Pre-approval of Associate Portfolio Managers’ advice

GN-2500-21-009
Type: Rules Notice> Guidance Note
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IIROC Rules
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Executive Summary

Effective Date: December 31, 2021

IIROC is publishing guidance on the pre-approval of Associate Portfolio Managers’ (APMs) advice. We are issuing this guidance to clarify our requirements under subsections 2553(7), 3971(3) and 3971(4) of the IIROC Rules1 (the APM pre-approval requirements).

This guidance does not address any other requirements relating to the supervision of managed accounts under Part G of Rule 3900. For guidance on compliance and supervision generally, please see GN-1400-21-002 – The Role of Compliance and Supervision. For guidance on account supervision, which includes managed accounts, please refer to GN-3900-20-001 – Account Supervision Guidance.

  • 1In this guidance, all rule references are to the IIROC Rules unless otherwise specified.
Table of contents
  1. What is an APM?

An APM is an individual designated by the Dealer Member (Dealer) and approved by IIROC to provide discretionary portfolio management for managed accounts under the supervision of an individual Portfolio Manager (PM).2

  1. Role

Typically, the APM approval category is used by individuals who are working towards approval as a PM, but who do not yet meet the higher standards of the PM education or experience requirements3 . APMs may also be individuals who assist PMs with client relationships but are not themselves responsible for managing investment portfolios.

  1. Proficiency requirements

For information on our APM and PM proficiency and other approval requirements, please see IIROC Rule 2600 and GN-2600-21-001 – Plain Language Rule Book Project – Registration Changes.

  1. What can an APM do?

  2. Advisory (non-managed) accounts

Under subsection 2553(1), an APM can conduct all normal course Registered Representative activities for advisory accounts4 , including taking orders and recommending securities without pre-approval.

  1. Managed accounts

1.3.2.1 Activities not requiring pre-approval

An APM can provide a variety of services to assist a PM5  with their managed accounts6 without their pre-approval, such as:

  • collecting “know-your-client” information,
  • assisting with client relationships,
  • assisting with assessing suitability (without making a decision for the client),
  • researching and analyzing individual securities for potential inclusion in investment portfolios,
  • performing research and analysis on the economy or asset classes generally, and
  • performing managed account rebalancing which is mechanical in nature.

1.3.2.2 Activities requiring pre-approval

Under the supervision of a PM or an advising representative (AR), an APM can, subject to the PM’s pre-approval, manage client accounts and conduct activities such as:

  • formulate, draft, implement and change investment policy statements (IPS),
  • make investment decisions for managed accounts, and
  • determine asset allocations.
  1. What are the pre-approval of advice requirements?

Under subsection 2553(7), an APM must not advise on securities in a managed account unless a PM has pre-approved that advice. The appropriate processes for approving the APM’s advice will depend on the circumstances, including the APM’s level of experience.

  1. Who can pre-approve an APM’s advice?

In subsection 3971(4), we require that if a PM7 is pre-approving the advice or supervising the APM, they must be:

  • at an IIROC Dealer,
  • authorized to provide discretionary management to managed accounts, and
  • not subject to any supervision terms and conditions, including close supervision.

The IIROC Rules also permit an AR to pre-approve an APM’s advice provided they enter into a contract with the Dealer. If a PM at another registrant is pre-approving the advice or supervising the APM, we expect the Dealer to comply with our requirements relating to outsourcing, as outlined in GN-2300-21-003 – Outsourcing arrangements.

We expect that an AR or a PM at another registrant will only be supervising an APM in situations where the Dealer does not employ sufficient PMs to supervise an APM or multiple APMs.

  1. When is pre-approval of advice required?

APMs need pre-approval from a PM before:

  • providing a new or revised IPS to a client or equivalent document which includes an asset allocation,
  • choosing a model portfolio for a client’s managed account,
  • conducting rebalancing of a client’s account that is not mechanical in nature,
  • making an investment decision for a client’s managed account that would result in a change to, or a deviation from, the advice pre-approved by the PM, including a change to the IPS, asset allocation, and individual investment level investment directive or model portfolio pre-approved by the PM, or
  • otherwise making any investment management decision at the “individual investment level” that has not been pre-approved by the PM (or taking individual security selection investment management actions).
  1. How should the pre-approval be provided?

PMs can provide their pre-approval of the APM’s advice in a variety of forms, including verbal, electronic or hand-written approval. Regardless of how they choose to provide their pre-approval, PMs must maintain adequate evidence of the pre-approval consistent with our record-keeping requirements8 .

  1. Must the PM or AR pre-approve each trade an APM makes?

We do not expect PMs to pre-approve each trade an APM makes. Rather, we require that they approve the APM’s advice before they provide it to clients.

If the APM places a trade that is in furtherance of advice that has been pre-approved, the trade itself does not require approval.

We expect Dealers to include guidelines in their policies and procedures governing when PMs must pre-approve an individual trade before an APM makes it.

  1. What do we consider advice with respect to APMs and managed accounts requiring PM pre-approval?

  1. Investment Policy Statements and asset allocations

For most managed accounts, the advice a PM provides to clients is set out in an IPS or similar document. The IPS is tailored to the client and documents their investments needs and objectives. An IPS often includes a planned asset allocation for the client’s managed account. The asset allocation contains recommendations of the types of securities the client should hold and what percentage of their overall portfolio they should account for.

We consider an asset allocation to constitute investment advice and, as such, an APM requires pre-approval from a PM before constructing an asset allocation and providing it to a client. More specifically, an APM requires pre-approval from a PM before providing an IPS to a client which contains an asset allocation.

The asset allocation contained in an IPS may be general or specific. For instance, the asset allocation may be at the:

  • general asset class level (e.g. 60% equities, 40% fixed income),
  • investment type and sector level (e.g. 10% Canadian bank securities, 20% international bank securities), or
  • individual investment level (e.g. 8% ABC Bank Inc. common shares, 2% XYZ Bank Inc. common shares).

Where the IPS is more general and does not include an asset allocation at the individual investment level, we expect the PM to pre-approve a more specific asset allocation or investment directive at the individual investment level. The more specific asset allocation or investment directive can be contained in a separate document from the IPS.

  1. Can a PM approve a single IPS created by an APM for multiple accounts?

A PM can approve a single IPS created by an APM for multiple accounts for the same client where the suitability assessment and advice are consistent across the accounts. In GN-3400-21-004 - Know-your-client and suitability determination for retail clients, we discuss the circumstances under which we consider it appropriate for suitability to be determined on a multi-account basis.

  1. Model portfolios

A model portfolio provides PMs and APMs with asset distributions that purport to be an appropriate guide for building a portfolio. A model portfolio may show a suggested portfolio by security, class of asset or industry sector, or be based on a specific type of investor and/or time horizon.

PMs or APMs may invest a managed account according to a model portfolio. Model portfolios may be created by a PM, or a separate investment management team working at or hired by the Dealer. These model portfolios usually have very specific asset allocation target ranges and weights set at the individual investment level.

Based on their suitability assessment, an APM may choose a model portfolio for their client. We consider an APM’s selection of a model portfolio for a client to be advice requiring pre-approval by a PM.

However, we consider any trading the APM does only to maintain consistency with the model portfolio as rebalancing of a mechanical nature that does not require PM pre-approval, provided that the model portfolio’s asset allocation is set at the individual investment level.

Where the model portfolio’s asset allocation is not set at the individual investment level, we expect the PM to pre-approve an investment directive (or similar document) set at the individual investment level.

  1. Rebalancing

  2. Rebalancing not requiring PM pre-approval

APMs do not need pre-approval from a PM to conduct rebalancing of a client’s account that is purely mechanical in nature because we do not consider it advice. When an APM conducts this mechanical rebalancing, they are merely effecting advice that has already been approved by a PM.

We consider any re-weighting by an APM to maintain an investment directive or a model portfolio (set at the individual security level) to be rebalancing of a mechanical nature. For example, where a model portfolio directs that a client account’s hold 8% ABC Bank Inc. common shares, and market changes result in that client’s account holding 7% ABC Bank Inc. common shares, the APM can make trades without the PM’s pre-approval to bring the client’s account back to 8% ABC Bank Inc. common shares.

  1. Rebalancing requiring PM pre-approval

On a regular basis, an APM must monitor the investments in their client accounts and must maintain up-to-date KYC information on their clients9 . Through these ongoing activities, an APM may decide to recommend changing an investment’s target weight or range. Depending on the client’s IPS, this decision may also trigger a change to the client’s IPS.

We consider any rebalancing of a strategic nature by the APM, including the following actions, to be advice requiring PM pre-approval:

  • any change to an asset class’, investment’s or security’s target weight or range,
  • any trades placed by the APM that would result in a either a change to, or a deviation from, the IPS, asset allocation or individual investment level investment directive pre-approved by the PM, or
  • any trades that would make changes to a model portfolio (or over-ride a model portfolio).

Based on their own monitoring, a PM may also direct the APMs they supervise to change an investment’s target weight or range in their client’s portfolios or make changes to a model portfolio.

When pre-approving or directing rebalancing of a strategic nature, we expect the PM to use their professional judgement to determine when trade-by-trade pre-approval is necessary, based on the circumstances (e.g. the type, liquidity, and complexity of securities), the impact of the change on the client and the APM’s level of experience. For example, a PM may direct the APMs they supervise to switch all ABC Bank Inc. common shares in their clients’ accounts to XYZ Bank Inc. common shares, but allow each APM to determine when and how to place the individual trades. Conversely, a PM may want to approve each trade made by a less experienced APM, to oversee the manner in which they place the trade (e.g. the timing of each purchase).

  1. Applicable IIROC Rules

This guidance relates to the following subsections:

  • 2553(1) and 2553(7)
  • 3971(3) and 3971(4)
  1. Related documents

This guidance was published under Notice 21-0224.

This guidance references:

  • GN-1400-21-002 – The Role of Compliance and Supervision
  • GN-2300-21-003 – Outsourcing arrangements
  • GN-2600-21-001 – Plain Language Rule Book Project – Registration Changes
  • GN-3400-21-004 – Know-your-client and suitability determination for retail clients
  • GN-3900-20-001 – Account Supervision Guidance
  • 2Subsection 1201(2).
  • 3See clause 2602(3)(xiii) for the proficiency requirements applicable to APMs and clause 2602(3)(xiv) for the proficiency requirements applicable to PMs.
  • 4Subsection 1201(2) defines an “advisory account” as “[a]n account which is subject to a suitability determination where: (i) the client is responsible for all investment decisions but is able to rely on advice given by a Registered Representative, and (ii) the Dealer Member and the Registered Representative are responsible for all advice given”.
  • 5References to PMs in this guidance shall include a person registered as an advising representative under Canadian securities laws unless otherwise specified. See National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations for more information.
  • 6Subsection 1201(2) defines a “managed account” as “[a]n account which is subject to a suitability determination where: (i) investment decisions are made on a continuing basis by a Portfolio Manager or an Associate Portfolio Manager or a third party hired by the Dealer Member, and (ii) the Dealer Member, or a third party hired by the Dealer Member, and the Portfolio Manager or Associate Portfolio Manager are responsible for all investment decisions made.”
  • 7Clause 3971(4)(i) does not apply to ARs.
  • 8See sections 3803 and 3804.
  • 9See subsection 3209(1).