Investor Alert:
CIRO is issuing a warning to Canadian investors regarding Canada Token Trade.
Effective Date: December 31, 2021
In this Guidance Note, we set out IIROC’s expectations for Dealer Member (Dealer) supervision of client account activity.
Registered Individuals1 are primarily responsible for compliance with business conduct requirements. However, Rule 3900 requires Dealer supervision of account activity to ensure compliance with IIROC requirements, securities laws and other applicable laws. The standards in Rule 3900 provide Supervisors with guidelines to monitor the handling of these responsibilities by Registered Individuals.
Dealers’ supervisory structures should include policies and procedures that address screening of trading activity to detect issues for further enquiry or investigation. A Dealer is not required to enquire into or investigate every trade that meets the criteria in Rule 3900 or this Guidance, but should exercise reasonable judgment in selecting items for further investigation.
This Guidance focuses on the requirements in Rule 3900 of the IIROC Rules2 - Supervision. Guidance on IIROC’s Universal Market Integrity Rules’ (UMIR) trading supervision requirements can be found in Notice 17-0190.
Related Projects
In IIROC’s Three Year Strategic Plan and Priorities for Fiscal 20203 , we discuss modernizing our approach to supervision. Generally, our supervisory requirements are technology neutral and we support Dealers using automation to assist them with supervisory tasks. It is reasonable to think that as Dealers’ technological capabilities improve, they will be able to supervise accounts on a more comprehensive basis. However, we have received requests from industry participants for more clarity about how our rules are to be applied to evolving business models and processes (e.g. the use of algorithm logic). Consequently, we are working on a number of separate projects to modernize our approach to supervision and provide the clarity industry is seeking. This work will result in, among other things, new guidance and updates to this Guidance. In the meantime, we encourage you to contact us if you have any questions relating to this topic.
Part B of Rule 3900 sets out the general requirement for Dealers to establish and maintain written policies and procedures for supervising accounts, which includes its supervision standards and account activity review steps. Parts C through G of Rule 3900 contain more specific supervision requirements for different account types4 . For example, Part C contains the requirements for supervision of retail client accounts, and Part G contains those for managed and discretionary accounts.
When appointing Supervisors, Dealers should consider the following:
Dealers conducting retail business outside their head office should consider the following:
The following should be considered when developing policies and procedures addressing the supervision of retail client accounts, as required by Part C of Rule 3900:
Based on their business model, Dealers may choose to use a two-tiered trade review system as described in this Guidance. We traditionally considered a two-tier system of post-trade activity review acceptable for Dealers with multiple business locations conducting retail account activity. However, other supervisory systems can be used based on the Dealer’s business model provided they meet our daily and monthly trade supervision requirements8 . We invite any Dealer considering a different supervisory system to speak with us.
Resident Supervisors will normally conduct the first-tier review at their respective business location. Dealers can conduct these reviews in a central location (head office or regional office) provided:
Dealers should design their first-tier daily review of the previous day's trading to detect the issues in section 3945. They should complete this review one business day after the trading activity occurs, unless precluded by unusual circumstances.
A first-tier monthly review should cover the same areas as daily activity reviews. Dealers may not be able to review every retail account statement produced. A first-tier monthly review starts with the selection of retail client accounts. Dealers should design this selection to detect improper account activity. For example, a Dealer could review the activity of all clients charged gross commissions of $1,500 or more for that month.
A first-tier monthly review should include all non-client accounts with any activity other than dividend and interest payments.
Dealers should complete this review within 21 days of the review period, unless precluded by unusual circumstances.
While a Dealer’s head office will normally conduct the second-tier review, a regional office could also conduct it. Second-tier supervision has a different purpose and is generally not at the same depth as first-tier supervision. Dealers should design their second-tier supervision to:
Where the second-tier reviews are conducted by personnel who do not have the authority to resolve the issues they identify, the Dealer should have procedures for referring these issues to a Supervisor who has the appropriate authority.
Dealers should include criteria for trading activity subject to second-tier daily reviews in their policies and procedures. For example, the following criteria would satisfy Rule 3900:
Dealers should complete this review one business day after the activity occurs, unless precluded by unusual circumstances.
Dealers should select accounts for second-tier review based on criteria in their policies and procedures. For example, the following review criteria would satisfy Rule 3900:
Dealers should complete this review within 21 days of the review period, unless precluded by unusual circumstances.
Dealers must have policies and procedures that address identifying, dealing with and keeping first level Supervisors informed about other client related matters such as:
IIROC Rules this Guidance Note relates to:
This Guidance relates to:
This Guidance Note was published under Notice 20-0007 – Notice of Approval/Implementation – Guidance Review Project – Group 1.