From the Regulators

Proposed guidance details common due diligence practices

By James Langton |

In a bid for greater consistency in underwriting due diligence standards, the Investment Industry Regulatory Organization of Canada (IIROC) is proposing new guidance that outlines best practices in that area.

On Thursday, IIROC published proposed new guidance for comment that details common due diligence practices, and suggestions for IIROC dealers that act as underwriters. The proposed guidance sets out: the elements of due diligence; the types of industry policies and procedures that dealers need to carry out that due diligence; and, the components of an appropriate supervisory and compliance framework.

The proposed guidance indicates that IIROC's compliance examinations of dealers have revealed variations in due diligence practices and record-keeping. It reports that, in some cases, dealers' policies only described one standard due diligence process, while others contemplated varying degrees of due diligence investigation and supervision, based on the risk factors of particular offerings. This new guidance represents an effort to develop more consistent standards.

To that end, IIROC established an industry advisory committee on underwriting standards to help identify best practices, and to point out any gaps in current practices and ways to address them. It has also engaged in consultations with several other IIROC standing committees, its National Advisory Committee, various dealers with experience in the venture market, and its small dealers committee. Now, its proposals are out for public comment until June 4.

IIROC notes that it is specifically seeking comment on certain key issues, including additional practices that might be included in the proposed guidance, different considerations for specific industry sectors or types of public offerings, and circumstances that may require heightened due diligence and/or enhanced disclosure.

"As gatekeepers to the capital markets, [dealers] and individuals performing due diligence investigations on their behalf should take an approach to due diligence that goes beyond the avoidance of liability and mitigation of risk to [the dealer]," the guidance says. "[Dealers], together with other gatekeepers, play a role in protecting investors, fostering fair and efficient capital markets and creating and maintaining confidence in capital markets."

The guidance also notes that due diligence is not one size fits all, and that it should be customized to the issuer, the industry it operates in, and the type of security being offered. "Underwriters must not put ‘form over substance' and are expected to exercise professional judgment to determine the appropriate level of due diligence in each set of circumstances," it says.

The proposed guidance is not intended to apply to dealers participating in private placements, although it notes that some aspects of the guidance may be helpful in those sorts of transactions too. And, the proposals question whether the standards set out in the guidance should be extended to the exempt markets; although it notes that IIROC dealers aren't the only firms operating in these markets, and it says that investor protection should be consistent for all players in this area.

IIROC also notes that its future compliance examinations in the area of underwriting due diligence "will focus on the adequacy of a [dealer's] policies and procedures and whether the process has been followed in sampled files. The results of the examinations will inform further potential policy development by IIROC in this area," it adds.

"The capital-raising process is vital to a vibrant economy and IIROC dealers who facilitate this process play an important gatekeeper role. The proposed guidance is designed to promote consistency and enhanced underwriting due diligence practices," said IIROC president and CEO, Susan Wolburgh Jenah.

Additionally, IIROC indicates that it is also reviewing the registration regime for individuals involved in investment banking and corporate finance activities, many of whom are no longer required to register in the wake of registration reform. It says that it will publish any proposed changes in this area for public comment, too.