IIROC Proposed Guidance on Know-your-client and Suitability Determination for Retail Clients

August 21, 2021

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IIROC Proposed Guidance on Know-your-client and Suitability Determination for Retail Clients

Letter Summary:

The Proposed Guidance would replace the existing KYC and suitability guidance in its entirety and is intended to conform IIROC’s guidance in all material respects to the CSA’s CFRs. The new guidance explains IIROC’s expectations on the collection of KYC information, its interpretation of certain terms, its expectations on how dealers can in fact “put the client’s interest first” and confirms that KYC requirements are not one-size fits all but depends on a member’s business model, service offerings and clients. Similar to the MFDA’s guidance, IIROC states that dealers should apply the guidance and the suitability determination requirement to all investment products offered, and not just securities. With respect to specific dealer models, the guidance notes that while the KYC obligation is generally the same for all accounts, some exceptions exist for accounts such as OEO or DEA accounts. The suitability determination obligation not only applies before taking or recommending an investment action for a retail client, but the order type, trading strategy, fee structure and method of financing must also be suitable (and put the client’s interests first). In the guidance, IIROC clarifies that it will not review suitability determinations in hindsight, but rather on the basis of what a reasonable dealer or registered individual would have done in the same circumstances.

Overview of the Council’s Comments:

The CAC recommended that several additional items be added to the proposed know-your-client and suitability processes.

We strongly support efforts to allow dealers to tailor their own policies for the CFR requirements in light of their business models and the type of services provided to their clients. We believe that the Proposed Guidance would benefit from additional specificity regarding the KYC information to be collected as it relates to the suitability determination, as it currently may have the unintended result of encouraging the gathering of client information simply as a compliance exercise.

In particular, the CAC believes that there should be additional guidance around account-type suitability and the requirement to consider a “reasonable range” of alternatives. Additionally, as part of the KYC information that dealers must collect, the Proposed Guidance outlines details that should be obtained about a client’s personal circumstances. While an individual client’s date of birth and family situation are mentioned as examples, the Proposed Guidance does not specifically contain a reference to the number of dependents (other than with respect to a determination of risk capacity) and potential vulnerabilities (other than with respect to ensuring extra care is taken to explain the KYC process). We believe these items should be considered “essential facts” to be obtained for each client.