CIRO Registration – The Fit and Proper Test for Approved Persons

1. CIRO Registration Reviews

1.1 Introduction

Pursuant to CIRO’s Rules1 and securities legislation, an individual’s application will be approved unless:

1. the applicant:

• does not meet CIRO requirements
• is likely not to comply with CIRO requirements, or
• does not satisfy securities legislation relating to or is not suitable for approval on the basis of training, experience, solvency or integrity, or

2. the approval is not in the public interest or is otherwise objectionable.

An individual’s application may be approved subject to any terms and conditions that may be appropriate.

Securities commissions have delegated to CIRO registration authority under securities legislation for individuals associated with Dealer Members. The registration regime set out in securities legislation is based on the same principles.

Registration Staff will evaluate for each application for registration whether an individual meets the criteria set out in CIRO’s Rules or securities legislation as applicable2. This includes evaluating whether the individual is suitable or “fit and proper” and/or whether the approval/registration is not in the public interest or otherwise objectionable.

A similar review may be conducted for existing Approved Persons under CIRO’s Rules and securities legislation.

1.2 The “Fit and Proper” Test

Three fundamental criteria determine whether an individual is “fit and proper”:

• Integrity, which includes honesty and good faith, particularly in dealings with clients, and compliance with CIRO’s Rules and securities laws
• Financial solvency, which is considered relevant because it is an indicator of the risk that an individual will engage in self-interested activities at the expense of clients
• Competence, which includes prescribed proficiency and knowledge of the requirements of CIRO’s Rules and securities laws and experience, where applicable.

1.2.1. Integrity

In evaluating an individual’s integrity, Registration Staff’s considerations will include whether the individual has been:

• convicted of any offence. Particular weight is given to offences of dishonesty, fraud, financial crime, or other offences under legislation relating to securities, financial services, insolvency, insurance, consumer protection, money laundering, market manipulation or insider trading. All offences are reviewed, regardless of whether they were committed in Canada or not.
• the subject of any adverse finding or any settlement in civil proceedings, particularly in connection with investment or other financial business, misconduct, or fraud
• the subject of any existing or previous investigation or disciplinary proceedings, by CIRO, other securities regulatory authorities, other self-regulatory organizations or government bodies or agencies
• the subject of any proceedings of a disciplinary or criminal nature, or has been notified of any potential proceedings or of any investigation which might lead to those proceedings
• in contravention any requirements or standards of the securities regulatory system or equivalent standards or requirements of other regulatory authorities, professional bodies, or government bodies or agencies
• the subject of any complaints relating to regulated activities
• involved with a company, partnership or other organization that has been refused registration or approval, or that registration or approval was terminated
• a director, partner, or officer concerned in the management of a business that has gone into insolvency, liquidation or administration, while the individual has been connected with that organization
• dismissed, asked to resign and resigned, or resigned while under investigation, from employment
• the subject of an internal disciplinary action by a CIRO Dealer Member or other registered firm
• prohibited from acting as a director or officer of any issuer or registrant or has been ordered to resign one or more positions that the individual holds as a director or officer of an issuer or registrant
• candid and truthful in all dealings with any regulatory body and whether the individual demonstrates a readiness and willingness to comply with the requirements and standards of the regulatory system and with other legal, regulatory, and professional requirements and standards
• compliant with orders of courts, tribunals, credentialing bodies or decision makers

We treat each application on a case-by-case basis. We will take into account the seriousness of and circumstances surrounding any matter that may impact the individual’s suitability, the explanation provided by the individual, the passage of time since the matter occurred, and evidence of the individual’s appreciation for the seriousness of the matter.

Dealers, applicants and Approved Persons must be mindful of the importance of true, complete and timely disclosures. Failure to provide the required information will be considered in the review3.

1.2.2 Financial solvency

In evaluating an individual’s financial solvency, our considerations include whether the individual has:

• been the subject of any judgment debt or award, in Canada or elsewhere, that remains outstanding or was not satisfied within a reasonable period
• made, in Canada or elsewhere, any arrangements with their creditors, filed for bankruptcy, had a bankruptcy petition served on them, or been adjudged bankrupt
• failed to meet a material financial obligation as it came due or has, or has had, any outstanding garnishment, unsatisfied judgments or directions to pay.

1.2.3 Competence

In evaluating an individual’s competence and capability, our considerations include whether the individual:

• satisfies the relevant minimum CIRO or securities law proficiency requirements in relation to the activity the individual performs or is intending to perform
• has demonstrated by education, experience and training that the individual is able, or will be able to if approved, to perform the activity.

1.3 Is approval/registration contrary to the public interest or objectionable?

CIRO’s Rules and securities legislation generally draw a distinction between whether:

• an applicant is suitable for approval or registration, or
• the approval is not in the public interest, or the registration is objectionable in the case of securities legislation generally.

In considering whether an approval is not in the public interest or a registration is objectionable, we will take into account:

• the public interest mandate of securities regulators:
  • to provide protection to investors from unfair, improper or fraudulent practices, and
  • to foster fair and efficient capital markets and confidence in capital markets
• whether approval/registration should be granted on broader public interest grounds, regardless of the determination of suitability.

In most cases the question of whether an individual's approval or registration is objectionable, or not in the public interest, is related to the same factors as those considered in the suitability assessment. We will also consider whether the approval or registration should be granted on broader public interest grounds regardless of the determination made based on the suitability criteria/factors.

1.4 CIRO’s response where issues arise

If Registration Staff have concerns about an individual, they may recommend refusal, revocation, suspension, or imposing terms and conditions on their approval/registration. In all such cases, individuals are given an opportunity to be heard before a decision is made on their approval/registration4.

Registration Staff will recommend imposing the terms and conditions on the individual’s approval/registration under circumstances where enhanced supervision or other protective/corrective measures may be appropriate. We do not accept voluntary supervision as an appropriate regulatory response. The imposition of formal terms and conditions on the record provides transparency. These terms and conditions, while in effect, are disclosed on CIRO’s Advisor Report and on the National Registration Search website. The disclosure will provide investors and other stakeholders with access to the information about approved/registered individuals.

We recognize the importance to Dealers of timely reviews and approvals. We may require additional time in cases where we have concerns about an individual based on the criteria set out in the Notice. Such reviews are ultimately in the best interest of investors and the industry itself. In order to facilitate our reviews it is important that Dealers and associated individuals provide prompt and complete responses to our questions.

2. Review of material disclosures and additional supporting documents

The following generally trigger a more extensive CIRO Registration Staff review:

• any approval or registration application (Form 33-109F4 Registration of Individuals and Review of Permitted Individuals) or any notice filed by an existing approved or registered person that contains disclosure related to:
  • item 12 (Resignations and Terminations);
  • item 13 (Regulatory Disclosures);
  • item 14 (Criminal Disclosures);
  • item 15 (Civil Disclosure); or
  • item 16 (Financial Disclosure)
• any material information about an approved or registered person that may otherwise come to our attention.

In these cases, Registration Staff will typically request that the individual provide a letter (signed by both the individual and an Approved Person in a supervisory capacity) to explain the circumstances leading up to the relevant disclosure. In cases where Registration Staff have serious concerns about an individual, we will also request letters from the Chief Compliance Officer of the Dealer and the individual explaining why they believe the individual is suitable for approval/registration and why the Dealer supports the individual’s application or continued approval/registration. Dealers should expect applications containing material disclosures and non-disclosure of required information to take additional time.

Dealers should submit relevant supporting documents when making individual registration filings on material issues or provide CIRO with these documents as soon as practicable after the initial filing. We may also ask for additional information or documents at any time during the review process.

3. Hiring due diligence

It is critical that Dealers conduct background investigation of prospective Approved Persons. This is an important part of determining regulatory risk for both the Dealer and its clients. We recommend the following hiring best practices in addition to reviewing and discussing the applicant’s Form 33-109F4 and contacting their previous employers:

• discuss with the applicant the nature of their prior clients and the types of securities sold
• obtain from the applicant explanations regarding any client complaints and regulatory actions to determine the merit, to the extent practicable, of each
• ask applicants about the existence of and nature of any pending proceedings, client complaints, regulatory investigations, or civil litigation
• involve compliance and legal staff, as appropriate, in the hiring process. Designate an individual (above the branch office manager level) or a committee to review any circumstances of previous terminations for cause, client complaint history, previous disciplinary actions, or outstanding regulatory or civil proceedings
• review the applicant’s registration record, including any relevant Notices of End of Individual Registration filed by previous employers (Form 33-109F1 Notice of End of Individual Registration or Permitted Individual Status)
• ensure applicants understand the questions in Form 33-109F4 and have an opportunity to discuss questions with their supervisor in order to answer them correctly. We expect accurate and complete information. Carelessness or misunderstandings are not satisfactory explanations for non-disclosure

We strongly encourage Dealers to proactively consider the issues set out in this notice before hiring or promoting an individual and before submitting an application for approval/registration. Dealers should refer to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, and its companion Policy as well as NI 33-109 Registration Information with regards to their due diligence obligations. Failure of a registered firm to take reasonable steps to discharge its due diligence responsibilities may be relevant to the registered firm’s own continued fitness for registration.

4. Applicable rules

CIRO Rules this Guidance Note relates to:

• section 9204 and 9207 of the IDPC Rules.

5. Previous guidance note

This Guidance Note replaces Notice 9200-21-001, IIROC Registration – The Fit and Proper Test for Approved Persons.

6. Related documents

This Guidance Note was published under Bulletin 26-0135 - Updated guidance on the Fit and Proper Test for Approved Persons.

7. Appendices

Appendix A – Section 9204 of the IDPC Rules and equivalent securities legislation

Appendix A – Section 9204 of the IDPC Rules and equivalent securities legislation

• 1All rule references are to both the CIRO Investment Dealer and Partially Consolidated Rules (IDPC Rules) and the Mutual Fund Dealer Rules (MFD Rules), unless specified otherwise.
• 2See IDPC Rules section 9204, or the equivalent sections in securities legislation, listed in Appendix A.
• 3Please refer to CSA Staff Notice 33-320 The Requirement for True and Complete Applications for Registration.
• 4Please refer to Rule 9400 of the IDPC Rules – Procedures for opportunities to be heard for Investment Dealer individuals. Similar procedures apply to Mutual Fund Dealer individuals.