March 19, 2021
As the June 30, 2021 deadline for the Conflicts of Interest (COI) section of the Client Focused Reforms (CFRs) approaches, most of you have started preparations to implement the new requirements. If you have not, it’s important to begin to do so soon, given the changes can take time to assess, implement, and deliver.
Most registrants will likely find that their current disclosures need to be updated. For example, their disclosures may need to add additional conflicts, such as those specifically identified in the companion policy. Current disclosures may not be as fulsome as the new rules require; disclosures now have to also describe the conflict’s impact and risk to the client, and how the conflict has or will be addressed in the best interest of the client.
Similarly, registrants may find that policies & procedures changes are required to identify, address, and resolve material COIs, including reflecting the new standard for resolving conflicts in the best interest of the client. Compliance manuals will also need to have a process for registered individuals to identify, address (or avoid) and report COIs, implement enhancements to their monitoring & testing of the new procedures, and introduce a system for confirming that effective disclosure of material COIs is provided to clients.
As you prepare for the Client Focused Reforms, be sure to also read the FAQs, most recently updated by the CSA on December 18, 2020. The FAQs intend to add clarity on how certain requirements under the CFRs should be operationalized. For example, they discuss proprietary products, conflicts of interest records, client consent, manner of disclosing COIs, referral arrangements, amongst other topics. The CSA may issue additional guidance or updates to the FAQs – registrants should check the CSA site regularly.
Registrant Law has summarized some of the COI requirements in the Client Focused Reforms below. The entirely of the new COI requirements can be found here.
Identifying material COIs:
Firms must have robust policies & procedures to identify material COIs in a timely way. As you review your policies, also implement steps to assess the materiality of conflicts to distinguish between those conflicts that are material and those that are not.
What is a material COI? As you review your firm’s conflicts to assess their materiality, also consider the companion policy’s examples of conflicts that are “material”, such as:
- Third party compensation
- Internal compensation arrangements with incentive practices
- Compliance or supervisory staff compensation is tied to sales or revenue generation of the firm
- Fee-based accounts where account holds securities with embedded commissions
- Conflicts between clients
- Referral arrangements (note, definition of “referral fee” has changed)
- Full control or authority over the financial affairs of a client (e.g. power of attorney)
Also look to the FAQs, which provide further guidance. For example, there is a discussion on the new definition of “referral fee”, examples of steps registrants can take to (1) conduct due diligence of the other party in a referral arrangement, and (2) monitor and supervise referral arrangements.
Addressing material COIs:
Material COIs must be addressed in the best interest of the client, otherwise, avoided. In addressing material COIs, consider updating your policies and procedures manuals to:
- identify and assess material COIs
- include a broad definition of COI
- include an escalation procedure for handling potential conflicts
- delineate between firm and registered individual responsibilities
- ensure there are appropriate resources, independence and authority to the CCO and other internal control functions
- have regular reporting of the CCO to the UDP, executives and board of directors
- have periodic testing of the firm’s COI framework
Also, you should have a system for confirming that effective disclosure of material COIs is provided to clients, and that proper record-keeping is created and maintained.
Disclosing material COIs in a timely manner:
The CFRs explicitly require that firms disclose, in writing and in plain language, material COIs, and include in disclosures:
- the nature and extent of the COI
- the potential impact on and risk that the COI could pose to the client, and
- how the COI has or will be addressed.
There’s also specific rules on timing of the disclosure, which must be provided:
- before opening a client account if the COI is identified at that time
- in a timely manner upon identifying a COI that has not previously been disclosed to the client and must be disclosed to client
It’s important that your disclosures should not be generic, so partial that they could mislead clients, or “buried” in the middle of a large disclosure document.
Registered individuals also have specific responsibilities. In particular, they must take reasonable steps to identify existing material COIs and material COIs that are reasonably foreseeable, between the individual and the client; report the COI to their firm; and address the COI in the best interest of the client, or else avoid it.
They also cannot engage in any trading or advising activity in connection with the material COI unless the COI has been addressed in the best interest of the client and the firm has consented to the individual proceeding with the activity.
Ensure that your firm’s policies and procedures address the requirements applicable to registered individuals.
Registrant Law would be pleased to provide our assistance in helping you meet the Client Focused Reforms requirements, and can assist with:
- Updating policies and procedures
- Updating client disclosures
- Updating account opening forms
- Interpretation questions
Please contact Nancy Mehrad at firstname.lastname@example.org or 647-402-7729.
Registrant Law is a boutique law firm based in the Toronto area, providing quality, practical and affordable securities law advice to exempt market dealers and other dealers, portfolio managers and investment fund managers. We offer two service models: (1) advice at an hourly rate and (2) temporary in-house counsel services, at your desired cadence. This article is an overview only and does not constitute legal advice. It is not intended to be a complete statement of the law. You should not act upon the information in this article without a thorough examination of the law or proposed regulations as applied to the facts of your situation. No part of this publication may be reproduced without the prior written permission of Registrant Law.
Source: Registrant Law