Disclosure and approval of outside activities

GN-2500-22-001
Type: Rules Notice> Guidance Note
Rule connection:
IIROC Rules
Distribute internally to:
Institutional
Internal Audit
Legal and Compliance
Registration
Retail
Senior Management
Training

Contact:

Registration
Email:
Business Conduct Compliance
Email:

Executive Summary

IIROC is providing guidance on the disclosure and approval of outside activities. In this Guidance Note, we set out:

  1. a summary of the outside activity disclosure and approval requirements,
  2. considerations relating to the approval of outside activities,
  3. Dealer Members’ supervisory responsibilities relating to outside activities, and
  4. National Registration Database (NRD) outside activity filing requirements.
Table of contents
  1. Application

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.

  1. Summary of outside activity disclosure and approval requirements

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.

  • General conflicts of interest identification and disclosure requirements set out in Part B of Rule 31002 apply to all Approved Persons.
  • General conflicts of interest identification and disclosure requirements set out in National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and the associated companion policy apply to each individual acting on behalf of a Dealer.
  • Within the context of conflict of interest related requirements, the companion policy of NI 31-103 (CP of NI 31-103) specifically references the need for the disclosure and approval of outside activities of registrants.
  • In addition to the above noted conflict of interest related provisions in NI 31-103 and the CP of NI 31-103, section 2554 specifically requires all Approved Persons to disclose, and obtain the approval of the Dealer before engaging in, any outside activities.
  • In addition to the above noted requirements, pursuant to National Instrument 33-109 – Registration Information (NI 33-109), and as required through Rules 2800 and 3700, all Approved Persons must disclose if there is a change in the Approved Person’s registration information

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:

  • identify the risk of client confusion and/or conflicts of interest in advance,
  • consider the best interests of the client, and
  • ensure that approval is only granted in cases where effective controls and qualified supervisory personnel are first in place.

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.

  1. Approval considerations relating to outside activities

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:

  1. Duty of care to existing clients

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.

  1. Activities preventing fully-informed advice

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.

  1. Use of client information

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.

  1. Use of Dealer’s facilities

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

  1. Robust approval process

The approval and control processes for outside activities should be robust and impartial. These processes should include the following:

  1. Policies and procedures, as well as training programs (both initial and ongoing), that emphasize:
    • the requirement to disclose all outside activities and obtain pre-approval of the outside activities,
    • the process by which they may seek that pre-approval, and
    • approval/disapproval criteria in their outside activity policy.
  2. An annual “outside activity” canvas of their employees.
  3. Records that include complete supporting evidence regarding the Dealer’s handling of all outside activity approval requests, including any special conditions, policies, procedures and controls that have been imposed and how compliance will be monitored.

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:

  1. there is a risk of client confusion, and if any confusion exists, the existence of effective controls and supervision in place to address the risk,
  2. the outside activity presents any material conflict of interest for the individual and whether that material conflict of interest has been addressed in the best interest of the client,
  3. the outside activity provides the individual with access to privileged, confidential or insider information relevant to their registerable activities,
  4. the individual will have sufficient time to effectively carry out their registerable activities, and
  5. the individual will be able to properly service clients.
  1. Supervision of outside activities

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:

  1. require all of their Approved Persons to disclose their outside activities to the Dealer, prior to engaging in such activities,
  2. ensure that the Dealer has the ability to identify conflicts of interest, and
  3. determine the risks that may arise from a conflict and respond appropriately to the conflict of interest.

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:

  • providing training or education on outside activities, including the need to report on changes in outside activities and the restrictions on a registered individual who is in a position of influence as to the clients the registered individual can deal with or advise.
  • assessing whether the Dealer has the necessary information and can properly supervise and monitor the outside activities.
  • maintaining records documenting its supervision of its individuals’ outside activities and storing these records so that they are available for review by regulators.
  • taking appropriate supervisory actions when the Dealer identifies non-compliance with its policies on outside activities, such as no or late reporting of an outside activity.
  • permitting only outside activities that do not impair the ability to provide adequate client service, including, where necessary, having an alternate representative available for the client.
  • assessing whether the Dealer’s knowledge of its registered individual’s lifestyle is commensurate with its knowledge of the registered individual’s activities and stay alert to other indicators of possible fraudulent activity.
  1. National Registration Database (NRD) Filing Requirements

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 leader in religious or similar organization,
  • a medical doctor,
  • a nurse,
  • a professor, instructor or teacher at a degree or diploma granting institution,
  • a lawyer, and
  • a notary.

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:

  • an individual who has a relationship with the registered individual arising from the position of influence, that a reasonable person would be considered to be susceptible to the registered individual’s influence, or
  • an Approved Person knows is a spouse, parent, sibling, grandparent or child of the foregoing individual.

This restriction is required to address the conflict arising from the position of influence.

  1. Applicable rules

IIROC Rules this Guidance Note relates to:

  • Rule 1400,
  • Rule 2800,
  • section 2554,
  • Part B of Rule 3100,
  • Rule 3700.
  1. Previous guidance note

This Guidance Note replaces Notice 13-0163 – Disclosure and approval of outside business activities.

  1. Related documents

This Guidance Note was published under Notice 22-0080: Updated Guidance – Disclosure and approval of outside activities and investment in a Dealer Member

  • 1As defined in subsection 1201(2) of the IIROC Rules.
  • 2All rule references are to the IIROC Rules unless otherwise specified.
  • 3Keep in mind, section 2216 of the IIROC Rules specifically sets out requirements where a Dealer shares premises with another “financial services entity”.