Canada: New Themes And Direction Resulting From CSA Consultation Paper 33-404

Last Updated: July 24 2017
Article by Mark Bowman

On May 11, 2017, the Canadian Securities Administrators (CSA) published CSA Staff Notice 33-319 Status Report on CSA Consultation Paper 33-404 Proposals to Enhance the Obligations of Advisers, Dealers, and Representatives Toward Their Clients (Notice).

The Notice provides a high level summary of the consultation process to date regarding CSA Consultation Paper 33-404 Proposals to Enhance the Obligations of Advisers, Dealers, and Representatives Toward Their Clients (Consultation Paper), and identifies certain high level themes arising in the process and gives a sense of the direction that the CSA will take in regards to certain of the proposals from the Consultation Paper.

Background

The Consultation Paper is part of the CSA's effort in improving the relationship between clients and their advisers, dealers and representatives, and sought comments on proposed regulatory action aimed at enhancing same.  The Consultation Paper proposed two regulatory changes: (1) amendments to NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) that would work together to better align the interests of registrants to the interests of their clients and enhance various specific obligations that registrants owe to their clients, and (2) a regulatory best interest standard, accompanied by guidance, that would form both an over-arching standard and the governing principle against which all other client-related obligations would be interpreted.  All CSA jurisdictions are participating in the consultation process on these topics, with the exception of the British Columbia Securities Commission who is only consulting on the proposed amendments to NI 31-103.

The comment period for the Consultation Paper ended on September 30, 2016, and the CSA received more than 120 comment letters.  Approximately 85% of the comment letters were from industry stakeholders (including advisers, dealers, representatives, industry associations and law firms), and approximately 15% of the comment letters were from non-industry stakeholders (including investors, investor advocates, academics and others).

Themes Raised during Consultation

The Notice provides high level themes regarding both regulatory changes, which were raised to the CSA during the consultation process.

The following high level themes regarding the proposed reforms to NI 31-103 were identified by industry stakeholders:

  • the proposed reforms to NI 31-103 are too prescriptive;
  • depending on the applicable registration category, some of the proposed reforms would be difficult for registered firms to implement;
  • the proposed reforms are over-broad in their approach and application;
  • existing requirements, (including securities legislation (such as NI 31-103), SRO rules or professional codes of conduct) are sufficient to address the concerns identified in the Consultation Paper;
  • the proposed reforms will have significant unintended consequences, including potentially reducing the number of products offered and the types of products recommended to clients;
  • the CSA should wait to measure the impact of other regulatory initiatives before proceeding with the proposed reforms; and
  • the proposed reforms do not consider the value of advisors to clients, and disregard the importance of the judgement of these representatives.

In contrast, the following themes were identified by investor advocates and non-industry stakeholders:

  • compensation and incentives should be focused on moving the industry towards a client-centered advice model rather than an incentives-driven model;
  • disclosure is not an effective means for addressing conflicts of interest;
  • support limiting the use of specific client-facing titles; and
  • the proposed reforms are not adequate to provide effective investor protection without an overarching best interest standard.

In regards to the proposed regulatory best interest standard, the following high level themes were identified by industry stakeholders:

  • concern that the best interest standard will create legal and regulatory uncertainty with risk of significant unintended consequences;
  • concern over the potential lack of harmonization across CSA jurisdictions;
  • concern over how to operationalize the standard, assess whether the standard is met, and supervise compliance of the standard;
  • not clear how the standard would apply across all registration categories and business models; and
  • of the few in industry who supported the proposed regulatory best interest standard, some suggested that a regulatory best interest standard would be preferable to the proposed targeted reforms to NI 31-103, and that if a principles-based standard is adopted, more prescriptive requirements in the targeted reforms to NI 31-103 would not be necessary.

The following themes relating to the regulatory best interest standard were identified by investor advocates and non-industry stakeholders:

  • a regulatory best interest standard is needed as a guiding principle;
  • the standard is needed because of the inequality in the relationship between investors and their registrant;
  • disclosure is not sufficient to address the inequality in the client registrant relationship;
  • investors already believe that their registrants are acting in their best interest and a regulatory best interest standard would close this expectations gap;
  • some commenters suggest moving beyond a best interest standard to a fiduciary standard for all registrants; and
  • consideration is needed of how a regulatory best interest standard would apply in certain business models.

Direction on the Proposed Regulatory Changes

As a result of these comments and other feedback received, the CSA are reconsidering some of the proposed reforms to NI 31-103, as identified in the Notice.  These include:

  • the mandatory collection of basic tax information (proposed as part of the know your client reforms);
  • the element of the know your product proposal that would require the market investigation of a reasonable universe of products, and the differentiation of know your product requirements based on whether a firm is proprietary or mixed / non-proprietary in terms of its product offering;
  • considering adding an element of reasonableness or other modification to the requirement for representatives to understand and consider the structure, product strategy, features, costs and risks of each security on their firm's product list; and
  • the default requirement to perform a suitability assessment at least once every 12 months absent a triggering event, and the requirement to perform a suitability assessment if there is a significant market event affecting capital markets to which the client is exposed.

The Notice also states that the CSA are considering incorporating the concept of scalability in certain of the proposed reforms, addressing concerns regarding a one-size-fits-all approach that some stakeholders feel that the CSA have used, and other changes to refine or eliminate certain prescriptive elements from the proposed reforms.

In regards to the regulatory best interest standard, the CSA jurisdictions will not be moving forward unanimously.  The Ontario Securities Commission and New Brunswick's Financial and Consumer Services Commission will carry out further consultation on the standard.  However, the British Columbia Securities Commission, Quebec's Autorité des marchés financiers, the Alberta Securities Commission and the Manitoba Securities Commission expressed strong concerns about the benefits of introducing a regulatory best interest standard over and above the proposed reforms to NI 31-103, and will not be pursuing this standard any further.  The Nova Scotia Securities Commission and Saskatchewan's Financial and Consumer Affairs Authority may, in the future, consider a regulatory best interest standard, but are currently focused on the proposed reforms to NI 31-103.

The CSA and its member jurisdictions will continue to work on the two proposed regulatory changes, as applicable, over the 2017-2018 fiscal year.

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.

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