Under proposed National Instrument 31-103 Registration Requirements1 all registrants will be required to establish compliance and supervisory procedures, including procedures concerning management of conflicts of interest and complaint handling. Detailed guidelines are given to registrants seeking to comply with these requirements. The compliance requirements and guidelines will apply uniformly to all registered dealers, portfolio managers and investment fund managers.
The CSA purposefully propose "principle-based" rules mandating compliance systems. The rules proposed in NI 31-103 are relatively simple, but are supplemented by guidelines in the companion policy to proposed NI 31-103 outlining how registered firms should implement an effective compliance system, as well as the CSA’s views about the elements of an effective compliance system.
The proposals in NI 31-103 concerning compliance, supervision and management of conflicts of interest are generally new articulations of existing regulatory concepts. Proposed NI 31-103 also contains new concepts, such as requirements that registered firms implement policies and procedures designed to address client complaints. A registered firm will be required to document all complaints made, or legal actions or other dispute resolution proceedings commenced against the firm and its representatives. A registered firm also will be required to respond in writing to any complainant within five business days.
A registered firm will be required to establish and enforce a system of controls and supervision that is designed to achieve the firm’s compliance with all applicable securities laws, as well as manage the business risks faced by the firm in accordance with "prudent business practices". This system of controls will be required to be documented in the form of written policies and procedures, although the CSA emphasize that "policies and procedures in themselves do not constitute an effective compliance system". An effective compliance system is one that in practice achieves reasonable assurance that all regulatory requirements are being met in a timely and on-going fashion.
NI 31-103 also proposes that a registered firm ensure that the ultimate designated person and the chief compliance officer of the firm have direct access to the firm’s board of directors at such times as either of them may independently deem necessary. The CSA emphasize in the companion policy to proposed NI 31-103 that compliance is not the sole responsibility of the ultimate designated person or the chief compliance officer or a designated individual in a firm but rather it is a firm-wide responsibility. According to the CSA, a registered firm’s compliance system should achieve each of the following objectives
- It should ensure that everyone in the firm, including the board of directors, partners, management, employees and agents (whether or not themselves registered) understands the standards of conduct applicable to their designated roles
- It should be reasonably likely to identify non-compliance at an early stage
- It should provide effective mechanisms for the timely correction of non-compliant conduct.
A registered firm, when setting up its compliance systems, will be encouraged to consider its size, scope of operations, products, types of clients and risks, along with other relevant factors.
A registered firm will also be required to ensure that its compliance monitoring and supervision policies and procedures take conflicts of interest management issues into account. Proposed NI 31- 103 describes four areas where a registered firm must identify and address any potential or actual conflict of interests: (i) within the registered firm; (ii) with other entities; (iii) with a client; and (iv) between clients. Each registrant will be required to have a written policy which sets out policies and procedures on how it deals with conflicts of interests in a fair, equitable and transparent manner exercising responsible business judgment influenced only by the best interest of its client(s). The CSA suggest that registrants can avoid, control and/or disclose conflicts of interest in order to comply with proposed NI 31-103.
The guidance given by the CSA on compliance systems and controls is consistent with, but differently worded from and less detailed than the guidance given in December 2006 to members of self-regulatory organizations by the Canadian SROs. Please refer to BLG’s Investment Management Advisory entitled Canadian SROs Focus On Role of Compliance and Supervision In Member Firms December 2006 for more information about the SROs’ expectations on compliance and supervisory systems.
The emphasis placed in proposed NI 31-103 on compliance and supervisory systems is not unexpected. For the past several years, the members of the CSA have been conducting regular and spot compliance examinations of registrants. We have consistently urged registrants, in preparation for these examinations, to consider regular testing and review of compliance regimes to determine whether records will demonstrate compliance with applicable securities legislation.
1 Proposed National Instrument 31-103 Registration Requirements was released for comment on February 20, 2007. The comment period ends on June 20, 2007.
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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].
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