;
  • conflicts of interest – e.g., extending disclosure requirements to all identified conflicts of interest that a reasonable client would want to know and specifying the content, nature, and timing of this disclosure; and 
  • relationship disclosure information (RDI) – e.g., requiring registered firms to make publicly available the information that potential clients would consider important in deciding whether to become a client. 

CSA Staff Notice 81-330 Status Report on Consultation on Embedded Commissions and Next Steps

The second notice [PDF] sets out the intended policy decision with respect to mutual fund embedded commissions.  This decision is the result of Consultation Paper 81-408 Consultation on the Option of Discontinuing Embedded Commissions (the Consultation paper), published for comments on January 10, 2017.

The CSA’s policy decision has three components. The first component is integrated into the client-focused reforms proposal above, which requires registrants to address conflicts of interest in the best interest of the client. 

The CSA will address the other two components with a publication of rule proposals for comment in September 2018 to prohibit:

  1. all forms of the deferred sales charge (DSC) option, including low-load options and their associated upfront commissions; and
  2. the payment of trailing commissions to dealers who do not make suitability determinations. 

The September 2018 Notice will include a regulatory impact analysis, rule proposals for the elimination of the DSC option and trailing commission payments to dealers that do not make a suitability recommendation, and transition measures. Some CSA jurisdictions may hold in-person consultations to discuss the proposed policy changes.

We will continue to monitor and provide updates regarding the evolving regulatory landscape.