Effective Date: December 31, 2021
IIROC is publishing guidance on the capital requirements for contingent liabilities involving lawsuits where there is an enforceable judgment against the Dealer Member (Dealer).
Capital requirement for contingent liability
For regulatory accounting purposes, IIROC staff considered the issue of whether capital charges should apply at the time of the judgment, and determined, based on the potential for the judgment amount becoming a definite liability, that a capital charge subject to the exception listed below, must be provided.
Adverse judgment and Dealer does not intend to appeal
In instances where there is an adverse judgment and the Dealer does not intend to appeal the decision, IIROC will require the Dealer to accrue a loss provision equal to the judgment amount.
Adverse judgment and Dealer intends to appeal
Where the Dealer intends to appeal the decision, the Dealer is required to:
- notify IIROC of its intention to appeal, and
- provide within 30 days of the judgment date, a legal opinion by an independent counsel outlining clear errors of fact and/or law that constitutes a reversible error on appeal. IIROC would regard an independent counsel as a person or firm that is not a party to the proceedings or the appeal.
If such a legal opinion is provided to IIROC, no capital charge is required until the time that the appeal is heard and ruled upon. If however, the Dealer does not obtain such an opinion or decides not to obtain an opinion within this 30- day period, IIROC will require the Dealer to either accrue a loss provision or provide a capital charge equal to the judgment amount less any loss provisions that have already been accrued by the Dealer until such time that the appeal is heard and ruled upon.
Dealer Members’ responsibilities
All Dealers are reminded:
- IIROC may designate the Dealer in early warning level 1 or 2, at its discretion, and impose applicable sanctions, if there is concern as to the future impairment in the Dealer’s regulatory capital due to the judgment, and
- of the requirement to report any adverse judgment to IIROC pursuant to IIROC Rule 3700 Reporting and handling of complaints, internal investigations and other reportable matters.
IIROC Rules this Guidance Note relates to:
- Statement B, Form 1, and
- Rule 3700.
Previous Guidance Note
This Guidance Note replaces Member Regulation Notice MR0230 - Recognition of Contingent Loss arising from Litigation.
This Guidance Note was published under Notice 21-0190 - IIROC Rules, Form 1 and Guidance.