Client Focused Reforms: the SRO Chapter
Last week, the MFDA and IIROC published their much-awaited versions of the Client Focused Reforms (CFRs) (MFDA’s publication – IIROC’s publication). These versions are aimed to amend the Self Regulatory Organization’s (SRO’s) rules to adhere to provincial regulators’ requirements. The combined efforts of the provincial regulators and the SROs are intended to result in a new, higher standard of conduct across all registration categories to the benefit of their clients.
The SRO publications included two types of changes to theirs rules: Public Comment Rule proposals, and Housekeeping changes. Housekeeping Rule amendments have been deemed to be approved and will be in effect with the implementation dates of the CFR amendments. Public comment amendments are subject to a 60-day public comment period.
For example, IIROC has published for comment proposed guidance on Product Due Diligence and Know-Your-Product which will replace Notice 09-0087 best practices for product due diligence (Notice 09-0087). Similarly, the MFDA’s notice announced it is seeking comment on conforming amendments to Rules 2.2.1 (Know-Your-Client), 2.2.5 (Know-Your-Product), 2.2.6 (Suitability Determination), to name a few.
To set expectations around the scope of public comments, the MFDA stated that comments are being sought on the “drafting of the proposed conforming amendments’’. Implying that to the dismay of some, the SROs are not inviting comments that seek to revisit the policy rationale behind the new requirements.
Best Interest Principles
Many might recall that prior to publishing these amendments, IIROC and MFDA worked with the Canadian Securities Administrators (CSA) to develop the CFRs. The published amendments to their rules are the SRO’s attempt of helping their members align with them. Therefore, it shouldn’t be a surprise that the reforms will be implemented on the same schedule by the CSA, IIROC and the MFDA.
An example of the principled-based requirements include a registrants’ obligation to ‘know your product’. This requires that registrants must take steps to understand the securities that they purchase, sell or recommend to a client. This includes the impact of the initial and ongoing costs associated with acquiring and holding each security, sufficient to enable them to make a suitability determination that puts the client’s interests first.
On September 10, 2020, InvestorCOM held its first CFR Roundtable. The event included 25 senior leaders from 16 leading wealth management firms. The forum provided compliance leaders an opportunity to better understand the nuances of the regulation, discuss compliance challenges, and consider viable strategies and solutions in a collaborative virtual environment with industry peers. The slivers of insights from this gathering may shed light on the types of comments the SROs may receive during the 60-day comment period.
During the Roundtable for example, participants indicated that the newly formed KYP obligations and Enhanced Suitability requirements will be the most challenging aspects of the CFR requirements. Moreover, nearly 70% of the participating firms stated that they plan to deploy technology to assist with the representative’s requirement to demonstrate KYP, including the suitability requirement to assess Reasonably Available Alternatives.
Visit https://info.investorcom.com/cfr-insights to read the insights gathered from this event.
While some may have hoped for the SRO rules to dial down the required implementation pressures, others have used the time to better understand potential gaps in their operations, while conducting an external stakeholder analysis of various compliance technology vendors and service providers.
What the SRO publications have clarified is that the principles of the CFRs are here to stay. Moreover, the reforms are intended to result in a new, higher standard of conduct across all categories of registered dealer and registered adviser.
InvestorCOM will be hosting an IIROC Workshop on November 24 to dive deeper into the CFR requirements and to explore implementation opportunities surrounding the new KYP obligations. We will be publishing insights from this event. Sign up for our mailing list to be notified when this information is available.
Author: Parham Nasseri, VP, Regulatory Strategy at InvestorCOM Inc.