Investor Alert:
CIRO is issuing a warning to Canadian investors regarding Canada Token Trade.
IIROC is providing guidance on the disclosure and approval of outside activities. In this Guidance Note, we set out:
For the purposes of this Guidance Note, “outside activities” includes any activities conducted outside of the Dealer Member (Dealer) by an Approved Person,1 whether or not the Approved Person receives compensation for such activities.
Dealers should have policies and procedures that require all outside activities to be disclosed and approved by the appropriate supervisor. The process of approval ought to consider any potential client confusion or conflicts of interest. Approval should only take place where there are effective controls and qualified supervision. Dealers should ensure that approval provisions include a due diligence process and that appropriate records are kept.
Below we have set out a summary of the various requirements relating to outside activities. Dealers should note that there are differences in the individual scope of each requirement.
As set out above, the conflict of interest provisions in NI 31-103 and in Part B of Rule 3100 require Dealers, and where applicable Approved Persons, to take reasonable steps to identify existing material conflicts of interest and material conflicts of interest that the Dealer would reasonably expect to arise between the Dealer, including each Approved Person acting on behalf of the Dealer, and a client.
Part B of Rule 3100 also requires Approved Persons to address all material conflicts of interest between the client and the Approved Person in the best interest of the client. If they cannot do so, the conflict or potential conflict must be avoided.
Given that conflicts may arise when Approved Persons are engaged in outside activities, and in keeping with guidance provided in the CP of NI 31-103, Dealers should ensure that they consider any existing or potential conflicts of interest that may arise from an Approved Person’s proposed outside activity before approving any such activity. Furthermore, if a Dealer concludes that it cannot properly control a potential conflict of interest in the client’s best interests, it should not permit the outside activity.
Dealers’ pre-approval processes should be robust and impartial enough to reasonably:
Under no circumstances should an outside activity which might cause consumer confusion or reflect poorly on the Dealer or the industry, be permitted. Accordingly, the reputation of others involved with the outside activity should be considered. Dealers are also reminded that they must be able to provide evidence of the due diligence performed as part of their outside activity approval process. IIROC reserves the right to satisfy itself as to the sufficiency of that evidence.
Dealers are also reminded that there is also an implicit obligation to ensure that the outside activities of all Approved Persons are compatible with the conduct standards set out in Rule 1400.
Dealers should establish appropriate approval processes which take into account the considerations below. However, the following do not represent an exhaustive list of factors that a Dealer should consider when assessing an outside activity:
Outside activities should not materially impair a Dealer’s ability to discharge its “duty of care” to its clients. A Dealer should not permit other activities which are likely to disrupt timely client access to their accounts and suitable advice (where that is part of the service offered). The amount of time that an Approved Person devotes to an outside activity is an important consideration.
Outside activities (e.g. positions with public issuers) that may prevent an Approved Person from providing fully informed and unbiased counsel to his/her clients should not be permitted unless the conflict is addressed in the best interest of the client. Consistent with section 13.4 of NI 31-103 CP, Dealers and Approved Persons are reminded that some conflicts of interest are so fundamentally contrary to another person’s or company’s interests, that controls and/or disclosure and supervision cannot effectively address them and they should be avoided. Furthermore, as noted in subsection 3111(2), an Approved Person must avoid any material conflict of interest between the client and the Approved Person if the conflict is not, or cannot be, otherwise addressed in the best interest of the client.
Outside activities should not involve the use of client information. Clients provide confidential information to Dealers solely for the purposes of their dealings with Dealers. They may also grant permission for the Dealer to provide that information to affiliates of the Dealer that provide other services that may be of interest to the client. That permission does not, however, extend to an individual Approved Person’s outside activities. Therefore training and controls should be in place to prevent Approved Persons from making use of such information in their pursuit of outside activities.
Activities “outside” of the Dealer must be clearly seen to be outside the Dealer. The distinction between the Dealer’s business and the outside activity should be clear to clients.
Dealers should not permit the use of its premises, records, logos, trade name(s), stationery, support staff, office facilities (e.g., mail, fax, email, etc.) for the purposes of outside activities.3
The approval and control processes for outside activities should be robust and impartial. These processes should include the following:
Approved Persons should never adjudicate their own outside activity request.
As noted above, outside activities should comply with both the letter and spirit of Rule 1400 and Part B of Rule 3100 .Therefore no outside activity which might cause consumer confusion or reflect poorly on the Dealer or the industry should be permitted.
As part of their approval process, Dealers should also consider the criteria set out in section 2.2 of the Companion Policy to NI 33-109 (CP of 33-109) that the CSA will consider in relation to an individual’s outside activities when assessing an individual’s application for registration, change in registration or continued fitness for registration. Among other things, the CSA will consider whether:
In order to comply with the requirements set out in Rule 1400 and Part B of Rule 3100, as well as section 13.4 of NI 31-103, Dealers must have policies and procedures in place that:
Once identified, conflicts can be addressed either through avoidance or by disclosure and supervision. Conflicts of interest must be addressed in the best interests of the client(s).
Dealers should refer to section 13.4 of the CP of NI 31-103 which sets out the CSA’s expectations relating to a Dealer’s responsibility to monitor and supervise outside activities. Among other things, section 13.4 of the CP of NI 31-103 states that this monitoring and supervision include the following:
This Guidance Note also sets out the process for reporting outside activities, via NRD, to IIROC. Dealers are reminded that all Approved Persons are required to disclose their outside activities on NRD. A helpful resource is Appendix C of the CP of 33-109 which illustrates the analysis on whether an activity outside of a Dealer is reportable.
Item 10 of Form 33-109F4 – Registration of Individuals and Review of Permitted Individuals (Form 33-109F4) is intended to capture all roles and responsibilities with their Dealer and certain other identified reportable outside activities, including activities with affiliates of the Dealer. Individuals must treat each reportable activity outside of their sponsoring firm as a separate item. Please also note that changes to employment relationships and outside activities must be reported within 30 days of the change, pursuant to section 4.1 of NI 33-109.
This reporting requirement is also for activities with affiliate/related/subsidiary companies of the Dealer. Although generally any position with a parent, affiliate or subsidiary of a Dealer would have been approved by the Dealer, nonetheless the position must be disclosed to the relevant regulators.
The reporting requirement also includes situations where the Approved Person conducts business through a “trade name” or conducts other activities outside of the Dealer. Reporting of a trade name is required under item 1(3) of Form 33-109F4 if the trade name is used for purposes of Dealer activities. If a trade name will be used for outside activities (e.g., insurance) the trade name is required to be filed under both item 1(3) and item 10 of NI 33-109F4.
For individuals who are conducting insurance activities,, this information is recorded under item 13(3)(a) Non-securities regulation of Form 33-109F4 and is also required to be disclosed as an outside activity under items 10 of Form 33-109F4, whether or not through the Dealer’s related or affiliated entity. Responses to all item 10 and 13(3)(a) questions are required.
IIROC’s acknowledgement of these notices, via NRD, does not represent our approval of the individual’s outside activity or that we agree that all potential conflicts of interest have been addressed. As a result, IIROC may request further information following its acknowledgement of the notice, where deemed necessary.
Item 10 of Form 33-109F4 requires that all roles and responsibilities of an Approved Person with their Dealer member must be disclosed. Certain other identified reportable outside activities, including activities with affiliates of the Dealer must also be disclosed.
Any outside activity that places an Approved Person in a position of influence over a client or potential client must be disclosed. A position of influence is defined in subsection 13.4.3(1) of NI 31-103 as a position, other than a position with a sponsoring firm, if, due to the nature of the position or training or specialized knowledge required for the position, an individual in that position would be considered by a reasonable person to have influence over another individual. This may include the following:
A registered individual in a position of influence is prohibited from purchasing or selling securities or derivatives for, or recommending the purchase, sale or holding of securities or derivatives to:
This restriction is required to address the conflict arising from the position of influence.
IIROC Rules this Guidance Note relates to:
This Guidance Note replaces Notice 13-0163 – Disclosure and approval of outside business activities.
This Guidance Note was published under Notice 22-0080: Updated Guidance – Disclosure and approval of outside activities and investment in a Dealer Member