From the Regulators

The paper provides guidance on how regulators have addressed the issue of suitability through their enforcement proceedings against advisors

By James Langton |

The Mutual Fund Dealers Association of Canada (MFDA) has published a new research paper that aims to demystify the concept of suitability by surveying regulatory enforcement cases that have brought against advisors involving suitability issues, which remain at the heart of conduct standards for the Canadian investment industry.

The paper doesn't establish any new regulatory obligations or create any new policy; rather, it's intended to provide guidance to the mutual fund industry on how regulators have addressed the issue of suitability through their enforcement proceedings. The MFDA indicates that the paper will be updated every two years.

The MFDA covers the process of assessing suitability, including the role of know-your-client (KYC) and know-your-product (KYP) obligations; making recommendations; compensation; and disclosure, among other things, in the paper.

"Past disciplinary decisions have made it clear that disclosure of material negative factors to a client is not enough to satisfy [rep's] suitability requirement," the MFDA paper states. "[A rep] must ensure that the client understands the risks involved, particularly where the client has relatively little investment experience."

The paper also addresses suitability in the context of leveraging recommendations and examines factors that regulators have considered in determining that a leveraging strategy is deemed unsuitable. For example, it sets out a list of nine factors that were deemed to make a particular leveraging strategy excessive and unsuitable for a set of investors in an Ontario Securities Commission (OSC) decision. These include that the investors had insufficient income or liquid assets; that the underlying investment was inappropriate; and that the benefits of the strategy were misunderstood or misrepresented.

"Past disciplinary decisions canvassed as part of this resource document confirm the significant importance placed on [a rep's] responsibility to meet the suitability requirement by Canadian securities regulatory authorities," the MFDA paper concludes. "They also reinforce that [reps] should be aware that a failure to satisfy any obligations of the three-stage suitability analysis including the order in which it is performed could result in disciplinary action against them."

Photo copyright: 3ddock/123RF