This article was written by Michael Bookman and Ellen Bessner. Michael Bookman is an associate at Babin Bessner Spry LLP.
The investment industry, like most industries, can experience conflicts of interest among its participants. A conflict of interest occurs when a person or entity has competing loyalties in a given set of circumstances.
In the investment industry, regulators seek to identify and define real and perceived conflicts of interest that may affect dealers, advisors and the investing public. Recently, the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Securities Administrators (CSA) issued up-to-date guidance to dealers on “soliciting dealer arrangements,” a type of conflict of interest that has arisen of late.
Soliciting dealer arrangements are agreements between issuers and dealers that incentivize dealers to encourage shareholders to take certain actions in connection with the issuer, such as voting for a particular director to the board. While these arrangements have become an effective way of assisting shareholders in becoming aware of certain corporate actions, conflicts of interest inevitably arise.
IIROC’s guidance advises that certain soliciting dealer arrangements — for example, those that pay fees to the dealer in contested director elections — are to be avoided. In IIROC’s view, the dealer in such situations cannot provide objective advice and will likely be motivated by obtaining the result that triggers the fee.
For IIROC, these conflicts are unmanageable and should be avoided. Disclosure of these types of arrangements by the dealer is not sufficient to resolve this conflict of interest. (Certain other conflicts of interest, however, may be managed through disclosure.)
Under the investment regulatory schemes in Canada, any conflict that cannot be addressed in a fair or transparent manner, consistent with and considering the best interest of the client, must be avoided.
Dealers and advisors bear the risk associated with assessing, addressing and managing conflicts of interest and ensuring compliance with regulations. Not only do conflicts increase risk for dealers and advisors, they must also be resolved in the best interest of the client.