Overview: On March 5, the Canadian Securities Administrators (CSA) proposed amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and the related Companion Policy (NI 31-103CP) to clarify how registrants can deal with situations involving clients with diminished mental capacity and/or vulnerable clients who may be experiencing financial exploitation (Proposed Amendments). If the Proposed Amendments are adopted, registrants will have to take reasonable steps to obtain:

  • The name and contact information of a “trusted contact person” (TCP) from each of their individual clients; and
  • The client’s written consent for the registrant to contact the TCP in certain circumstances.

NI 31-103 also will be amended to prescribe the steps that registered firms must take if they place a temporary hold on certain transactions in the client’s account because they reasonably believe that either a vulnerable client is being financially exploited or that the client does not have the mental capacity to make financial decisions with respect to an instruction.

More on the TCP Requirements: According to the Proposed Amendments to NI 31-103, registrants must take reasonable steps to obtain their individual clients’ consent to contact the TCP named in their account to confirm or make inquiries about any of the following:

  • Possible financial exploitation of the client;
  • Concerns about the client’s mental capacity in respect of the client’s financial decision-making or lack of decision-making; and/or
  • The name and contact information for: (a) a legal guardian of, or any other personal or legal representative of, the client; or (b) an executor of an estate or trustee of a trust under which the client is a beneficiary.

New guidance to be included in NI 31-103CP describes the intended role of a TCP and emphasizes that the TCP doesn’t replace a client-designated attorney under a power of attorney (POA). Similarly, the TCP does not have authority to transact on the account or make any other decision on the client’s behalf as a result of being named a TCP. There is no prescribed form to complete but NI 31-103CP will be revised to describe the information that the registrant should provide to the client and request from the client regarding the TCP.

The proposed guidance also emphasizes that a registrant may still act for a client who refuses to provide a TCP, provided that the registrant took reasonable steps to obtain the TCP information and the client’s consent to contact the TCP in the circumstances described above. In addition, the guidance describes the circumstances when registrants should speak to the client and/or the TCP about the registrants’ concerns about financial exploitation or mental incapacity. It also outlines the CSA’s expectations with respect to registrants’ policies, procedures, and relationship disclosure information (RDI) concerning TCPs.

We have been advising clients for a while about the benefits of obtaining the name and contact details for a TCP as part of the account opening process, and the proposed guidance provides helpful confirmation about the role of TCPs.

What Do “Financial Exploitation”, “Mental Capacity”, and “Vulnerable Client” Mean? The Proposed Amendments will add the following definitions to NI 31-103:

  • “Financial exploitation” means, in respect of an individual, the use, control or deprivation of the individual’s financial assets through undue influence or wrongful or unlawful conduct;
  • “Mental capacity” means the ability to understand information or appreciate the foreseeable consequences of a decision or lack of a decision;
  • “Temporary hold” means a hold that is placed on the purchase or sale of a security or withdrawal or transfer of cash or securities from a client’s account; and
  • “Vulnerable client” means a client of a registered firm or a registered individual who may have an illness, impairment, disability or aging process limitation that places the client at risk of financial exploitation.

More on the Temporary Hold Provision: NI 31-103 will be amended to indicate that a registered firm or individual must not place a temporary hold:

  • In relation to the financial exploitation of a vulnerable client unless the firm reasonably believes that the client is a vulnerable client and that financial exploitation has occurred, is occurring, has been attempted, or will be attempted; or
  • In relation to the lack of mental capacity of a client unless the firm reasonably believes, with respect to an instruction given by the client, that the client does not have the mental capacity to make financial decisions.

If a temporary hold is placed on a client’s account, the registered firm must:

  • Document the facts that caused the firm or individual to place and continue the temporary hold;
  • As soon as possible after the temporary hold is placed, notify the client of the temporary hold and the reasons for doing so;
  • As soon as possible after the temporary hold is placed and until the hold is terminated, further review the facts that caused the hold to be placed; and
  • Within 30 days of placing the temporary hold, and within every 30 days thereafter until the hold is lifted, notify the client of the firm’s decision not to terminate the hold and the reasons for that decision.

The Proposed Amendments also will amend NI 31-103CP to provide guidance on, among other things, the purpose of a temporary hold, the scope of a temporary hold, and the CSA’s expectations regarding firms’ policies, procedures and RDI regarding temporary holds.

Clients dealing with vulnerable clients have asked us whether they are permitted to refuse a withdrawal or redemption request due to concerns about financial exploitation or the client’s mental capacity. The proposed, regulatory “safe harbour” for temporary holds provides comfort and helpful guidance on how to handle such scenarios consistently in these difficult situations.

Comment Deadline and Timeline for Implementation: In the Notice, the CSA asked for comments by June 3, 2020 and indicated that their goal was to adopt the Proposed Amendments and have them come into force at the same time as the know-your-client provisions in the client-focused reforms (CFRs) to NI 31-103 (i.e. December 31, 2021). As a result of the CSA’s March 18 news release on COVID-19 matters, the June 3 comment deadline has been extended to July 18. If you would like to discuss the potential impact of the Proposed Amendments on your business, please contact your usual lawyer at AUM Law.

March 31, 2020