Registrants should be mindful of an uptick in regulatory scrutiny relating to conflicts of interest, as we first noted in our June 2022 bulletin here. As a reminder, the Client Focused Reforms (CFRs) pursuant to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations came into force in two stages. The conflicts of interest requirements came into force on June 30, 2021, and the remainder of the CFR requirements, including the know-your-client (KYC), know-your-product (KYP), suitability and relationship disclosure information reforms, came into force on December 31, 2021. Current regulatory “sweeps” have been aimed at assessing how firms have operationalized the first stage of the CFRs – the new, more stringent, conflict of interest rules (referred to below as the CFR Sweep).
As part of the CFR Sweep, regulators are looking for a number of key items, including:
- Ensuring a process is in place to identify material conflicts of interest that arise at both the firm and individual registrant levels;
- The identification of actual material conflicts of interests;
- Whether there are adequate controls in place to mitigate risks associated with any material conflicts of interest;
- How any identified material conflicts of interest between a client and the registrant firm had been addressed in the best interest of the client;
- Whether adequate disclosure had been provided to clients regarding the material conflicts of interest; and
- Whether the firm’s written policies and procedures adequately address conflicts of interest, including whether they contain criteria to determine the materiality of the conflicts of interest and if the policies and procedures outline training for employees on identifying material conflicts of interest.
Common material conflicts of interest include investments in related or connected issuers (such as a firm’s proprietary products), and conflicts which arise from internal compensation arrangements, which may raise questions as to whether a registered individual is placing their interest ahead of their client’s interest. Registrants should also note that adequate disclosure of material conflicts of interest to a client is expected to include a description of (i) the nature and extent of the conflict of interest; (ii) the potential impact on and risk that the conflict of interest could pose to the client; and (iii) how the conflict of interest has been, or will be, addressed. Furthermore, although the focus of the current CFR Sweep is on the conflicts of interest rules, it is prudent for registrants to have a demonstrable compliance framework to address the second stage of the CFRs, as it is likely a CFR sweep focused on these obligations will be forthcoming.
Finally, as a reminder, it is important for registrants to note that they should keep their policies and procedures manuals up to date to account for ongoing regulatory developments and amendments, as an outdated policies and procedures manual generally will be cited as a deficiency upon any regulatory review.
If you require updates to your compliance program or policies and procedures manuals or have any questions regarding the CFRs or are generally interested in learning more about these requirements, please contact us.
October 31, 2022