On June 21, both IIROC and the MFDA published proposed guidance regarding suitability that relate to the CSA’s client-focused reforms. IIROC’s Proposed Guidance on Know-your-client and Suitability Determination, applicable to investment dealers and their representatives, would replace its existing KYC and suitability guidance in its entirety, and is intended to conform in all material respects to the CFRs. The new guidance details IIROC’s expectations on the collection of KYC information, its interpretation of certain terms, its expectations on how dealers can in fact “put the client’s interest first” and confirms that KYC requirements are not one-size fits all but depend on a member’s business model, service offerings and clients. The requisite KYC information is divided into “essential facts” about an order, client and account which dealers must collect as gatekeepers to the capital markets (such as client ID), and KYC information needed for the suitability determination obligation (e.g. financial circumstances, risk profile, investment knowledge and investment time horizon). IIROC states that dealers should apply the guidance and the suitability determination requirement to all investment products offered, and not just securities. With respect to specific dealer models, the guidance notes that while the KYC obligation is generally the same for all accounts, some limited exceptions exist for accounts such as OEO or DEA accounts. The notice also addresses when it would be acceptable to collect and maintain one set of KYC information for multiple accounts (spoiler alert: the account beneficial owner must be the identical individual for all the accounts, for starters) and when separate account applications would be required. The suitability determination obligation not only applies before taking or recommending an investment action for a retail client, but notes that the order type, trading strategy, fee structure and method of financing must also be suitable (and put the client’s interests first). In the draft guidance, IIROC clarifies that it will not review suitability determinations in hindsight, but rather on the basis of what a reasonable dealer or registered individual would have done in the same circumstances.
For mutual fund dealers, the MFDA has published CFR Conforming Changes to MSN-0069 (Know-Your-Client and Suitability). The new draft guidance has been combined with prior guidance to ensure that it reflects the business models of MFDA members while still being consistent with new CSA guidance. The staff notice sets out the various types of KYC information that must be collected such as personal circumstances, investment knowledge, financial circumstances, investment needs and objectives, investment time horizon and risk profile, and explains how each can support a suitability determination. The draft updates its description of the situations where certain KYC information can be collected jointly for joint accounts. The guidance also focuses on the timing of suitability determinations, including with respect to bulk account transfers, and the meaning of an “investment action”. The inputs into a suitability determination have been updated, to include items such as a comparison of KYC information to the characteristics of the investments in the accounts, as well as KYP information, concentration and liquidity factors, and the potential and actual impact of costs. The guidance also confirms that members must have policies and procedures for both branch and head office staff relating to the opening of new accounts and updating of KYC information, which can not be solely an administrative exercise but a review of the information’s adequacy, reasonableness, consistency and uniformity. Specific guidance is reiterated with respect to the MFDA’s suggestion for supervisory policies and procedures to flag specific concentration limits (at 25% of a client’s total investments with the member and an additional limit of 10% of a client’s total investable assets) relating to any one security, sector or industry. Other changes to MSN-0069 include its scope, to ensure it applies to all business conducted through the facilities of a member (e.g. non-securities related investment products), removal of KYP guidance (which is now addressed by another staff notice) and other content found in other compliance bulletins, and the removal of examples of a KYC and suitability review on the basis that the requirements are well understood by members. The changes to the staff notice all support the requirement to ensure that before a member or approved person opens an account, makes a recommendation or takes any other investment action for a client it is suitable for the client and puts the client’s interests first, as required by the CFRs.
Comments on both proposals are due on August 20. If you have any questions or wish to comment on the proposals, please reach out to your usual lawyer at AUM Law.
June 30, 2021