Through the Client Focused Reforms set out in the revisions to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations that came into force on December 31, 2019, the CSA expect registrants to better align their interests with the interests of their clients. Registrants will be expected to put the interests of their clients first, particularly (but not solely) when managing conflicts of interest and making suitability determinations.
The new rules and CSA expectations regarding conflicts of interest and enhanced client disclosures will be effective on December 31, 2020, with the balance of the rule and policy changes becoming effective on December 31, 2021. The Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) are taking steps to further amend their rules and associated guidance within these time periods to conform to the Client Focused Reforms.
The CSA emphasize that their aim is to create a "new, higher standard of conduct" across all categories of registrants. It is clear that the CSA intend for the Client Focused Reforms to be transformational and give rise to real change in how registrants approach their interactions with clients. Compliance with the new expectations will be critical. The months ahead to December 31, 2020 and beyond to December 31, 2021 provide an excellent opportunity for registrants to reflect on – and improve – existing processes, controls and client interactions and disclosures.
We believe that all registrants will need to develop a project plan to identify and implement changes to client documentation, internal controls, training programs, compliance policies and procedures, compensation models, client services and product line-up, among other things. There is much to understand, consider and implement in ways that make sense for a firm and its clients. BLG would be pleased to be your external adviser to assist in your planning for, and implementation of, the Client Focused Reforms.
With BLG's 2020 Vision of the Client Focused Reforms, we can provide you with the full range of legal and advisory services you may need. Our services will initially emphasize the new rules and expectations coming into force in 2020, and we will develop other specific frameworks for the 2021 rules and expectations.
- BLG's 2020 Conflicts Framework will enable registrants to develop a compliance framework for identifying and managing conflicts in the best interests of their clients.
- BLG's 2020 Client Disclosure and On-Boarding Framework will enable registrants to develop enhanced client disclosure, including for the RDI, pre-trade disclosure and conflicts disclosure expected by December 31, 2020.
- BLG's 2020 Training Programs Framework will allow registrants to meet the training expectations for representatives, and also for executives, the board and compliance staff.
We have extensive experience and expertise in working with registrants on implementing new and enhanced regulatory requirements. We would be pleased to discuss with you how we can assist you in understanding the Client Focused Reforms and how they will affect your firm and its representatives.
Through the Client Focused Reforms set out in the revisions to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations that came into force on December 31, 2019, the CSA expect registrants to better align their interests with the interests of their clients. Registrants will be expected to put the interests of their clients first, particularly when managing conflicts of interest.
The new rules and CSA expectations regarding conflicts of interest will be effective on December 31, 2020. The Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) are taking steps to further amend their rules and associated guidance within this time period to conform to the Client Focused Reforms.
Compliance with the new expectations around identifying and managing conflicts of interest will be critical. The months ahead to December 31, 2020 provide an excellent opportunity for registrants to reflect on – and improve – existing processes, controls and client interactions and disclosures.
The Client Focused Reforms introduce a new standard for managing material conflicts of interest: conflicts must be addressed in the best interest of the client.
- take reasonable steps to identify existing and reasonably foreseeable material conflicts of interest between a client and the firm or any individual acting on the firm's behalf
- address all material conflicts of interest in the best interest of the client
- avoid material conflicts of interest that cannot be otherwise addressed in the best interest of the client
- provide affected clients with written disclosure of material conflicts of interest at account opening or in a timely manner thereafter
- in the case of registered representatives – promptly report all material conflicts of interest to their sponsoring firm and refrain from any trading or advising activity in connection with a material conflict of interest unless (i) the conflict has been addressed in the best interest of the client, and (ii) the representative has received consent from their sponsoring firm to proceed with the activity.
A registrant will not satisfy the requirement to address material conflicts in the best interest of the client solely by providing disclosure to the client.
Investment fund managers of public funds remain subject to the conflicts regime in National Instrument 81-107 Independent Review Committee for Investment Funds and therefore are exempt from the conflicts rules in the Client Focused Reforms. We anticipate that the resolution of conflicts under the NI 81-107 regime will be coloured by the Client Focused Reforms and a coordinated approach will be key.
BLG's 2020 Conflicts Framework
We can assist registrants in developing a compliance framework for identifying and managing conflicts in the best interest of their clients. BLG's 2020 Conflicts Framework will allow registrants to:
- Define "conflicts of interest" in ways that will resonate with individuals working for the firm - including executives, representatives and operational and compliance staff. Conflicts of interest are not always obvious and all executives, representatives and staff must be able to understand when a conflict of interest may arise. Determining whether a material conflict exists is a context-specific exercise in which registrants should consider whether the conflict may be reasonably expected to affect the client's decisions and/or the registrant's decisions or recommendations in the circumstances.
Identify existing conflicts of interest and determine whether these conflicts are being managed in the best interest of the client. BLG's 2020 Conflicts Framework identifies common conflicts of interest, which will allow a firm to determine if these specific conflicts are material to the firm.
Examples of conflicts of interest are provided by the CSA in the Companion Policy to NI 31-103 (as listed below), but these should not be taken as the only conflicts of interest that could apply to a firm.
- Distribution of proprietary products
- Accepting compensation from third parties for distributing certain securities
- Referral arrangements
- Fee-based accounts (in certain circumstances)
- Internal compensation practices that could influence which securities and products are recommended to clients
- Outside business activities of representatives, including acting as director or officer of another entity or being a shareholder of another entity.
- Understand what is meant by managing conflicts of interest in the best interest of the client and what mitigation techniques or controls can be used to ensure that clients' interests are prioritized over any other competing considerations. A firm may need to prohibit certain activities, if it cannot be certain that a conflict will be managed in the best interest of the client. The CSA's suggested controls for those conflicts listed in the Companion Policy to NI 31-103 must be carefully considered.
- Develop escalation practices that will be implemented internally for representatives and all staff to identify conflicts of interest and escalate them to internal decision makers who will determine how to address the conflict.
- Ensure that plain and clear written (and verbal) disclosure is given to clients about conflicts of interest and how they are managed, while ensuring that other controls exist to manage the conflict beyond disclosure.
- Develop a testing regime for the firm's conflicts management framework.
- Include regular CCO reporting of conflicts management to the firm's UDP, executive team and board of directors.
- Develop adequate processes for written records on how conflicts are identified, escalated and managed.
- Develop and carry out effective training programs for all executive, representatives, operational and compliance staff to ensure appropriate levels of understanding of conflicts and the firm's conflicts regime.
- Ensure that the firm's written compliance policies and procedures reflect the specific conflict management practices.
- For investment fund managers, ensure that the conflicts regime as it applies to management of their public funds is effective and remains compliant with NI 81-107 and fits with the conflicts regime expected by the Client Focused Reforms for any other business conducted within the firm.
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