Two new notices spell out policies on conflicts of interest as well as a proposal to prohibit DSC options
The Canadian Securities Administrators (CSA) has published two notices relating to major initiatives in investor protection.
In the first notice titled Proposed Amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, the CSA laid out changes to require registrants to address conflicts of interest in the best interest of the client; put clients’ interests first in making a suitability determination; and provide clients with enhanced clarity on what they should expect from registrants they deal with.
The proposals covered critical areas of concern by enhancing requirements relating to know-your-client (KYC) and know-your-product (KYP) obligations, product suitability determination, resolution of conflicts of interest. They also include expanded record-keeping requirements to demonstrate KYP compliance; document sales, incentive, and compensation practices; show registrants’ practices or plans to address conflicts of interest; determine proper documentation of use of titles and designations; and show compliance with enhanced disclosure requirements.
In a separate but related notice, CSA Staff Notice 81-330 Status Report on Consultation on Embedded Commissions and Next Steps, the CSA announced a three-component policy decision relating to embedded commissions in mutual funds.
The first component is integrated into its proposal on client-focused reforms, which requires that existing and reasonably foreseeable conflicts arising from the payment of embedded commissions either be addressed in the best interests of clients or be avoided.
The other two components, which the CSA will address with a publication of rule proposals for comment in September, will involve prohibiting all forms of the deferred sales charge option — including low-load options and their associated upfront commissions — as well as payment of trailing commissions to dealers who do not make a suitability determination.
“Together, these initiatives are part of the CSA's harmonized response to concerns with the client-registrant relationship as it exists today,” the council said.
The proposals came as a result of years of consultation with key industry stakeholders, including the Mutual Fund Dealers Association (MFDA) and Investment Industry Regulatory Organization of Canada (IIROC).
