The regulator has issued guidance to dealers about their sales practice obligations
Canada’s investment industry regulator has flagged up the risk of particular types of exchange-traded funds (ETFs) amid the current market volatility.
IIROC has reminded dealer members of their sales obligations relating to ETFs that offer leverage or are designed to perform inversely to the index or benchmark they track.
These funds - which like traditional ETFs may be linked to benchmarks such as broad indices, commodities, or currencies - are growing in popularity and can be useful in sophisticated trading strategies. They are often marketed as a way to hedge exposure against downward-moving markets.
But IIROC warns that their complex nature only makes them unsuitable for retail investors who plan to hold them for one day’s trading session. This is especially true in volatile markets.
That’s because most of these ETFs “reset” daily and over longer periods their performance can be very different from that of the index or other benchmark they track.
Dealer obligations
Dealers are reminded that they should ensure clients are aware of the risks and any recommendations should be “based on a full understanding of the terms and features of the product recommended.”
The suitability of these products for individual investors should include the usual analysis which considers:
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the client’s financial situation, investment knowledge, investment objectives and risk tolerance
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the client’s account investment portfolio composition and risk level
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any other matter of relevance to the product or the client’s account.
Sales materials for these products should be “fair and accurate” and dealer members should have “adequate supervisory procedures in place to ensure that these obligations are met.”
Dealer members must also ensure the correct training for registered persons so they are fully aware of the terms, features, and risks of all ETFs they sell.
