Amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (Rule) and its Companion Policy, known as the Client Focused Reforms (CFR), are required to be implemented by registrants starting June 30, 2021.
The Canadian Securities Administrators (CSA) developed the CFRs based on the concept that the interests of the client should come first in the client-registrant relationship. The enhanced compliance requirements that arise as the CFRs take effect apply to all registered dealers and advisers (and registered investment fund managers under certain circumstances). Amendments came into force on December 31, 2019 with a phased implementation plan beginning on December 31, 2020. The CSA published relief orders providing registrants with additional time to comply with the CFRs, acknowledging operational and compliance challenges resulting from pandemic-related disruption to their businesses, which we wrote about here. To assist registrants as they prepare, the CSA have published guidance in the form of Frequently Asked Questions (FAQ), last updated on December 18, 2020. The Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association (MFDA) were involved in the development of the CFR amendments and will also be amending their rules, policies and guidance.
What Needs to Happen and When?
The key thematic reforms introduced by the CFRs and the required implementation dates are noted below:
By June 30, 2021:
- Conflicts of interest: The rules require that firms address material conflicts of interest in the client's best interest. The CFRs outline how material conflicts are expected to be identified, documented, addressed and disclosed. Conflicts arising from proprietary products and incentive and third-party compensation arrangements, in particular, must be fully disclosed and documented and a firm must be in a position to substantiate how these products and arrangements are aligned with a client's interest.
- Referral Arrangements: All referral arrangements must meet the enhanced standard for conflicts of interest and must be documented, monitored and supervised. Registrants must demonstrate how a specific referral is in the client's best interest.
By December 31, 2021:
- Know your product (KYP): The new KYP obligation requires registered firms to take reasonable steps to understand any securities that are purchased and sold for, or recommended to, their clients. This includes the structure, features and risks, and initial and ongoing costs and their impact. Registered firms are expected to have policies, procedures and controls in place to appropriately assess, approve and monitor all securities made available to clients.
- Know your client (KYC): Registrants must collect an expanded list of information to meet their KYC obligations. In addition, they must take reasonable steps to obtain the client's confirmation of the accuracy of any information collected. Client information must be reviewed at minimum intervals for currency and updated if the registrant becomes aware of a significant change.
- Suitability determination: The Rule now explicitly states that a registrant must put its client's interests first when making a suitability determination. After complying with KYC and KYP, a registrant is expected to have sufficient information to determine whether an investment action is suitable for a client and puts the client's interest first. An ongoing suitability determination is required when assessing the suitability of the type of account, conducting periodic reviews of a client's account, acting in response to client instructions and liquidating securities.
- Relationship disclosure information (RDI): Amendments to the Rule expand the RDI requirements to include informing clients about potentially significant restrictions, costs, and limitations relating to the products offered.
- Misleading communications: The Rule introduces an explicit requirement that a registrant not hold itself out in any manner that could reasonably be expected to deceive or mislead existing or prospective clients with respect to proficiency, experience or qualifications, the nature of the relationship with the registrant, and products or services provided.
- Compliance training: The Rule requires registered firms to provide ongoing compliance training to its registered individuals including how to meet CFR obligations.
Permitted Clients Exemption
Registrants are exempt from certain KYC and suitability determination obligations for their institutional “permitted clients” provided they obtain a written waiver. A new section in the Rule combines and expands existing exemptions to include institutional “permitted clients” with managed accounts. These obligations can also be waived by an individual “permitted client” whose account is not a managed account.
In the FAQ, the CSA advise that suitability cannot be waived if a client does not qualify as a non-individual “permitted client”, even in the case of a client having a high degree of sophistication in assessing their own investment needs. Registrants are expected to make reasonable enquiries to determine how much a client's own assessment informs their suitability determination for that client.
Compliance Systems and Recordkeeping
The CSA have restated their expectation that registered firms review and amend their compliance systems to implement the significant compliance and operation changes required to comply with the CFRs. This includes making changes to policies, procedures and controls to address material conflicts of interest in the best interest of clients and establishing a framework where clients' interests are put first when making suitability determinations. Registrants are required to keep records that document and demonstrate compliance with the CFRs. Registered firms will also need to train their registered representatives on compliance with securities legislation in light of these enhanced requirements.
The CSA have noted in the FAQ that, with respect to existing clients, firms may continue to conduct reviews and updates to KYC and suitability determination at the intervals that are currently in place until December 31, 2021, after which these reviews must be made according to the schedule indicated in the CFRs.
Originally Published by Stikeman Elliott, March 2021
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.