On August 3, the Canadian Securities Administrators (CSA) and the Canadian Investment Regulatory Organization (CIRO) published joint Staff Notice 31-363 Client Focused Reforms: Review of Registrants’ Conflicts of Interest Practices and Additional Guidance (the Notice).
The Notice provides a summary of the findings of the CSA and CIRO’s review of conflicts of interest practices related to the Client Focused Reform as well as additional staff guidance to securities advisers, dealers, and representatives (registrants).
The Notices finds the following deficiencies related to firm's management of conflicts of interest:
Failure by registrants to identify one or more material conflicts of interest (e.g. internal compensation arrangements and incentive practices, third-party compensation, fees charged to clients, referral arrangements, gifts /entertainment…)
Inadequate controls to address certain material conflicts in the best interest of clients
Missing or incomplete disclosure related to material conflicts of interest (i.e. missing or incomplete disclosure related to material conflicts of interest, format of disclosure, disclosure prepared by another entity)
Inadequate policies and procedures related to conflicts of interest
Lack of or inadequate training on conflicts of interest
Inadequate conflicts of interest record keeping
CSA and CIRO recommend that firms (non-exhaustive list):
Maintain internal compensation arrangements that do not differ by product or service sold or by account or client type
Apply consequences for inappropriate behaviour or activities in pursuit of sales or revenue that are proportionate to the potential benefit for reaching targets or thresholds
Clearly document how securities that provide third-party compensation fit within the firm’s business model and strategy and how they are aligned with client interests and the services provided to clients
Ensure that all clients (i.e., referred and non-referred clients) are treated fairly by the registrant
Send annual questionnaires to registered individuals who participate in referral arrangements on the nature and extent of their involvement in referral arrangements
Provide clear, concise and timely disclosure
Draft adequate policies and procedures and update the latter appropriately and regularly