From the Regulators

Regulators disagree over the approach to reporting certain off-book positions to clients

The Canadian Securities Administrators (CSA) are demanding revisions to the Investment Industry Regulatory Organization of Canada's (IIROC) version of certain Client Relationship Model reforms that are to be implemented over the next couple of years.

IIROC Thursday republished proposed changes to its rules that aim to implement the so-called CRM2 reforms in 2015 and 2016. The expectation is that the self-regulators' versions of these rules will be essentially equivalent to the CSA rules, and that SRO firms will be exempt from the CSA's CRM2 rules, as a result. However, according to the notice spelling out the proposed revisions, the CSA and IIROC clashed over a particular aspect of IIROC's proposed rules that they CSA insists is not "materially harmonized" with the CSA's version of these rules.

Specifically, the notice indicates that the CSA and IIROC disagree over their approach to reporting certain off-book positions to clients. Back in June, IIROC received a letter from CSA staff indicating that they concluded that IIROC's proposed amendments were not materially harmonized with the equivalent CSA requirements "because of a difference between the scope of the client positions that IIROC proposed be included" in reports on client positions held outside of the dealer, and in additional quarterly statements.

The notice says IIROC's proposed rules would only require reports on off-book positions where the firm receives ongoing compensation; whereas the CSA rules require reporting of all off-book positions in securities issued by a scholarship plan, mutual fund, labour-sponsored fund, in addition to any securities where the dealer receives ongoing compensation.

"While we believe that the scope difference between our respective rules is immaterial," IIROC says, it has nevertheless revised its proposals to follow the CSA's approach.

At the same time, IIROC says that it will also consider providing exemptions from this reporting to firms that "can demonstrate that the costs of building and administering this new client reporting capability significantly outweigh the benefits to the client of also receiving off-book position information". It says this exemption is designed to ensure that dealers that have an immaterial number of clients, and/or have an immaterial dollar amount of off-book client positions to report, won't have to build a new capability to report on off-book positions.

"IIROC staff recognizes that this revision to its proposals will likely have a significant impact on the costs that must be borne by its [dealers], in that they will be required to either build and maintain this new reporting capability or expend resources to demonstrate to IIROC that they should be exempted from this revised requirement to report to clients on their off-book positions," it says; adding that clients may ultimately end up paying for these additional costs.

The SRO also maintains that it continues to believe that its approach is better, in that, it leaves firms with a "simple choice between: building the new reporting capability and continuing the receive ongoing compensation on the off-book positions; and, not building the new reporting capability and not receiving ongoing compensation on the off-book positions." This would also mean consistent reporting treatment for off-book positions, rather than treating certain products, such as mutual funds, differently, it says.

Nevertheless, comments on the CSA-mandated revisons, and what IIROC says, are other immaterial revisions, are due by November 17.