Effective Date: December 31, 2021
We are providing guidance for Dealer Members (Dealers) on compliance with the requirements introduced under the Client Relationship Model (CRM) project1 . The CRM project addressed:
- Relationship disclosure;
- Conflicts of interest management/disclosure;
- Suitability assessment; and
- Account performance reporting.
While each of these issues can be viewed in isolation, the intent of the CRM project was for the different elements to work together within the larger CRM framework and our Rules. Essentially, each of these requirements is a part of the broader fundamental obligation of the Dealer and its representatives under securities legislation to deal fairly, honestly and in good faith with clients.
This Guidance Note addresses the first three of these issues.
- 1See Notice 15-0013 for more information on the CRM project.
Relationship Disclosure Requirements
Section 3216 of the IIROC Rules2 establishes minimum standards for client/firm relationship disclosure to be provided by Dealers to clients at the time of account opening. The policy rationale underlying section 3216 is that all clients should have a good understanding of the services they will be provided when they open an account.
Form and format of relationship disclosure
Section 3216 provides for a degree of flexibility as to the form and format of the relationship disclosure, but in all cases the information must be in writing, in plain language and must contain all of the required elements. Section 3216 allows for standardized disclosure to be provided to particular groups of clients, or all clients. Where Section 3216 requires the Dealer to advise as to whether optional services can be obtained from the Dealer, the costs associated with such services must be provided.
Content of relationship disclosure
The relationship disclosure to be provided to the client must include a description of the products and services of the Dealer, the nature of the account and the responsibilities of the Dealer. IIROC staff understands that many Dealers are already providing clients with marketing information that includes at least some information on products, services and account types offered. However, to provide more complete information, the client should also be advised as to specific limitations and Dealer responsibilities that might exist for the different classes of accounts it offers (for example, an order-execution service account versus an advisory account). The relationship disclosure information will help the clients understand:
- why the “know your client” information the client provides the Dealer is important;
- what service levels the client can expect from the Dealer once the account has been opened; and
- what information the Dealer will provide the client to update them on the status of the account.
One of the fundamentals in the advisory relationship is the requirement for the Dealer to satisfy the investment suitability requirements contained in Rule 3400. Accordingly, IIROC staff expects the Dealer to provide a fulsome, clear and meaningful explanation of its suitability determination obligation in the relationship disclosure information it provides to its clients (sub-clause 3216(5)(ii)(d)). To ensure accurate client understanding of this obligation, the relationship disclosure must include a description of both when and how suitability assessments will be made. Further, the client should be made aware of the limitations on the obligation and whether account suitability reviews will be performed in situations apart from those listed in the Rule. In particular, the Rule requires that clients be informed whether or not suitability reviews will be performed in response to significant market fluctuations. This will ensure that the client is aware of whether or not an account suitability assessment will be performed during a period of significant market fluctuation.
The types of transaction, position and performance reporting to be provided to the client must also be disclosed to the client (sub-clause 3216(5)(ii)(e)).
The disclosure required under sub-clause 3216(5)(ii)(f) is an extension of the CRM conflicts of interest management standards.
The disclosures required under sub-clauses 3216(5)(ii)(g) through 3216(5)(ii)(l) are an extension of our account operation and transaction fees/charges, account related documentation and client compliant handling requirements. Dealers must inform their clients as part of the relationship disclosures of the types of fees/charges they can expect to incur, the account related documentation they will receive and the complaint handling process in place at the Dealer. Consistent with the requirements of National Instrument 31-103 – Registration Requirements, Exceptions and Ongoing Registrant Obligations (NI 31-103), IIROC staff expects the discussion of account operation and transaction fees/charges will include all charges a client may incur during the course of acquiring, selling or holding an investment product position, including amounts to be paid indirectly to the Dealer by the client. For example, mutual fund fees/charges disclosure should include a discussion of the management expenses that are deducted from fund performance by the mutual fund manager and the types of fees/charges, such as trailing fees, that may be paid to the Dealer by the mutual fund manager from these collected management expenses.
Furthermore, it is consistent with good business practice to disclose to a client the charges specific to a transaction prior to recommending or accepting instructions from a client to purchase or sell a security in an account other than a managed account. Specifically, Dealers are encouraged to adopt best practices which include disclosing the following information prior to the acceptance of a client’s order:
- the charges the client will be required to pay in respect of the purchase or sale, and
- in the case of a purchase, any deferred charges that the client might be required to pay on the subsequent sale of the security or any trailing commissions that the firm may receive in respect of the security.
In the case of the purchase of a mutual fund security on a deferred sales charge basis, the Dealer should advise clients that a charge may be triggered upon the redemption of the security if sold within the time period that a deferred sales charge would apply. The actual amount of the deferred sales charge, if any, would need to be disclosed once the security is redeemed.
Content disclosure for different account types
The obligations of Dealers to provide certain specific disclosures regarding suitability do not apply for order-execution service accounts, as there is no suitability determination obligation for such accounts. Apart from this exception, all of the required elements listed in section 3216 must be addressed in the Dealer’s relationship disclosure provided for order-execution service accounts.
Other information that may be included in the relationship disclosure
Beyond the required content set out in section 3216, the Dealer may also elect to include additional information in the relationship disclosure. In consulting with Dealers, IIROC staff has noted that some Dealers recommend steps to be taken by their clients to maintain a successful relationship with the firm. These include:
- Carefully and promptly reviewing all documentation provided by the Dealer that relates to the operation of the account, account investment recommendations, account investment transactions and account investment holdings. This would include the “know your client” information maintained by the Dealer for the account; conflicts of interest disclosures; descriptions of all transaction costs and account service fees and charges relating to the account; trade confirmations; and account statements.
- Promptly informing the Dealer of changes to the client’s life circumstances or objectives that may materially affect the accuracy of the “know your client” information maintained by the Dealer for the account.
- Promptly informing the Dealer of any trade confirmation or account statement errors.
- Proactively asking questions and requesting information about the account.
- Contacting the Dealer immediately if the client is unsatisfied with the handling of the affairs in the account.
Discussion of relationship disclosure and other account opening materials with clients
Although there are a variety of business models employed by Dealers, IIROC expects that in a typical initial face-to-face client meeting, the Registered Individual3 will sit down with the client and explain to him or her the purpose and use of important account opening information that is collected from the client and important account opening documents, including the relationship disclosure materials, that are provided to the client. As part of this meeting, “know your client” information would be collected from the client and, based on the information collected, the client would be provided with the relationship disclosure materials and other important account opening documentation that detail the account service and investment product offering that is most appropriate for the client. Sufficient time should be spent reviewing the relationship disclosure materials with the client to ensure that the client has a clear understanding of the account relationship they are being offered.
If the proposed account relationship is acceptable to the client, the Registered Individual would then complete the account opening forms and obtain the required client signatures and/or acknowledgements. The client would then be provided with a copy of the forms and disclosure documents. Ideally, throughout this process, the client will be raising any questions and the representative will be providing meaningful responses. The intent of the relationship disclosure is to ensure that all clients have answers to some basic questions on the account relationship, whether or not the client raises these questions with their representative.
Clients that must be provided with relationship disclosure information
Dealers are required to provide the relationship disclosure information to all retail clients. In the case of retail clients of Dealers that are introducing brokers, this obligation must be met by the introducing broker. It is expected that new clients will be provided with the information at the time of account opening.
Significant changes to disclosure information
Where significant changes to the relationship disclosure information have occurred, it is expected that the Dealer will provide timely notice to clients of any changes. This could be accomplished by including details of the updated information with a regular client communication, such as the client statements.
Conflicts of interest management / Disclosure Requirements4
There are a number of provisions in the existing IIROC Rules that set out Dealer and Approved Person obligations relating to specific conflict of interest situations between Dealers and clients and between Approved Persons and clients. In addition to these existing specific obligations, Part B of Rule 3100 further clarifies the existing obligations that Dealers and Approved Persons have to manage conflicts of interest with their clients. These obligations require Dealers to have written policies and procedures in place for identifying and addressing material conflicts of interest and to carry out these policies and procedures. Part B of Rule 3100 also sets out a general framework for:
- identifying conflict of interest situations; and
- addressing conflict of interest situations through/by:
- other approaches to control the satiation
Approved Person responsibility to address conflicts of interest
- General requirement to address all material conflicts of interest
Subsection 3111(2) requires that all existing or potential material conflicts of interest between an Approved Person and a client must be addressed by the Approved Person “in a fair, equitable and transparent manner, and consistent with the best interests of the client or clients.” Conflicts can be addressed by avoiding, disclosing or otherwise controlling the conflict of interest situation. In addition to this general requirement to address material conflicts of interest between the Approved Person and the client:
- subsection 3111(3) requires that “Any existing or potential material conflict of interest between the Approved Person and the client that cannot be addressed in a fair, equitable and transparent manner, and consistent with the best interests of the client or clients, must be avoided.”; and
- subsection 3113(1) requires that “Unless avoided, an existing or potential material conflict of interest must be disclosed to the client in all cases where a reasonable client would expect to be informed.”
As a result, the requirements collectively mandate when a conflict of interest between an Approved Person and a client must be addressed by avoiding the conflict, or must be addressed at least in part by disclosing the conflict of interest to the client. The requirements do not mandate the other approaches which must be used to further control the conflict of interest situation.
Sub-section 13.4(2) of N1 31-103 requires that “A registered firm must respond to an existing or potential conflict of interest.”
Having said that, material conflict of interest situations can only be addressed / responded to by:
- avoiding the situation which gives rise to the conflict of interest; or
- controlling the situation as much as possible and/or disclosing the conflict of interest.
As with the other elements of the CRM project, the Rule requiring that material conflicts of interest be addressed should be read in light of the fundamental statutory obligation imposed on all registrants to deal with clients fairly, honestly and in good faith. The intent of Part B of Rule 3100 is to provide greater clarity to Dealers as to how these basic principles can be satisfied when considering conflict of interest situations.
In a number of cases, Approved Persons will address conflict of interest situations by disclosing it to the affected clients. However, in other cases, to properly address a material conflict, the Dealer may need to implement policies and procedures and the Approved Person will need to carry out procedures that go beyond simple disclosure. For instance, NI 31-103 requires registrants to execute a written agreement as well as providing prescribed disclosure prior to entering into a referral arrangement. Other types of personal financial dealings, if permitted, may also necessitate additional measures, such as requiring the client to obtain independent advice before entering into a transaction.
- Conflict avoidance
Subsection 3111(3) requires that “Any existing or potential material conflict of interest between the Approved Person and the client that cannot be addressed in a fair, equitable and transparent manner, and consistent with the best interests of the client or clients, must be avoided.” When determining whether a conflict of interest between an Approved Person and a client must be avoided, Approved Persons should consider:
- the interests of the client(s) involved; and
- whether it is feasible to address the conflict of interest in any way other than by avoiding the situation giving rise to the conflict of interest.
Further, the guidance in Companion Policy 31-103CP provides the following general examples of material conflict of interest situations that must be avoided:
- the conflict of interest involves confidential, commercially sensitive information, or the information amounts to “inside information” under insider trading provisions in securities legislation;
- the conflict of interest is inconsistent with the interests of the client and/or there is a high risk of harm to the client and the situation cannot be addressed in any fashion to reduce this inconsistency/risk of harm; and
- the situation that gives rise to the conflict of interest is sufficiently contrary to capital markets integrity and cannot be addressed in any fashion to reduce the risk of harm.
Consistent with the avoidance standard set out in Section 3111(3), the following is an example of a specific rule that stipulate conflict of interest situations between an Approved Person and a client which must be avoided by the Approved Person:
- A registered individual must not act as a director or as a dealing, advising or associate advising representative of another registered firm that is not an affiliate of an individual’s sponsoring firm [NI 31-103, Section 4.1].
Conflict of interest situations between Dealer Members and clients
- General requirement to address all material conflicts of interest
Subsection 3112(2) requires that all existing or potential material conflicts of interest between a Dealer and a client must be addressed “in a fair, equitable and transparent manner, and considering the best interests of the client or clients.” In applying this requirement, it is recognized that it is not always possible or practical for a Dealer to address all conflicts of interest in the best interests of each client when the conflict of interest situation involves multiple clients with competing interests.
The general approaches used by Approved Persons to address conflicts of interest between themselves and their client(s) must also be followed by Dealers when addressing conflict of interest situations between Dealer(s) and their clients. As previously stated, material conflict of interest situations can only be addressed / responded to by:
- avoiding the situation which gives rise to the conflict of interest; or
- controlling the situation as much as possible and/or disclosing the conflict of interest.
Companion Policy 31-103CP also sets additional guidance when the conflict of interest situation involves multiple clients with competing interests. Specifically, Dealers “should make reasonable efforts to be fair to all clients” and “should have internal systems to evaluate the balance of these [client] interests.” The conflict of interest that arises between a Dealer’s investment banking client, issuing public securities and the Dealer’s retail clients, who will be offered the new issue, is cited as an example of a competing interests scenario.
- Conflict avoidance
Subsection 3112(3) requires that any “material conflict of interest between the Dealer and the client that cannot be addressed in a fair, equitable and transparent manner, and considering the best interests of the client or clients, must be avoided.” In applying this subsection, Dealers should consider the same factors as an Approved Person would consider when assessing whether to avoid a conflict of interest with a client.
Consistent with the avoidance standard set out in Subsection 3112(3), the following are examples of specific rules that stipulate conflict of interest situations between a Dealer and a client which must be avoided by the Dealer:
- all client orders must be given priority over all proprietary orders for the same security at the same price in order to avoid a conflict of interest between the Dealer and its client with respect to that trading opportunity [section 3503(1)].
- A Dealer shall not trade, or permit or arrange to trade, in reliance upon information regarding trades that have been made or which will be made for any discretionary or managed account [Part G of Rule 3200].
- A Dealer is prohibited from issuing a research report for an equity or equity related security relating to an issuer for which the Dealer acted as manager or co-manager of (i) an initial public offering of equity or equity related securities, for 10 calendar days following the date of the offering, or (ii) a secondary offering of equity or equity related securities, for three calendar days following the date of the offering [-section 3622].
Subsection 3112(4) requires that “The Dealer Member must adequately supervise how existing or potential material conflicts of interest between the Approved Person and the client are addressed by its Approved Persons pursuant to section 3111.” This requirement is consistent with the general expectation that Dealers should adequately supervise all activities they undertake; in this case the conflict of interest management activities of their Approved Persons.
Conflict of interest disclosure
As previously stated, section 3113 requires disclosure to the client of a material conflict of interest situation that has not been avoided “in all cases where a reasonable client would expect to be informed.”
When determining whether a conflict of interest must be disclosed to the client, the guidance in Companion Policy 31-103CP requires Dealers to consider whether the conflict of interest affects the services that are being provided or that are proposed to be provided. As part of this guidance, the example of a registered individual recommending a security they own is cited and it is suggested that “this may constitute a material conflict which should be disclosed to the client before or at the time of the recommendation”.
Consistent with the disclosure standard set out in 3113, the following are examples of specific Rules that stipulate conflict of interest situations which must be disclosed to the client by the Dealer:
- Where one client has guaranteed the account obligations of another client, such that there are potentially conflicting client interests, the Dealer must disclose to the guarantor in writing that the suitability of the transactions in the guaranteed client’s account will not be reviewed in relation to the guarantor’s risk tolerance or investment objectives [Rule 5800].
- Each confirmation issued for trades involving securities:
- of the Dealer or a related issuer of the Dealer, in the course of a distribution to the public; or
- of a connected issuer of the Dealer
- Dealers must comply with the following disclosure requirements for analyst research reports:
- Dealers must disclose information in a research project which might reasonably be expected to indicate a potential conflict of interest on the part of the Dealer or the analyst in making a recommendation with regard to the issuer.
- Any Dealer that distributes research reports to clients or prospective clients in its own name must disclose its research dissemination policies and procedures on its website or by other means.
- Dealers must disclose in research reports if in the previous 12 months the analyst responsible for preparing the report received compensation based upon the Dealer’s investment banking revenues.
- Dealers must disclose in research reports if and to what extent an analyst has viewed the material operations of an issuer. Dealers must also disclose where there has been a payment or reimbursement by the issuer of the analyst's travel expenses for such visit.
In general, the guidance in Companion Policy 31-103CP concludes that the only scenario under which a material conflict (that has not been avoided) would not be disclosed to the client under the “reasonable client” test would be where the Dealer has taken other steps to control the conflict of interest and has effectively ensured, with reasonable confidence, that the risk of loss to the client has been eliminated. As a result, disclosure is fundamental in addressing / responding to material conflicts of interest.
The disclosure should be timely and meaningful to the client. Specifically, disclosure should be made before the product or service related to the conflict is sold or provided to the client. Further, the disclosure should be sufficient to provide the client with an understanding of the specific conflict. A generic form of disclosure simply stating that conflicts may arise will not satisfy the Dealer’s obligation to respond to specific conflict of interest situations that may arise.
Furthermore, disclosure and informed consent is not an appropriate alternative to conflict avoidance in those cases where avoiding the conflict is the only reasonable response. Implied or expressed consent does not discharge a Dealer from the obligations to comply with their regulatory requirements.
Compensation-related conflicts of interest
Many conflict of interest situations are compensation-related, where the Approved Person’s / Dealer’s interest in being compensated for a transaction or service is inherently in conflict with a client’s interest in growing their wealth. As part of the requirement to address these compensation-related conflicts of interest and consistent with the requirements set out in subsections 3111(2) and 3112(2) to address conflicts of interest:
- the Dealer should ensure its product and service offerings, including the fees associated with such offerings, are consistent with the overall wealth building objectives of its clientele; and
- the Approved Person should, in addition to determining, where applicable, whether a certain product or service is suitable for the client, ensure that the transaction, account and service fees and costs to be charged are fair and are properly disclosed to the client.
On the topic of compensation practices, Companion Policy 31-103CP states that “Registered firms should consider whether any particular benefits, compensation or remuneration practices are inconsistent with their obligations to clients, especially if the firm relies heavily on commission-based remuneration. For example, if there is a complex product that carries a high commission, the firm may decide that it is not appropriate to offer that product.”
IIROC Rules this Guidance Note relates to:
- Rule 3100,
- Rule 3200, and
- Rule 3400.
Previous Guidance Note
This Guidance Note replaces IIROC Notice 12-0108 – Client Relationship Model - Guidance.
This Guidance Note was published under Notice 21-0190 - IIROC Rules, Form 1 and Guidance.
- 2In this Guidance, all rule references are to the IIROC Rules unless otherwise specified.
- 3In this Guidance, the term “Registered Individual” refers collectively to individuals approved by IIROC as Registered Representatives, Portfolio Managers or Associate Portfolio Managers.
- 4[IIROC is considering a comprehensive re-write and update of this section in light of the amendments to Part B of Rule 3100 (Conflicts of Interest) as part of the Client Focused Reforms. See Notice 20-0239]