Securities regulators are seeking to ease the rules governing brokers’ personal financial dealings with clients in order to avoid unintended consequences and competitive issues that could be created by the existing rules.
New rules relating to personal financial dealings between reps and clients largely took effect in December 2013. On Thursday, the Investment Industry Regulatory Organization of Canada (IIROC) published proposed personal financial dealing amendments to clarify the rules, after dealers suggested that certain arrangements could be unintentionally captured in the existing rules, and that smaller dealers could be at a competitive disadvantage in certain circumstances.
To address those concerns, IIROC is proposing amendments which aim to, among other things, clarify the types of dealings that should be captured by the rule.
“The proposed amendments have been designed to balance the investor’s right to choose the individuals they appoint to manage their financial affairs with the need to protect investors from exposure to inappropriate conflict of interest situations,” IIROC notes.
The amendments clarify the kinds of financial dealings that are outright prohibited by the rules, and which ones give rise to conflicts that must be managed. “If these proposals are adopted, all personal financial dealings that are not specifically prohibited… must be assessed by [dealers]… to determine whether the proposed financial dealing must be avoided or can be addressed in a manner that is consistent with the best interests of the affected client,” it says.
IIROC is also proposing to narrow the scope of the rule so that specific prohibitions only apply to registered reps and investment reps, instead of applying to all dealer employees. Additionally, the proposals aim to reduce the administrative burden (such as pre-approval requirements) associated with engaging in certain financial dealings with family members.
The amendments would also allow registered reps and investment reps to continue to act as a client’s trustee or executor, subject to certain conditions and additional supervisory controls. The original rule bans reps from serving as a trustee or executor. However, IIROC notes that there was concern that this measure would take away a client’s right to choose their advisor as their executor or trustee; and, that this benefits bank-owned dealers (with affiliated trust divisions) at the expense of smaller firms.
“Staff acknowledge the competitive impact this prohibition may have on some [dealers] and does not want to inappropriately restrict client freedom, however, the conflict of interest that such arrangements potentially give rise to must be dealt with,” it notes.
Therefore, the amendments would allow reps to continue to fill those roles, subject to certain conditions, including pre-approval requirements, and measures to manage any potential conflicts of interest. IIROC says that it believes this approach gives firms and clients the flexibility to allow such arrangements, while also providing sufficient client protection.
The proposals also extend the deadline to unwind existing trustee, executorship, power of attorney or similar arrangements to June 13, 2015. That deadline was scheduled to come into effect on June 13 of this year. “This extension is necessary in order to ensure that existing control or authority arrangements are not unnecessarily unwound in the event that these proposed amendments are ultimately adopted,” it says.
Comments on the proposed changes are due by June 23.