Canada: IIROC Finalizes Guidance On Underwriting Due Diligence

The Investment Industry Regulatory Organization of Canada recently published itsfinal guidance on underwriting due diligence (the "Guidance"). Being IIROC's first ever codification of this nature, the publication of the Guidance represents an opportunity for underwriters to review internal practices in light of IIROC's expectations. As we discussed when IIROC's draft guidance were published for comment, while the intention is to codify common practices, the guidance may represent a departure from what some may consider to be the market standard. This is an issue that may be of particular relevance given the role of due diligence in demonstrating that an underwriter has fulfilled its statutory obligations in respect of prospectus offerings.

A draft version of the guidance was originally published for comment in March of 2014, following which IIROC engaged in further industry consultations and consideration of comments. Similar to the draft version, the Guidance is organized into nine key areas spanning the entire underwriting due diligence process. However, it appears that IIROC has made some key adjustments in response to comments received, mainly affording a greater degree of flexibility to underwriters on certain significant matters. Of these, the most notable changes or clarifications are highlighted below, and otherwise discussed in context in our review of the nine principles that follows.

  • Written due diligence plan for each offering – IIROC has clarified that the decision to prepare a formal written due diligence plan is a contextual determination. Where an underwriter's written policies and procedures adequately set out the matters to be considered, a specific written plan may not be required for all offerings.  
  • Relevant representation on Q&A sessions - IIROC has revised the Guidance to indicate that syndicate members should be represented during a due diligence "Q&A" session by an investment banking professional with an appropriate level of seniority (as opposed to the earlier requirement to have a "senior investment banking professional" that may have had an overly rigid application in certain circumstances).  
  • Materiality threshold for business due diligence - In determining the extent of appropriate business due diligence, taking contextual factors into account, IIROC expressly acknowledges that Dealer Members may choose to establish a materiality threshold in the due diligence plan from both a quantitative perspective (i.e. a dollar threshold considering the issuer's financial position) and a qualitative perspective (e.g., the areas of business, operations, risk, etc. most relevant to the issuer).

1. Policies and Procedures for Underwriting Due Diligence

Principle: Each Dealer Member is expected to have written policies and procedures in place relating to all aspects of the underwriting process and to have effective oversight of these activities. These policies and procedures should reflect that what constitutes reasonable due diligence involves, for each underwriting, a contextual determination.

With respect to this main principle, IIROC notes that due diligence in connection with a public offering is the process by which the underwriter takes reasonable steps to ensure that all prescribed information is included in the prospectus, to investigate the information provided by the issuer for inclusion in the prospectus and to verify key material facts. Because of its contextual nature, due diligence should go beyond prescriptive checklists alone.

2. Due Diligence Plan

Principle: The Dealer Member should have a due diligence plan that reflects the context of the offering and the level of due diligence that will be reasonable in the circumstances.

A due diligence plan should be prepared in conjunction with underwriters' counsel (including local counsel in foreign jurisdictions, as applicable), and set out the lead underwriter's expectations relating to the scope of the investigation. Contextual matters to consider in developing a due diligence plan include the size, nature and sophistication of the issuer and the particulars of the offering.

Less extensive diligence procedures may be reasonable for seasoned, significant and widely-followed issuers, including those familiar to the Dealer Member due to an ongoing relationship, absent any unusual, complex or significant transaction. Conversely, more extensive due diligence procedures may be required where the Dealer Member has not previously performed due diligence for the issuer or where significant time has passed since the Dealer Member last undertook a due diligence investigation. Here, IIROC has clarified that in certain circumstances, it may be appropriate for a Dealer Member to rely on due diligence conducted on an issuer in a prior offering. For example, where the Dealer Member has maintained a relationship with the issuer (e.g., equity research coverage). However, IIROC suggests that the reasonableness of reliance on due diligence performed by another firm will depend on a wide range of factors, including the time that has passed since the previous offering, the nature of the previous offering, whether the Dealer Member was part of the syndicate on the previous offering, the degree of familiarity that the Dealer Member has with the other firm and its due diligence practices, and the amount of information available to the Dealer Member regarding the due diligence performed by the other firm.

Ultimately, while the plan may be less or more extensive depending on the type of offering, reasonable due diligence must be completed prior to the underwriters certifying the final prospectus, and appropriate supervision and compliance must be ensured in all circumstances, including compressed time-frames for bought deals. IIROC also stresses that irrespective of the nature of the public offering, underwriters have a duty to make an investigation that provides them with a reasonable basis for a belief that the prospectus contains full, true and plain disclosure of all material facts relating to the offering.

3. Due Diligence Q & A Sessions

Principle: Due diligence "Q&A" sessions should be held at appropriate points during the offering process and are an opportunity for all syndicate members to ask detailed questions of the issuer's management, auditors and counsel.

The due diligence plan should contemplate Q&A sessions at appropriate times (typically, for equity offerings, one prior to filing the preliminary prospectus and another update or bring-down session prior to filing the final prospectus), and the underwriters should participate with their counsel in preparing questions. Individuals in the best position to have the necessary information should participate in the Q&A session and questions should be circulated sufficiently in advance in order to allow for appropriate enquiries to be undertaken. Further, all syndicate members should be given an opportunity to participate in and ask questions at each Q&A session, and should be represented by investment banking professionals with an appropriate level of seniority.

4. Business Due Diligence

Principle: The Dealer Member should perform business due diligence sufficient to ensure that the Dealer Member understands the business of the issuer and the key internal and external factors affecting the issuer's business. A Dealer Member should use its professional judgment when determining which material facts will be verified independently depending on the circumstances of the transaction.

The due diligence plan should distinguish clearly between legal and business due diligence. Principal elements of business due diligence include visiting the issuer's head office and principal operations, reviewing business plans, budgets, projections, key operational data, material contracts (or summaries prepared by underwriter's counsel) and relevant external information, and reviewing public disclosure and comparing it to the issuer's peers. IIROC also recommends conducting in-depth discussions with management and experts, but it expressly recognizes that limitations may be imposed on participants in the offering process by their governing rules (e.g., such as the parameters established by CPA Canada for auditors' comfort letters and due diligence Q&A responses).

The exercise of independent judgment and verification of material facts may require independent background checks (including through local agents where necessary) as well as interviewing the issuer's customers, suppliers, and counterparties. It may also be appropriate to consult research analysts and other industry experts within a member's affiliates.

Further, the Dealer Member's policies and procedures should address how to deal with "red flags" where heightened due diligence and/or enhanced disclosure may be required. (Examples of red flags cited by IIROC include recent significant changes in the issuer's business over the last 12-24 months, financial information or other disclosure that is inconsistent with its peers, a high degree of reliance on a founder, CEO or government relationships, recent ratings downgrades or significant changes in research analysts' target prices or the issuer's board of directors recently establishing a special committee of independent directors to investigate allegations of fraud or other improper conduct.) While certain red flags may be addressed by additional risk factor disclosure, IIROC notes that other red flags may require that an issuer undertake remedial action or implement safeguards before a preliminary prospectus is filed.

5. Legal Due Diligence

Principle: Dealer Members should clearly understand the boundary between business due diligence and legal due diligence, to ensure that matters that should be reviewed by the underwriters are not delegated to underwriters' counsel. Dealer Members should provide adequate supervision of the legal due diligence performed by underwriters' counsel.

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. This should include enhanced due diligence for foreign and emerging market issuers, including how counsel propose to address issues relating to local business practices and laws, the issuer's government relationships, issues relating to asset ownership within the issuer's jurisdiction and retention of local experts. IIROC notes that enhanced due diligence may be required where a material business is held in a subsidiary incorporated or organized under the laws of an emerging market country, such as asking local counsel to explain how those laws differ from applicable Canadian law, including with respect to the issuer's effective control and management of the subsidiary and its assets.

Counsel should be prepared to communicate the results of legal due diligence to the entire syndicate, including by briefing the entire syndicate on the scope of the due diligence conducted and reporting on the status and results of any due diligence completed prior to any management Q&A session. Further, IIROC observes that underwriters should instruct their counsel to inform them of any difficulties counsel experiences in obtaining any information requested from the issuer as part of legal due diligence or in obtaining appropriate legal opinions from the issuer's counsel.

6. Reliance on Experts and Other Third Parties

Principle: The extent to which a Dealer Member should rely on an expert opinion is a contextual determination, having regard to the qualifications, expertise, experience, independence and reputation of the expert.

Underwriters should consider whether experts are properly qualified for the task for which the experts are retained (i.e. to give a report or opinion), and should obtain reasonable evidence that experts have consented in writing to expert reports (or any extract or summary) being used in the prospectus. The credentials, knowledge and experience of experts in emerging markets should be considered and assessed in light of standards as would be expected in Canada for similar experts and, where appropriate, dealers should consider obtaining corroboration by other experts.

Here IIROC acknowledges that a Dealer Member or its legal counsel may experience difficulties in conducting due diligence with respect to areas requiring technical expertise where the issuer operates in an industry requiring specialized knowledge. If it is not reasonable or economically feasible for a Dealer Member to retain its own experts in such a situation, it may be appropriate for a Dealer Member to rely on the issuer's third party experts, supplemented by appropriate checks and balances.

7. Reliance on Lead Underwriter

Principle: Each syndicate member is subject to the same liability for misrepresentation under securities legislation. 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.

While the lead may bear additional reputational and regulatory risk, each member of the underwriting syndicate is subject to the same liability for misrepresentation in a prospectus (subject to provisions capping the statutory civil liability to the amount underwritten) and should be prepared to establish its own due diligence defence. As such, each syndicate member should satisfy itself that the lead underwriter performed the kind of due diligence that it would have performed if it were the lead underwriter. To this end, while IIROC indicates that each syndicate member should receive, on request, copies of all letters, opinions or memoranda relating to the underwriters' due diligence investigation, and should be invited and given the opportunity to ask questions of the issuer and its counsel and auditors during the Q&A session, it is not necessary for syndicate members to prepare their own due diligence plans where the lead underwriter has done so.

8. Due Diligence Record-Keeping

Principle: A Dealer Member should document the due diligence process to demonstrate compliance with its policies and procedures, IIROC requirements and applicable securities laws.

A dealer should maintain records of its due diligence process in order to demonstrate that it followed its own policies and procedures as well as IIROC's requirements and record keeping obligations under applicable securities laws. IIROC recognizes that the Dealer Member acting as lead underwriter may keep more detailed information than those Dealer Members acting as syndicate members. IIROC has reiterated in the final Guidance that it is not specifying the nature of the records to be kept, only that file retention policies should balance the legitimate considerations in favour of "pruning" the due diligence file with the need to document compliance and, while not all documents need to be retained, the dealer's policies and procedures in this respect should be clearly established.

By way of example, a record should be kept of any committee meetings (and attendance), as applicable and the Q&A session with issuer's management, auditors and legal counsel. Meanwhile, if a specified document is not contained in the file, there should be an explanation for its absence.

9. The Role of Supervision and Compliance

Principle: IIROC Dealer Member Rule 38 requires each Dealer Member 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. A Dealer Member's execution of the prospectus certificate should signify that the Dealer Member has participated in the due diligence process through appropriate personnel and internal processes.

While the performance of due diligence may be delegated to a range of personnel, including junior personnel as part of the team, a senior member of the dealer member's management team must be involved throughout the process and is ultimately responsible for the quality and extent of the due diligence. While supervision may be based on a committee structure, typically composed of senior investment banking managers, internal counsel and/or compliance personnel who can exercise independent judgment, the use of a committee structure depends on the size, nature and extent of the Dealer Member's business activity.

Further, a compliance framework involving any one or a combination of the compliance, in-house legal or internal audit departments is acceptable so long as the applicable individuals have a clear mandate to identify and monitor issues relating to non-compliance with policies and procedures in respect of securities offerings, and to report and escalate such matters in accordance with such internal policies and procedures.

Addressing the New Guidance

While presenting these "common practices," IIROC is careful to note that due diligence, by its nature, is a fluid and evolving process and should be customized to the particular circumstances based on the underwriter's exercise of professional judgment. In developing the Guidance, IIROC previously noted that its process began by soliciting input on current practices from an industry advisory committee composed of senior industry representatives from a cross-section of firms in terms of size and regional representation. Given its comprehensive nature, this offers a good opportunity for Dealer Members to generally revisit their underwriting practices with a view to identifying possible gaps and enhancing existing practices.

For more information see IIROC Notice 14-0299 Guidance respecting underwriting due diligence published on December 18, 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.

In association with
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.