Since the CFRs in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations came into effect the other year, firms have been making serious efforts to meet their enhanced conduct obligations. This includes taking reasonable steps to identify existing and reasonably foreseeable material conflicts of interest and to address those conflicts in the best interests of clients. If there is no way to address a material conflict in the best interest of clients using controls, the conflict must be avoided.
Last year, the CSA and CIRO staff (the Regulators) published further guidance outlining their expectations relating to identifying and addressing material conflicts of interest: Joint CSA and CIRO Staff Notice 31-363 (Notice).
One specific conflict that was highlighted was “fees charged to clients”, with the Regulators noting that that some firms had not identified that different / multiple fee schedules could be a material conflict of interest in certain circumstances as it could affect either or both decisions of the client or the services or products offered by the firm. The Regulators noted that where a client is charged more than other clients for the same or substantially similar products or services, there could be a breach of a registrant’s duty to treat clients fairly, honestly and in good faith. Additionally, they reminded firms that disclosure alone is not sufficient to address this conflict, nor is disclosure alone sufficient to demonstrate that the firm has met its standard of care.
Our experience with clients has led us to observe that this conflict is amongst the most consequential that needs to be considered and addressed. In considering the impact of different / multiple fee schedules for the same services, firms should be cognizant that they will be expected to have acceptable measurable criteria in place to justify the fee differences among clients. This can include a client’s account size, but likely should not include factors such as the geographic location of the firm’s registered individuals or their seniority.
Additionally, amongst other considerations, if a firm has a standard fee schedule but allows some clients to negotiate fees or deviate from the schedule, the firm should be aware that the Regulators’ guidance is that they expect the firm to: (a) implement guidelines or criteria for circumstances where a deviation from the standard fee schedule would be acceptable, (b) implement a process where deviations require prior approval from designated senior personnel, and (c) disclose to all clients and describe the circumstances under which the firm is prepared to negotiate fees or deviate from the firm’s standard fee schedule.
We have also seen this conflict come to the fore in instances where a registered firm is acquiring or merging with another registered firm; i.e. as the firms move towards being one firm, how will they address their historically separate fee schedules so that their combined clients will be paying appropriate fees for the same or substantially similar products or services on a go-forward basis. We have seen required regulatory non-objections be delayed in instances where firms have not adequately addressed this consideration.
If you have any questions or would like to discuss any of the above further, please contact your regular lawyer at AUM Law. AUM Law regularly assists clients to consider their enhanced conflict of interest obligations, including advising firms on implementing disclosure and controls to address material conflicts in a manner consistent with regulatory expectations.
March 28, 2024