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This is a joint staff notice published by staff of the Canadian Securities Administrators (CSA) and staff of the Canadian Investment Regulatory Organization (CIRO) (together Staff or we).
We are publishing this joint staff notice (the Notice) to summarize the findings of our review of firms’ conflicts of interest practices and to provide additional Staff guidance to securities advisers, dealers and representatives (registrants) including suggested practices related to the conflicts of interest requirements. We reviewed firms across various registration categories and business models. In this Notice, we discuss the most common findings and identify applicable rules and guidance. The guidance set out below will be relevant to registrants to varying degrees, and will depend on the registration category/business model.
The CSA, the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) (IIROC and the MFDA amalgamated as of January 1, 2023 to continue as CIRO) adopted amendments to implement the Client Focused Reforms (CFRs), which made changes to the registrant conduct requirements in order to better align the interests of registrants with the interests of their clients, improve outcomes for clients, and make clearer to clients the nature and the terms of their relationship with registrants.
The CFRs introduced significant enhancements to the registrant conduct obligations which came into force in two stages in 2021 by amending Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant Obligations (Regulation 31-103), as well as Policy Statement to Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant Obligations (Policy Statement 31-103). Each of IIROC and the MFDA also amended their member rules, policies and guidance to be uniform with the CFRs in all material respects.
Under the CFRs conflicts of interest requirements that came into force on June 30, 2021, registrants must take reasonable steps to identify existing and reasonably foreseeable material conflicts of interest, and must address those material conflicts in the best interest of clients. If there is no way to address the material conflicts of interest in the best interest of clients using controls, those conflicts must be avoided. This is an ongoing registrant obligation.
We expect firms to take the lead in addressing material conflicts of interest, including those related to the firm’s product shelf and compensation structures. We expect registered individuals to comply with their firm’s conflicts of interest policies and procedures and with their own obligations to identify and address material conflicts of interest in the best interest of the individual client, and must report conflicts of interest to their firm.
Registered firms are also required to provide affected clients with disclosure of material conflicts of interest before account opening or in a timely manner if the conflict has not previously been disclosed. We reiterate that disclosure alone is not sufficient to address a material conflict of interest in the best interest of clients. Therefore, to address a material conflict of interest in the best interest of clients, controls (including pre-trade controls, post-trade reviews etc.) must be used in conjunction with adequate disclosure.
The CFRs conflicts of interest requirements are fundamental obligations of registrants toward their clients and are essential to investor protection. They are an extension of the duty of registrants to deal fairly, honestly and in good faith with their clients.
The main objectives of the review were to:
The CSA, IIROC and the MFDA conducted compliance reviews (the reviews) of 172 registered firms to assess their compliance with the CFRs conflicts of interest requirements. The sample included:
Registration Category | Number of Firms Reviewed |
---|---|
Investment Fund Manager / Portfolio Manager / Exempt Market Dealer | 54 |
Exempt Market Dealer | 32 |
Investment Dealer | 28 |
Mutual Fund Dealer | 26 |
Portfolio Manager | 14 |
Investment Fund Manager / Portfolio Manager | 11 |
Portfolio Manager / Exempt Market Dealer | 7 |
Total | 172 |
No deficiencies relating to conflicts of interest were raised for 37 firms. For the remaining firms, compliance deficiencies were identified, and we required each firm to take corrective actions to address the deficiencies raised. We will work with these firms to ensure they address and resolve the deficiencies within a reasonable time frame. We may also consider other appropriate regulatory action as necessary.
When reviewing registrants’ conflicts of interest practices, the following informed our review:
While the relevant securities legislation is generally principles-based, we intend the guidance in this Notice to provide direction to registrants regarding how to meet these obligations, which we will apply when assessing compliance with securities law. However, there may be other ways to meet these obligations that we will closely examine.
The following table sets out the common deficiencies identified and the percentage of firms reviewed with the noted deficiencies as observed during the reviews:
Deficiency Noted | % of Firms |
---|---|
Failure by registrants to identify one or more material conflicts of interest (see Section A) | 34% |
Inadequate controls to address certain material conflicts in the best interest of clients (see Section A) | 28% |
Missing or incomplete disclosure related to material conflicts of interest (see Section B) | 53% |
Inadequate policies and procedures related to conflicts of interest (see Section C) | 66% |
Lack of or inadequate training on conflicts of interest (see Section D) | 17% |
Inadequate conflicts of interest record keeping (see Section E) | under 10% |
We observed that some firms were not familiar with the guidance published in Policy Statement 31-103 and did not consider the examples of conflicts or controls provided when determining how to address material conflicts of interest in the best interest of their clients. These firms failed to identify certain conflicts of interest, assess them as material conflicts of interest, or implement controls sufficient to address them in the best interest of clients.
This Notice primarily focuses on the findings we observed as a result of our review of the firms included in the sample; therefore, there may be other deficiencies related to conflicts of interest which are not specifically discussed in this Notice.
A description of the specific issues observed and related guidance is provided in the Notice as follows:
Identifying material conflicts of interest and addressing material conflicts of interest in the best interest of the client
Identifying conflicts of interest is a fundamental registrant obligation. We expect registrants to identify any circumstances where:
The materiality of a conflict will depend on the circumstances. While we recognize that registrants exercise their professional judgement to determine whether a conflict of interest is material, we expect registrants to consider whether the conflict may be reasonably expected to affect either of the following or both (i) the decisions of the client in the circumstances; (ii) the recommendations or decisions of the registrant in the circumstances.
We found that although some firms had appropriately identified certain conflicts of interest as material, they lacked controls to address the material conflicts of interest or the controls implemented were insufficient to address the material conflicts of interest in the best interest of clients.
Also, while certain firms had controls in place to effectively address certain material conflicts of interest, they had not identified those conflicts of interest or assessed them as material.
When addressing material conflicts of interest in the best interest of clients, a registered firm and its registered individuals must put the interests of their clients first, ahead of their own interests and any other competing considerations. Registrants must address material conflicts of interest by either avoiding those conflicts or by using controls to mitigate those conflicts sufficiently so that the conflict has been addressed in the client’s best interest.
To comply with subsections 13.4(2) and 13.4.1(2) of Regulation 31-103 and subsection 3112(1) and subsection 3110 (3) of IDPC Rules and Rule 2.1.4.(1)(b) and 2.1.4.(2)(b) of MFD Rules, as applicable, registrants must avoid a material conflict of interest if there are no appropriate controls available in the circumstances that would be sufficient to otherwise address the conflict in the best interest of the client. Similarly, if a particular conflict is capable of being addressed by using controls, but the specific controls being used by a registered firm are not sufficiently mitigating the effect of the conflict, the firm must avoid that conflict until it has implemented controls sufficient to address the conflict in the best interest of the client.
Registered firms must avoid a conflict if that is the only reasonable response in the circumstances that is consistent with the obligation to address conflicts in the best interest of clients. Registered firms must avoid such conflicts even if this means foregoing an otherwise attractive business opportunity or type of compensation for the firm or its registered individuals.
We have set out below examples of specific conflicts of interest that were either:
We have explained why we view these conflicts as material in the circumstances, and have also outlined suggested controls to comply with the requirement to address those material conflicts of interest in the best interest of clients.
While motivating registered individuals to generate revenue or grow assets is normal practice, some compensation practices can result in behaviour that is not in the best interest of clients. We found that some firms reviewed did not:
For example, in our view material conflicts of interest can arise when the compensation (or some proportion of the compensation) paid to registered individuals is tied to certain factors, including but not limited to:
Although we appreciate that firms incentivize their registered individuals in order for the firm to succeed, in our view, internal compensation arrangements and incentive practices, including those that incorporate bonus structures, must be considered from a conflicts of interest perspective because these arrangements and practices have the potential to strongly influence the recommendations of a registered individual to clients. While we recognize that certain incentives associated with the performance of client accounts in many instances align the interests of the client and the registrant, such performance incentives could simultaneously present a material conflict of interest. This conflict arises because such incentives could impact the recommendations or decisions of the registrant in the circumstances (e.g., by investing in riskier securities) in order to achieve the prescribed performance bonus. We expect firms to implement controls to ensure that their compensation arrangements and/or incentive practices do not influence registrants to put their interests ahead of their clients’ interests, and must provide clients with the required conflicts of interest disclosure.
While some firms reviewed failed to identify the material conflicts of interest presented by internal compensation arrangements and incentive practices and therefore failed to disclose the conflicts adequately, almost all of those firms had internal controls in place to address the material conflicts of interest. As a reminder, the suggested controls to address the material conflicts of interest related to internal compensation arrangements and incentive practices are set out below, as well as some additional examples of controls that we noted were used by some firms reviewed.
Suggested Controls:
We direct you to section 13.4 of Policy Statement 31-103 for detailed examples of controls relating to this conflict, including the following:
Other examples of controls that some firms reviewed had implemented include the following:
Some firms reviewed failed to identify the receipt of any third-party compensation, including the receipt of greater third-party compensation for the sale of certain securities relative to others, as a material conflict of interest. In addition, some firms failed to identify the material conflict of interest associated with receiving third-party compensation in the following specific scenarios:
We note that material conflicts of interest almost always arise when a firm receives additional third-party compensation when making a product available for sale, such as due diligence or administrative fees received from an issuer.
Some firms reviewed lacked adequate controls on the conflicts of interest arising from third-party compensation and did not provide clients with adequate disclosure.
It is an inherent conflict of interest for a registrant to receive third-party compensation, such as commissions that the firm receives (which it may then share with registered individuals), for the distribution of products a firm sells to clients. We also consider circumstances where registrants receive greater third-party compensation for the sale or recommendation of certain securities relative to others to be an inherent conflict of interest. In our experience, these are almost always material conflicts of interest as it may influence the conduct of the firm and its registered individuals. For example, it may influence the selection of products that the firm puts on its product shelf, and the recommendations or decisions of the registered individual may also be affected by the incentive to earn the commission. The decisions of clients to invest may also be affected by the existence and/or amount of the third-party compensation.
Firms should be able to demonstrate that both product shelf development and client recommendations are based on the quality of the security without influence from any third-party compensation associated with the security.
With respect to disclosing the nature and extent of such conflict, the firm should include language in its conflicts of interest disclosure that states that a particular product or a group of products pays a larger percentage commission than other products available to the client and the extent of the compensation difference should be explained.
Suggested Controls:
We direct you to section 13.4 of Policy Statement 31-103 for detailed examples of controls relating to this conflict, including the following:
Some firms we reviewed did not recognize that a registrant trading in, or recommending, proprietary products, is an inherent conflict of interest that is almost always material, as there is the potential that the registrant will put their interest, or the interests of related entities, above their clients’ interests when making such trades or recommendations.
In addition, we found that firms that only trade in, or recommend, proprietary products, relied primarily on performing suitability determinations and providing clients with the conflicts disclosure to address these material conflicts of interest. In our view, this generally will not be adequate to address these material conflicts of interest in the best interest of clients.
We direct you to section 13.4 of Policy Statement 31-103 for detailed examples of controls relating to this conflict, including the following:
For firms who only trade in, or recommend, proprietary products:
We refer you to E. Conflicts of interest record keeping obligations for guidance about our expectations related to the information firms should maintain when conducting periodic due diligence on comparable non-proprietary products available in the market.
For firms who trade in, or recommend, proprietary products in addition to non-proprietary products:
Our reviews found that some firms did not identify that different / multiple fee schedules could be a material conflict of interest in certain circumstances as it could affect either or both of the decisions of the client or the services or products offered by the registrant. In addition, where a client is charged more than other clients for the same or substantially similar products or services, there could be a breach of the registrant’s duty to treat clients fairly, honestly and in good faith.
We expect firms to demonstrate how any material conflict of interest associated with the fees charged to clients has been addressed and how the firm’s standard of care has been met. Disclosure alone is not sufficient to address this conflict in the best interest of clients, nor would disclosure alone be sufficient to demonstrate that the firm has met its standard of care.
We observed the following practices related to fees charged to clients at some firms and concluded that there were inadequate controls to address the material conflict in the best interest of clients and firms did not meet their duty to treat clients fairly, honestly and in good faith:
For example, we noted that for one firm, although clients paid different fees, all client portfolios were invested in the same model portfolio(s) and used the same investment strategies, all clients received the same services, and the firm did not have acceptable measurable criteria in place to justify the fee differences among clients. In these specific circumstances (i.e., the clients are receiving the same products and services), we do not view, for example, the geographic location of the registered individuals or their level of seniority as relevant measurable criteria to justify the use of different fee schedules. Measurable criteria that would be acceptable in these circumstances would include the client’s account size, for example. Without adequate targeted controls, our view is that the material conflict of interest is not being addressed in the best interest of clients, and the firm has not sufficiently shown that it has met its duty to treat clients fairly, honestly and in good faith.
We reviewed a few portfolio management firms that only offered their products or services to non-individual permitted clients and that had determined that different fees were not a material conflict of interest in their specific context, based on their view that it is general industry practice for this client base to negotiate fees when they retain the services of a portfolio management firm. In these specific circumstances, we agreed with the materiality determination made by these firms.
Suggested Controls:
Registrants could consider the following controls when considering how to address this material conflict of interest in the best interest of their clients:
We note that conflicts of interest also arise in connection with spreads, mark-ups, mark-downs, commissions, and service charges applied to trades by exempt market dealers (in addition to the dealers’ overall obligation to deal fairly, honestly and in good faith with clients). For example, conflicts of interest arise where an exempt market dealer recommends a private debt instrument (e.g., loan or mortgage) to different clients and the exempt market dealer chooses the rate spread it will charge to each client. In these circumstances, in addition to the obligation to deal fairly, honestly and in good faith with clients, the suggested controls above apply, and in our view the exempt market dealer must have measurable criteria in place to determine the applicable rate spreads and must document its rationale for the spread chosen. We expect the exempt market dealer to justify situations where certain clients receive a higher interest rate than other clients for the same instrument. The exempt market dealer must also provide disclosure and make all clients aware that there may be differences in the spread that clients receive or if the spread is negotiable.
Finally, as noted below, the CSA and CIRO will conduct reviews to specifically assess registrants’ compliance with other CFRs obligations, including the know your client, know your product and suitability determination requirements that came into force on December 31, 2021. We will continue to review potential issues associated with fees charged to clients with the goal of issuing additional guidance.
Some firms did not identify tying a supervisor or branch manager’s compensation to the sales and revenue of registered individuals whose conduct the supervisor or branch manager is responsible for reviewing as a material conflict of interest. There is an inherent conflict of interest in this type of compensation as supervisory staff’s compensation is not independent of the activities they supervise. This may cause supervisory staff to put their own interests ahead of clients’ interests and not effectively oversee the registered representative’s activities.
The separation, or independence, of supervisory staff compensation encourages effective oversight of representative activities. We expect that the majority of the compensation of supervisory staff would not be tied to the revenue generation of representatives, the branch or the business line that the supervisory staff oversees. We noted that certain firms reviewed have moved away from a branch-level supervision to a corporate level supervision model.
However, we recognize that in some situations, producing or non-producing branch managers may be compensated partly on the basis of branch or business line profitability. In these cases, we expect firms to assess the design of their compensation models, and ensure that the controls they have in place are sufficient to address, in the best interest of clients, these compensation-related conflicts at the supervisory level.
Suggested Controls:
We suggest the following controls to address this conflict of interest in the best interest of their clients:
We noted that some firms failed to identify instances where a registered individual was a member of the board of directors of an issuer whose securities the firm distributed or advised in as a material conflict of interest.
Directors owe a fiduciary duty to the issuer(s) on whose board(s) they serve, but the same individuals are also required to address material conflicts of interest in the best interest of the firm’s clients and owe their clients a duty to act fairly, honestly, and in good faith. These conflicting obligations may give rise to a material conflict of interest. Firms should not approve this type of outside activity unless there are stringent controls put in place that address this material conflict in the best interest of clients.
In addition, we note that section 13.5 of Regulation 31-103 includes restrictions on registered advisers engaging in certain discretionary transactions for investment portfolios where the firm’s relationship with an issuer may give rise to a conflict of interest, including trades in securities in which a responsible person (defined in section 13.5(1) of Regulation 31-103) may have influence or control (including through acting as a partner, officer, or director of the issuer of such securities). Furthermore, CIRO Rules have specific requirements regarding trades made for discretionary accounts (IDPC Rule section 3276) or managed accounts (IDPC Rule section 3280) when the individual authorized to deal with the discretionary or managed account is an officer or director of the issuer.
Suggested Controls:
Registrants could consider the following controls when considering how to address this conflict of interest in the best interest of their clients:
Paid referral arrangements, whether they are referrals into a registered firm or referrals of a registered firm’s clients out to another entity, are inherent conflicts of interest which, in our experience, are almost always material conflicts of interest, and must be addressed in the best interest of the client. The payment of a referral fee to obtain a client, or the receipt of a referral fee to refer a client, can influence a registrant to put their interests in growing their business or receiving referral fee revenue ahead of their client’s interests. Registrants should also be mindful that referral fees include any benefit, and not only monetary benefits, provided for the referral of a client to or from a registrant. For example, a mutual referral arrangement between two firms is a form of referral fee.
We observed the following referral arrangements at reviewed firms:
We noted that many firms did not identify referrals in as material conflicts of interest. Most firms identified referrals out as a material conflict of interest.
Referrals in arrangements
When assessing whether referrals in are material conflicts of interest, we expect firms to consider the following factors:
The firm’s analysis and determination as to whether the referrals in are a material conflict of interest should consider the factors above and must be adequately documented, especially where the registrant has concluded that there is no material conflict of interest.
As a general rule, if a client is referred to a registrant, the registrant may not charge the client more than other (non-referred) clients for the same, or substantially similar, products and services.
Suggested Controls:
Registrants could consider the following controls when addressing material conflicts of interest associated with referrals in:
Referrals out arrangements
Before a registrant refers a client, in exchange for a referral fee, to another party, the registrant must determine that making the referral is in the client’s best interest. In making that determination, we expect registrants to consider the benefits to the client of making the particular referral over alternatives or at all.
In making a referral, registered firms and individuals must be guided only by the client’s interests. We therefore expect that a registrant will not make a client referral to a party solely because of the referral fee that they will receive from that party, or because the amount or duration of the referral fee that they will receive from that party may be greater than the amount or duration of the referral fee that they would receive from a competitor to that party. If a client pays more for the same, or substantially similar, products or services as a result of a referral arrangement, we would not consider the inherent material conflict of interest to have been addressed in the best interest of the client, nor would this be consistent with a registrant’s obligation to deal fairly, honestly and in good faith with its clients.
In our view, registered firms must conduct a due diligence analysis to assess options that could be made available to the client. This applies equally whether the firm has referral arrangements in place with a single provider or multiple providers.
We expect registered firms to exercise professional judgement when assessing whether they have obtained sufficient information in the circumstances to determine that making the referral is in the client’s best interest. In our view, this determination should include a judicious assessment of any detrimental information obtained through the due diligence process.
For example, registrants should take reasonable steps to consult publicly available databases, search engines and make inquiries of the other party (whether registered or not) to ascertain:
We expect a firm’s due diligence to also include an assessment of the quantum of the referral fee and duration of the referral arrangement, to determine whether the referral fee and the length of time for which it will be received are reasonable in the circumstances taking into consideration the nature and extent of the products or services being provided to the client by the other party. Firms must maintain records of the due diligence conducted and their determination that the referral would be in the best interest of the client, and must have controls in place to monitor and supervise the referral arrangement on an ongoing basis.
Referrals out include referrals to the firm’s affiliate(s). In these circumstances, we also expect the registrant to assess the affiliate’s products or services offering to confirm that the referral arrangement is in the best interest of the client.
Suggested Controls:
When addressing material conflicts of interest associated with referrals out, in addition to the elements noted above (performing an assessment of the benefits of the referral arrangement, conducting the necessary due diligence and keeping such due diligence updated, and making a determination that the referral arrangement would be in the best interest of the client), registrants could consider the following controls related to the ongoing monitoring and supervision of referral arrangements:
We noted that some exempt market dealer firms allowed their dealing representatives to trade in the same issuers alongside their clients (or the firm’s clients) but failed to identify this as a conflict of interest. In our view, this is a material conflict of interest because it may impact the recommendations or decisions of the dealing representative in the circumstances. For example:
In addition to not identifying this conflict of interest, we noted that the exempt market dealer firms did not have adequate controls to address this material conflict of interest in the best interest of clients.
We expect registered exempt market dealer firms to establish policies, procedures and controls related to personal trading by dealing representatives and the fair allocation of investment opportunities. Material conflicts of interest associated with trades alongside clients must be addressed in the best interest of clients and accordingly:
We note that the firms reviewed generally identified the provision or receipt of gifts and entertainment as a material conflict of interest. However, the firms did not always have adequate controls in place to address this material conflict of interest in the best interest of clients.
Examples of Controls:
We observed that firms reviewed took various approaches based on their size and circumstances, to address this conflict, and controls implemented by firms included the following:
We have observed that certain registered firms have not appropriately addressed material conflicts of interest arising from performing certain activities for proprietary issuers (including issuers that are investment funds) that they manage and distribute on a prospectus-exempt basis. The types of firms where we have noted this issue have been registered as exempt market dealers or as investment fund managers / exempt market dealers, where the issuers managed have been proprietary issuers distributed on a prospectus-exempt basis, such as mortgage investment entities. These firms did not appropriately identify and address certain material conflicts of interest as described below, nor did they sufficiently comply with other regulatory requirements associated with their management and distribution activities in connection with these issuers.
Specifically, we observed that these firms did not identify and address material conflicts of interest associated with the following activities:
Material conflicts of interest associated with managing and distributing prospectus-exempt proprietary issuers such as those described above must be addressed in the best interest of the clients of the registered firm. In addition, firms must ensure that their processes when managing and distributing issuers meet all other regulatory requirements.
Suggested Controls:
We expect registrants to consider the following controls when considering how to address these material conflicts in the best interest of their clients (in addition to having appropriate processes in place to meet all other regulatory requirements associated with their management and distribution activities in connection with the issuers, including those relating to valuation):
A significant number of firms reviewed did not provide any disclosure to their clients about the material conflicts of interest identified by the firm (approximately 10% of firms), or, where disclosure was provided, it was incomplete (approximately 43% of firms). For example, we noted that reviewed firms did not adequately disclose the following material conflicts of interest:
When disclosing conflicts of interest, registered firms are required to include a description of:
During our reviews, we noted that some firms did not update their conflicts of interest disclosure to comply with these new requirements. We also noted that even when the disclosure was updated by firms, the disclosure did not consistently cover all three required elements listed above. In particular, we noted that while many firms disclosed the nature and extent of a material conflict of interest, disclosure relating to the potential impact on and risk that the material conflict of interest could pose to a client and how the firm has addressed the material conflict of interest was often missing.
Registrants must ensure that their conflicts disclosure includes all of the required elements, including the potential impact on and risk that the conflict could pose to a client and how the registered firm has addressed or will address the material conflicts of interest in the best interest of its clients. In general, as noted in Policy Statement 31-103, disclosure regarding material conflicts of interest must be fulsome in content, must be prominent, specific and written in plain language, and must be disclosed at the appropriate time in order to be meaningful to clients.
Registered firms that successfully complied with the disclosure requirement were able to do so because they expressly laid out each element of the required disclosure in a clear and concise manner (e.g., by using headings related to each of the three elements or by using tables or other formats). We encourage firms to consider what format would enable them to provide the required disclosure clearly to clients.
We note that some firms reviewed relied on disclosure documents prepared by another entity. For example, some registered firms referred clients to disclosure related to conflicts of interest described in an issuer’s documents (e.g., the issuer’s offering memorandum) to discharge the registered firm’s conflicts of interest disclosure obligation under the CFRs. However, where this type of conflicts disclosure is prepared solely from the issuer’s perspective and does not reflect the registered firm’s perspective, this disclosure would not be adequate. This type of reliance could result in non-compliance by the registered firm with its own conflicts of interest disclosure obligations under the CFRs.
Some firms we reviewed provided disclosure to clients, but the disclosure was not provided in a timely manner as required. A firm must disclose a material conflict of interest:
As further described below, firms must periodically review their conflicts of interest disclosure and consider whether any updates are needed.
Without robust policies and procedures relating to conflicts of interest, there is a risk that material conflicts of interest may not be identified, reported or addressed by a registrant and may not be appropriately disclosed to clients.
Approximately 66% of the firms reviewed had inadequate written policies and procedures relating to conflicts of interest. Some of these firms had policies and procedures related to conflicts of interest, but had not updated these policies and procedures to comply with the CFRs conflicts of interest requirements, or the updates made were not sufficient.
A firm’s written policies and procedures related to conflicts of interest should include the following:
We noted that approximately 83% of the firms reviewed provided adequate training about conflicts of interest. We determined that training was inadequate when:
Firms are expected to train all appropriate staff on conflicts of interest generally. This would include all registered individuals and supervisory staff, and additional staff as may be necessary depending on their roles and responsibilities. We expect that this would include compliance staff. For example, most firms provide their staff with training on the firm’s code of conduct, which generally includes training about conflicts of interest policies, procedures and controls. Depending on the content, this may be sufficient to evidence training of staff on conflicts of interest generally. Specific training modules may be required for certain material conflicts in respect of certain staff. For example, training on conflicts of interest and firm controls related to compensation arrangements may be needed for all registered individuals and compliance / supervisory staff. We recognize that registrants will exercise their professional judgement when developing / implementing training modules and determining which staff require the training.
In some cases, firms provided training but did not maintain adequate documentation to evidence that such training was provided. In order to demonstrate compliance with the training requirement, firms should maintain documentation such as the following:
The requirement for a registered firm to maintain records to accurately record its business activities, financial affairs and client transactions, and to demonstrate the extent of the firm’s compliance with applicable requirements of securities legislation, predates the CFRs, and details of the requirement are set out in section 11.5 of Regulation 31-103 (IDPC Rule subsection 3804(1)). However, the CFRs introduced additional specific requirements relating to conflicts of interest for firms to maintain records to:
Although there is no prescribed format, firms must document their identification, review and analysis of conflicts of interest, their determination as to whether a conflict is material, and the controls used by the firm to ensure that material conflicts of interest have been addressed in the client’s best interest.
Registrants should exercise their professional judgement to assess what level of detail needs to be documented in records in order for them to demonstrate that they have complied with their conflicts of interest obligations. As the materiality of a conflict increases, there should be greater detail in the records maintained to demonstrate compliance.
Firms should:
Specifically with respect to the documentation of controls implemented to address material conflicts of interest, firms should maintain detailed information to evidence the use of the control. For example:
Interaction of CFRs Conflicts of Interest Requirements with Regulation 81-107 respecting Independent Review Committee for Investment Funds
We noted there was some confusion with respect to how Regulation 81-107 respecting Independent Review Committee for Investment Funds (Regulation 81-107) and section 13.4 of Regulation 31-103 interact.
Section 13.4 and 13.4.1 do not apply to investment fund managers in respect of investment funds that are subject to Regulation 81-107 in respect of conflicts of interest matters relating to those investment funds.
However, section 13.4 applies to the investment fund manager in respect of other conflicts of interest in its business and also in respect of the investment funds it manages that are not subject to Regulation 81-107.
All registrants must have policies, procedures and systems that are appropriate to their business models in order to comply with regulatory requirements. The suggested practices identified in this Notice are intended to provide additional Staff guidance on how we expect registrants to comply with the CFRs conflicts of interest requirements. The suggested practices outlined in this Notice will serve as guidance that Staff will apply when assessing compliance with these regulatory obligations.
We will continue to review and evaluate firms’ compliance with securities legislation, including all CFR requirements during regular compliance examinations and will use all tools available along the compliance enforcement continuum to address any non-compliance. The CSA and CIRO will conduct reviews in 2023 to specifically assess registrants’ compliance with other CFRs obligations, including the know your client, know your product and suitability determination requirements that came into force on December 31, 2021.
Additional rules will be considered if we do not observe the results we expected from the CFRs, including the conflict of interest provisions.
We established the CFRs Implementation Committee in 2020, which considered operational challenges industry stakeholders were facing when implementing the CFRs. We compiled a list of questions received by the CFRs Implementation Committee and have set out our responses to provide additional guidance (see Frequently Asked Questions).
We encourage registrants to refer to this Frequently Asked Questions document for additional guidance on complying with the CFRs.
Firms can also keep up to date on regulatory developments by reviewing Staff notices and publications, participating in information outreach sessions organized by, and signing up for mailings from, the various CSA members and CIRO.
Please refer your questions to any of the following Staff:
Gabriel Chénard Senior Policy Analyst Oversight of Intermediaries Autorité des marchés financiers 514 395-0337, ext. 4482 Toll-free: 1 800 525-0337, ext. 4482 [email protected] | Sylvie Lacroix Inspecteur coordonnateur – valeurs mobilières Direction du service de l’inspection – Valeurs mobilières Autorité des marchés financiers 514 395-0337 poste 4755 [email protected] |
Isaac Filate Senior Legal Counsel British Columbia Securities Commission 604 899-6573 [email protected] | Crystal He Senior Compliance Analyst, Capital Markets Regulation British Columbia Securities Commission 604 899-6795 [email protected] |
Edwin Leong Lead Compliance Analyst, Capital Markets Regulation British Columbia Securities Commission 604 899-6682 [email protected] | Colleen Ng Senior Compliance Analyst, Capital Markets Regulation British Columbia Securities Commission 604 899-6651 [email protected] |
Adam Hillier Team Lead, Registrant Oversight Alberta Securities Commission 403 297-2990 [email protected] | Matias Pendola Manager, Registrant Regulation Alberta Securities Commission 403 355-3892 [email protected] |
Curtis Brezinski Compliance Auditor, Securities Division Financial and Consumer Affairs Authority of Saskatchewan 306 787-5876 [email protected] | Angela Duong Compliance Auditor Manitoba Securities Commission 204 945-8973 [email protected] |
Alizeh Khorasanee Manager, Compliance and Registrant Regulation Ontario Securities Commission 416 593-8129 [email protected] | Stratis Kourous Senior Accountant, Compliance and Registrant Regulation Ontario Securities Commission 416 593-2340 [email protected] |
Erin Seed Senior Legal Counsel, Compliance and Registrant Regulation Ontario Securities Commission 416 596-4264 [email protected] | Kat Szybiak Senior Legal Counsel, Compliance and Registrant Regulation Ontario Securities Commission 416 593-3686 [email protected] |
Elizabeth Topp Manager, Compliance and Registrant Regulation Ontario Securities Commission 416 593-2377 [email protected] | Brian Murphy Manager, Registrant Regulation Nova Scotia Securities Commission 902 424-4592 [email protected] |
Nick Doyle Compliance Officer Financial and Consumer Services Commission (New Brunswick) 506 635-2450 [email protected] | Lisa Caputo Manager, Compliance, Mutual Fund Dealer Division Canadian Investment Regulatory Organization 416 943-7417 [email protected] |
Louise Hamel Vice-President, Member Compliance Canadian Investment Regulatory Organization 416 943-6911 [email protected] |