Implementation of the so-called "client relationship model"1 remains a key objective of the Canadian securities regulators’ Registration Reform Project. Proposed National Instrument 31- 103 Registration Requirements2 would mandate delivery by registered dealers and portfolio managers (but not investment fund managers) of a specified relationship disclosure document to clients who do not qualify as "accredited investors"3. The relationship disclosure document, or RDD, is an important element of the client relationship model and is proposed by NI 31-103 to be mandatory for non-SRO dealer and portfolio manager registrants. The Canadian self-regulatory organizations for dealers – the Investment Dealers Association of Canada and the Mutual Fund Dealers Association of Canada - are expected to publish new rules for their members that would mandate a similar RDD to be given by those dealers to their non-accredited investor clients.
The RDD would be given by registered dealers and portfolio managers to retail clients that are not accredited investors before those registrants perform any registrable activities for those clients. Any material change to the information contained in a firm’s RDD must be disclosed in writing to retail clients before taking any further action after the information changes. Clients are not required to sign any acknowledgement of receipt of the RDD, which is consistent with the CSA’s current direction to minimize unwieldy written client consents and acknowledgements. We assume that the RDD will form an important part of a registered firm’s account opening procedures with retail clients.
The RDD must contain information, written in plain language, that responds to 12 different disclosure points, including a description of conflicts of interest, disclosure of all service fees and charges that will be levied against the client’s account and a description of the compensation that the registrant will receive in relation to the different products that the client may purchase through the registered firm. We believe that the RDD will have to be tailored to the different clients of a registrant, and arguably would need to be tailored to each client of the registrant, since proposed NI 31-103 requires that the RDD contain the know-your- client information that a registered firm is required to collect about the client. The CSA suggest that a registrant consider including in the RDD a description of the registrant’s expectations of its clients – for example, that the client provide full and accurate information to the registrant, carefully review all account information and "understand all fees and costs".
The RDD will be a significant new compliance obligation for registered firms. The objective of the CSA appears to be to ensure that retail clients understand the services that they can expect from a registered firm, including all fees and expenses associated with their account. With the RDD, the CSA attempts to respond to the perennial concerns of investors and their advocates that retail investors need to better understand the registrant-client relationship, including what they can expect by way of on-going service and information. The expectation is that a retail investor can be in a better negotiating position with a registrant about his or her rights. The RDD is designed to be a plain language disclosure document that articulates the features of the registrantclient relationship, as well as a document that will allow the registrant to avoid any misunderstandings with its retail clients about the nature of that relationship.
The requirements to deliver a RDD are in addition to the other disclosure obligations under proposed NI 31-103 – many of which are continuations of existing obligations (albeit in modified forms), including
- Leverage disclosure information to clients in mandated circumstances
- Client consent to purchases of securities issued by related or connected issuers
- Disclosure of policies designed to ensure fairness in allocation of investment opportunities
- Issuer disclosure statements if the registrant is advising or dealing with a related issuer in specified circumstances.
The RDD is also in addition to the more traditional prospectus disclosure documents that must be delivered to investors acquiring newly issued securities of reporting issuers, including mutual funds.
The RDD supplements the account opening, "know-your-client" reviews and suitability analysis that dealers and portfolio managers must carry out, all of which will be required by and in some cases, enhanced in proposed NI 31-103.
1 The client relationship model refers to certain principles discussed in the January 2004 Concept Proposal of the Ontario Securities Commission (then known as the Fair Dealing Model): (i) clarity and transparency regarding relationships, (ii)transparency of costs, and (iii) transparency regarding performance and costs. The January 2004 Fair Dealing Model concept proposal is available on the OSC’s Websitewww.osc.gov.on.ca. More information about the CSA’s Registration Reform Project, including certain of the concepts behind the client relationship model can be found at www.rrp-info.ca
2 Proposed National Instrument 31-103 Registration Requirements was published for comment on February 20, 2007. The comment period ends on June 20, 2007.
3 The phrase "accredited investor" used in proposed NI 31-103 has the same meaning as used in National Instrument 45-106 Prospectus and Registration Exemptions.
* * * * * * * * * * * * * * * *
For more information on proposed NI 31-103, please see BLG’s Investment Management Advisory Canadian Securities Regulators Release Comprehensive Registration Rule for Comment released by our Investment Management Group on February 20, 2007. This Investment Management Advisory is one of eight in the series: Keeping Reforms in Sight: Understanding the Registration Reform Proposals. BLG’s Investment Management Advisories are available on our website at www.blgcanada.com [click on Publications and then select Capital Markets to search current publications].
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.