Canada: IIROC Proposes Guidance For Underwriting Due Diligence

The Investment Industry Regulatory Organization of Canada (IIROC) published proposed guidance on March 6, 2014, setting forth nine key principles for underwriting due diligence.

The Role of Underwriters and the Due Diligence Defence

Underwriters may be liable for a claim of damages (to compensate for loss) or rescission (a return of purchase price) if there is a misrepresentation in a prospectus. However, an underwriter is shielded from liability if it conducted a reasonable investigation of the material facts underlying the disclosure in the prospectus. This is referred to as establishing the "due diligence defense". In a public offering, each underwriter communicates that it has undertaken a reasonable investigation by certifying that, to the best of its knowledge, information and belief, the prospectus constitutes full, true and plain disclosure of all material facts relating to the offered securities.

Proposed Guidance

Provincial securities legislation across Canada recognizes that meaningful due diligence depends on the details of the issuer and the offering, and as a result provides no clear guidance on what constitutes a "reasonable investigation". While Canadian courts have addressed the due diligence defense in various judgements, the fact-specific nature of those cases do not lend well to a broad application of due diligence principles. IIROC acknowledges that the due diligence process is highly contextual. The proposed guidance is not intended to create an objective standard of what constitutes reasonable due diligence, nor does it create new, or modify existing, legal obligations. Nevertheless, the proposed guidance provides valuable direction for underwriters by addressing the appropriate level of due diligence required in order to discharge their role as gatekeepers of the capital markets, protect against reputational harm and establish the statutory due diligence defence.

Underlying the specific guidance is the theme that due diligence should be customized to the particular issuer, the industry in which it operates and the type of security being offered. Underwriters are expected to exercise professional judgment to determine the appropriate level of due diligence in each set of circumstances.

The proposed guidance sets out the following principles:

  1. Underwriters' policies and procedures for underwriting due diligence – Each underwriter is expected to have written policies and procedures relating to all aspects of the underwriting process. These policies and procedures should acknowledge that a reasonable investigation involves, for each offering, a contextual determination and the exercise of professional judgment. Prescriptive checklists are discouraged. The policies and procedures should establish the process to be followed where red flags indicate that heightened due diligence is required.
  2. Due diligence plans – The underwriter should have a deal-specific due diligence plan that reflects the context of the offering and the level of due diligence that will be reasonable in the circumstances. Further, a due diligence plan will, by necessity, be iterative and subject to change as circumstances change. The plan should address the unique challenge of conducting due diligence during the compressed time frame of a "bought deal" offering, particularly for non-lead members of the syndicate.
  3. Due diligence Q&A sessions – It is common practice for question and answer sessions to be held with management and its professional advisors at appropriate points during the offering process. However, there is concern that these sessions are overly formulaic and that meaningful and independent enquiries are not being made. Issuer and transaction-specific questions should be drafted after conducting significant business due diligence and reviewing the issuer's public disclosure records. Incomplete or evasive responses should trigger follow-up questions, which must be satisfactorily answered prior to certifying the final prospectus. All members of the underwriting syndicate should be empowered to participate in the due diligence process, and particularly at the Q&A sessions.
  4. Business due diligence – The underwriter should perform business due diligence sufficient to ensure that it understands the business of the issuer and the key factors affecting the issuer's business. Adequate diligence may include site visits, interviews with professional advisors, customers and third parties, review of operational data and, in the case of foreign or emerging market issuers, a study of the political and cultural environment. Enhanced due diligence may be required where there have been significant changes in the issuer's business, assets or operations, where accounting treatments are unusual or inconsistent with industry peers, where there has been unusual trading activity by the issuer or by insiders or where controversy surrounds the principals (including issues raised by institutional investors). Underwriters should be aware of red flags, including the failure to provide requested information, any undue delay or failure to facilitate a site visit and respondents that avoid or deflect direct questions. The underwriters, not management, should control the flow of information.
  5. Legal due diligence – The lead underwriter should discuss with underwriters' counsel the scope of the legal due diligence that counsel will perform, and the due diligence plan should clearly delineate the respective roles of the underwriters and their counsel. In addition, underwriters should provide adequate supervision of the legal due diligence performed by underwriters' counsel. All syndicate members should have access to underwriters' legal counsel to ascertain that sufficient legal due diligence has been completed.
  6. Underwriters' reliance on experts and other third parties – Securities legislation provides that underwriters are not liable for a misrepresentation with respect to any expertised portion of a prospectus provided the underwriters had no reasonable grounds to believe that there had been a misrepresentation. The proposed guidance cautions that the extent to which an underwriter may rely on an expert depends on that expert's qualifications, expertise, experience, independence and reputation. Even where expert qualifications have been verified, reliance shouldn't be blind in the face of red flags.
  7. Syndicate members' reliance on the lead underwriter – As each syndicate member is subject to the same liability for a prospectus misrepresentation, a syndicate member should satisfy itself that the lead underwriter performed the kind of due diligence investigation that the syndicate member would have performed on its own behalf as lead underwriter. The proposed guidance is not meant to re-allocate or result in a duplication of the responsibilities for due diligence as between the lead underwriter and a syndicate member. However, each syndicate member should receive copies of all letters, opinions or memoranda relating to the underwriters' due diligence investigation. Reliance on the due diligence conducted by the lead underwriter in a bought deal offering presents challenges for other members of the syndicate who have limited recourse if they conclude the lead's due diligence has not been adequate.
  8. Due diligence record keeping by underwriters – Each underwriter should document the due diligence process in order to be in a position to demonstrate that it conducted a reasonable due diligence investigation, followed its own policies and procedures and complied with IIROC requirements and record-keeping obligations under applicable securities laws. The underwriter's policies should describe which documents must be kept in the transaction file.
  9. The role of supervision and compliance in the underwriting process – Each underwriter is required under IIROC Dealer Member Rules to have a comprehensive and effective supervisory and compliance framework in place to ensure compliance with policies and procedures, IIROC requirements and applicable securities laws. The supervisory function should be led by a senior investment banking professional who is ultimately responsible for the quality and extent of the due diligence undertaken or a committee of senior investment banking managers, internal counsel and/or compliance personnel who can exercise independent judgment.

Practical Concerns

  1. Grounds for Litigation – It is our view that while the proposed guidelines provide a useful framework, they also present plaintiffs with a benchmark against which they can evaluate the sufficiency of the due diligence performed by the underwriters.
  2. The Due Diligence Paradox – The obligation to perform more extensive business and legal diligence for junior, infrequent and emerging market issuers creates a "due diligence paradox", where smaller offerings with the greatest cost sensitivities require the most thorough level of diligence. Underwriters should undertake a risk/reward analysis prior to committing to underwrite an offering.
  3. The Due Diligence Dilemma – Underwriters also face a dilemma in the context of accelerated short form offerings where there is not sufficient time to complete a reasonable investigation. It has been suggested that underwriters can address this dilemma by performing continuous due diligence of an issuer and its industry even when the issuer is not "in distribution". However, such a requirement may be impracticable as underwriters will resist incurring such costs without assurances that they will participate in any upcoming offering, let alone be designated as the lead underwriter.
  4. Inadequate Underwriter Indemnity – A contractual indemnification agreed to in the underwriting agreement may be of limited value to the underwriters as it may be difficult in practice to enforce (if the underwriter failed to establish the due diligence defense) or worthless (if the issuer is left with nothing as a result of direct claims against it). In less serious cases, underwriters may be competing with other claimants for limited resources, and the issuer may be resisting all claims through litigation. Underwriters should not assume the indemnity provisions will provide total protection.

Time for Comment

IIROC has requested comments with respect to the proposed guidance by June 4, 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions