Investor Alert:
CIRO is issuing a warning to Canadian investors regarding Canada Token Trade.
As part of our normal course activities, IIROC staff have come across certain limitation of liability or exclusionary clauses in retail client account agreements we consider to be inconsistent with our Dealer Members’ (Dealers) regulatory obligations. We are publishing our findings and analysis, along with next steps, to provide transparency and clarity to all Dealers.
We encourage Dealers to use this Guidance Note as a self-assessment tool in reviewing their client account agreements for compliance with IIROC requirements.
As noted above, some Dealers’ retail client account agreements have limitation of liability or exclusionary clauses that we consider to be inconsistent with the Dealer’s regulatory obligations. In particular, certain clauses that we have seen:
This Guidance Note focuses on retail client agreements. Through our normal course activities, we reviewed a number of retail client account agreements from a variety of Dealers, which contained various types of limitation of liability clauses. Some of these clauses raised regulatory concerns.
Unlike retail client agreements, institutional client agreements are generally more commercial in nature and subject to more negotiation between two sophisticated parties, and therefore have not raised the same regulatory concerns. However, while this Guidance Note is not directed at institutional client agreements, Dealers’ are reminded that agreements with their institutional clients must still be consistent with their regulatory obligations, including IIROC Consolidated Rule 1400 (Consolidated Rules) (discussed in section 3.1).
We have identified several types of clauses we consider contrary to subsection 1402(1)1 of our Consolidated Rules. In addition, the Ontario Securities Commission (OSC) has identified2 certain types of clauses it considers contrary to the duty to deal fairly, honestly and in good faith with clients in OSC Rule 31-505. Such clauses include:
We are of the view that clauses which purport to limit liability, in whole or in part, for losses, including losses resulting from a breach by the Dealer of their obligations under IIROC requirements or securities law, are not appropriate.
We consider any clauses described in section 3.1 of this guidance and those that:
to be violations of Dealers obligations under subsection 1402(1) of our Consolidated Rules.
We also consider clauses which seek to relieve a Dealer of its suitability obligation to be a violation of IIROC suitability requirements in Dealer Member Rule 1300.1(p) and (q)3 [IIROC Rule 3400].
We found that several Dealers have clauses that limit liability for technology systems malfunction4 . We recognize that some circumstances may be beyond the control of the Dealer (e.g. power outages, careless use of systems by clients, etc.). However, where the event is within the Dealer’s control, such as functionality of the online platform or services provided by the Dealer, we consider it inappropriate for the Dealer to unilaterally limit its liability.
If a Dealer has automated, or outsourced5 , certain tasks that relate to their regulatory obligations, they cannot disclaim liability simply on the basis that the process was automated or outsourced. In meeting their regulatory obligations to clients through automated or outsourced systems, Dealers remain responsible for performing system testing and monitoring and conducting due diligence reviews of vendors to which critical functions have been outsourced.
Many of the limitation of liability clauses we reviewed used the term “gross negligence” to describe what Dealers are responsible for6 . We note that the term “gross negligence” is not precisely defined in Canadian jurisprudence and may be unclear to clients. Further, our Consolidated Rules specifically refers to “negligence” (as opposed to “gross negligence”) when setting out the conduct which results in a breach of regulatory standards in subsection 1402(1) of our Consolidated Rules. Dealers should consider whether their use of the “gross negligence” term complies with the standards of conduct requirements in our Consolidated Rules.
We encourage Dealers to complete a self-assessment of their client agreements and look for clauses that fit into the categories discussed in section 3 above. If a Dealer identifies any inappropriate clauses, we encourage them to rectify any non-compliance and advise their clients of any changes to their account agreements.
When IIROC’s Business Conduct Compliance (BCC) Staff identify questionable clauses as part of normal course examinations, business model change reviews or new member application review, they will bring them to the Dealer’s attention for remediation. Depending on the severity of the issue, BCC Staff may, for example:
This Guidance Note relates to: