IIROC Client Focused Reforms – Proposed Rule Amendments for Public Comment

January 18, 2021

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IIROC Client Focused Reforms – Proposed Rule Amendments for Public Comment

Letter Summary:

The proposed amendments to the IIROC rules are intended to make the rules uniform (in all material respects) with the client-focused reforms in NI 31-103 (the “CFRs”).The amendments impact rules relating to KYC, suitability, misleading communications, conflicts and fee and relationship disclosure. Substantive changes are also proposed to guidance regarding product due diligence by dealer firms and KYP obligations on approved persons. Exemptions from specific KYC and KYP requirements are proposed for certain account types (such as order execution only accounts), client types (e.g. institutional clients) and service arrangements (e.g. carrying broker arrangements) that are unique to the IIROC infrastructure. The rules will be amended to explicitly provide that material conflicts must be addressed in the best interest of clients and that clients’ interests must be put first when dealers make their suitability determinations. The requirements for client-directed trades would also be updated such that, similar to the CFRs, dealers will be required to recommend suitable alternatives rather than simply accept the trades. The proposed new guidance for dealers will set out how product due diligence and KYP obligations can be tailored depending on a number of factors, including the type of security and a dealer’s business model. With respect to product due diligence, IIROC suggests that dealers may determine that some securities should not be made available to retail clients, such as inverse ETFs and debt-structured derivatives.

Overview of the Council’s Comments:

The CAC supports publishing the proposed rules specific to dealers and their business models. In the absence of the best interest standard, we also support the CSA’s new core requirement for registrants to put their clients’ interests first when making a suitability determination. We note that an example of expectations that may still require further clarification surrounds the framework and level of diligence expected for specific types of securities such as GICs and government backed agency bonds. We appreciate that the retail suitability requirements will require consideration of a reasonable range of alternative actions, and that IIROC is working on a second guidance note to provide clarity on the enhanced suitability requirements. IIROC may wish to consider including supplementary supporting language explaining how a consideration of alternative results will lead to a recommendation that puts clients’ interests first. We are of the view that the current KYP requirements should be permitted to take hold before initiating any potential rules for shelf access. We note however, that additional and more specific KYP guidance provided at this time may help pre-empt unintended consequences if in future additional rules are instead added with the purpose of narrowing the issues for dealers from a KYP perspective. With respect to the specific exemptions from the Proposed Amendments, we agree that dealers who offer order execution only accounts should not be exempted from the product due diligence requirements for products that they make available on their product shelf.