On December 20, 2019 the Investment Industry Regulatory Organization of Canada (IIROC) issued its 2020 compliance report highlighting its compliance priorities for the year ahead. The report can help IIROC Dealer Members (Dealers) focus their supervision and risk management efforts in 2020.
Key IIROC priorities include:
- Client Focused Reforms (CFR). IIROC worked
with the Canadian Securities Administrators to develop client
focused reform amendments which we discussed in a
previous article. The CFR amendments will be submitted for
IIROC board approval in early 2020 and will:
- require Dealers to put their client's interest first when making a suitability determination
- require Dealers to do more to clarify what clients should expect from their registrants
- introduce a Product Due Diligence/Know-Your-Product provision.
In preparation for the implementation of the CFRs, IIROC will enhance its Business Conduct Compliance (BCC) examination program, with particular emphasis on compensation-related conflicts.
- New Plain Language Rules. On June 1, 2020, IIROC's Plain Language Rule Book (New Rules) will come into effect (with a few exceptions), and the existing IIROC Dealer Member Rules (DMRs) will be repealed. The New Rules introduce both material and non-material changes to the DMRs, including changes to registration requirements, such as the re-introduction of the categories of Associate Portfolio Managers and Portfolio Managers, and changes to proficiency requirements. IIROC published a table of concordance that tracks the provisions of the New Rules to the existing DMRs and describes any repealed requirements and changes. IIROC will publish additional guidance on the New Rules soon.
- Automation of Supervisory Processes. Noting the increased use of automation by Dealers, including to support Dealer compliance activities, IIROC will enhance its BCC examination program to more effectively test for Dealer compliance in the area of automation. Dealers are reminded that any significant automation of processes currently conducted by registered supervisors, or their delegates, will require a business model change submission to IIROC.
- Limitation of Liability Clauses in Retail Client Account Agreements. As discussed in our previous article, IIROC has identified certain types of limitation of liability clauses in retail account agreements that it considers questionable and may take a range of actions against the Dealer if it identifies such clauses during the course of 2020 BCC examinations.
- Cybersecurity. To support the
cybersecurity resiliency of Dealers, IIROC:
- Visited small and medium-sized firms last year to discuss the results of the most recent cybersecurity report card, identify areas for improvement, and build a roadmap to help improve cyber resilience.
- Updated its 2015 Cybersecurity Best Practices Guide, which will be available in early 2020.
- Will be planning further table-top exercises for small and medium-sized firms.
- Will be incorporating criteria to assess cybersecurity risk at all Dealers within the Financial and Operations Compliance risk model by March 31, 2020.
- Trading Supervision Obligations Under UMIR
7.1. Having implemented changes to the supervision of
trading requirements effective March 27, 2018, IIROC continues to
encourage Dealers to apply a principles-based approach that
addresses the specific risks associated with their business model
and trading activity. Some of the factors to be considered include:
- The Dealer's size (by revenue, market share, market exposure and trade volume).
- The Dealer's organizational structure.
- The number and location of the Dealer's offices.
- The nature and complexity of the products and services offered by the Dealer.
- The number of registrants assigned to a location.
- The disciplinary history of registered representatives or associated persons.
- The risk profile of the Dealer's business and any indicators of irregularities or misconduct.
- Continuing Education. Significant amendments to IIROC's continuing education regime, discussed in our previous post, came into effect on January 1, 2020.
- Best Execution. IIROC reviews will continue to
focus on efforts taken by Dealers to address changes to the best
execution requirements introduced in 2018. Areas of focus for IIROC
- Documented and implemented policies and procedures that consider the factors and elements that contribute to the best execution of client orders.
- Content and disclosure of best execution policies.
- Governance around best execution decisions.
- Training conducted by the Dealer, including that training is provided to all employees who are involved in the best execution process.
- Customer Account Guarantees. In order to
ensure the enforceability of customer account guarantees used to
support capital positions of Dealers, IIROC examinations will
continue to focus on the following practices:
- Dealers accepting waivers by account guarantors to not receive monthly customer statements of all accounts guaranteed.
- Insiders of a Dealer guaranteeing the indebtedness of a non-arm's-length account rather than transferring cash from their trading account.
- The misuse by owners of the Dealer of personal account guarantees to offset capital charges associated with Dealer indebtedness to circumvent the triggering of month-end early warning tests instead of recapitalizing.
- Enterprise Risk Management (ERM) Examination Approach. IIROC examinations of large integrated Dealers that are subsidiaries of Canadian federally-regulated financial institutions and have mature ERM frameworks will focus on how the Dealer identifies, mitigates, and manages the risks associated with their financial and operational activities in compliance with IIROC rules.
- Portfolio Manager (PM) Service Arrangements. Dealers that provide recordkeeping and custody services for individual clients of PM registrants are reminded that each individual client of the PM is considered to be a client of the Dealer for purposes of providing record keeping and custody services. IIROC reminds Dealers to pay specific attention to minimum requirements relating to the execution of written agreements, the opening and operation of accounts, relationship disclosure information and the provision of client confirmations and statements.
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