The Investment Industry Regulatory Organization of Canada (IIROC) will be examining the distribution of proprietary products, know-your-client disclosure, and the compliance of order-execution firms, in the year ahead, it says in a new report.
IIROC has published a report outlining the results of its most recent compliance reviews, and spelling out the areas it plans to focus on in the year ahead. The report is designed to help firms ensure that their compliance systems and controls satisfy the regulator’s expectations. “The report is an important tool that we use to promote higher industry standards, improve investor protection and strengthen market integrity,” it says.
In the year ahead, the report indicates that IIROC’s business conduct compliance department is conducting a targeted review on the distribution of proprietary products, which will examine the adequacy of controls for the distribution and supervision of these products.
It’s also reviewing best practices in know-your-client (KYC) documentation amid the heightened obligations imposed by the client relationship model (CRM); and will be issuing a guidance note on the subject in early 2013.
Additionally, IIROC says that it continues to find compliance issues with dealers offering advice in the context of relationships that are meant to be order-execution only. IIROC says that while it recognizes that “dealers want to assist their clients in improving their investment knowledge and attaining their investment goals, order-execution only dealers must ensure they are not providing recommendations.”
Yet, as it continues to see compliance issues in this area, IIROC is planning to undertake a review of the practices of order-execution only platforms over the next year, which will look at client ‘planning tools’, online tutorials, third-party links, referral arrangements and client questionnaires used by dealers. It will also be looking at potential trading issues arising at order-execution only firms.
On the financial compliance front, the report indicates that IIROC staff will be focusing on the risk management of liquidity capacity of self-clearing firms in their examinations in the coming year. It will also be pushing dealers to limit their client free credit balance usage to a more restrictive standard than the current rules require; and says it plans to make rule proposals to address leverage risk in 2013.
There will also be an increasing focus on customer books and records that reside on accounting systems that are physically located outside the control of dealers. IIROC says it will be introducing new rule amendments requiring dealers to maintain full control over customer records running on shared computer systems, and that these records must be separate and distinct from all other affiliates’ customer records.
Various other issues that will receive regulatory attention are the supervision of leverage strategies, firms’ policies to prevent and detect manipulative and deceptive trading, electronic trading controls, the use of the new short marking exempt marker, and compliance with failed trades reporting requirements.
In the report, IIROC says that it recognizes that, in the current economic environment, there are challenges on dealers’ resources. “However, this does not diminish the responsibilities of dealers to have strong and effective compliance and risk control systems in place,” it says. “As many firms are now reviewing their current business models and looking for ways to effectively contain and reduce costs or alter business lines to meet the changing business environment, it is important for all firms to maintain a robust, effective compliance and risk management framework.”
The report also documents the results of its targeted reviews over the past year, and a variety of other deficiencies it uncovered during the year.
One of the areas that received specific attention during the year is firms’ complaint handling policies. IIROC reports that it found “good overall compliance” with its complaint handling rule, but that there were certain areas where some dealers could improve.
The most common deficiencies identified in the report include failing to update written policies and procedures; not informing new clients of the firm’s complaint handling procedures; not explaining their internal complaint handling process in their complaint acknowledgement letters; not giving clients a description of the options available to further pursue a complaint; and failing to retain adequate documentation in each complaint file.
The report also notes that IIROC reviewed the titles and designations used by reps during the year, and that it plans to issue a guidance note later this month that will report on the results of its review. It’s also preparing a glossary of various designations to help inform clients.
Finally, the regulator notes that it also reviewed dealers’ efforts to prevent online account intrusions. And, the report spells out a list of common deficiencies observed during the latest round of compliance reviews, including inadequate internal controls, deficiencies regarding books and records, deficiencies regarding related party transactions, deficiencies regarding policies and procedures for identifying and managing conflicts of interest, inadequate supervision of employee accounts, insufficient procedures for carrying out product due diligence, and technical malfunctions and programming errors that result in market disruptions.