The Investment Industry Regulatory Organization of Canada (IIROC) on Wednesday issued a revised version of its frequently asked questions (FAQs) document that aims to clarify firms’ obligations under the first phase of the Client Relationship Model (CRM) rules, particularly when it comes to ensuring suitability.
The new version of the FAQ document highlights several new issues that may arise under the tougher approach to suitability that was introduced as part of the first wave of CRM reforms.
For example, the new FAQ document addresses such issues as: assessing overall portfolio risk as part of complying with the obligation to ensure suitability; ensuring suitability for clients that have accounts at more than one dealer; and ensuring suitability for clients that have a high risk tolerance.
Under the CRM reforms, the obligation to ensure suitability shifted from ensuring that a particular trade recommendation is individually suitable to ensuring suitability within the context of the overall portfolio, the revised FAQ document notes. Notwithstanding this shift, revised FAQ document clarifies that clients can still hold individual securities that may exceed their overall risk tolerance, without pushing the overall portfolio to unacceptable risk levels.
Yet, at the same time, the revised FAQ document points out that it is also possible to construct a portfolio of securities that are individually acceptable, but where the overall portfolio is unsuitable. “This can occur in situations where the client’s investments are concentrated in a particular asset type, industry sector or individual issuer and the concentration risk in the portfolio increases the overall risk of the portfolio to an unacceptable level,” the revised FAQ document says.
For clients that have accounts at more than dealer, the revised FAQ document explains that dealers are not expected to consider the KYC and portfolio information across all the accounts that clients hold with all dealers. Instead, each dealer should be “generally aware” of the accounts held at other dealers, as this will help firms assess the reasonableness of the KYC information for the accounts they are responsible for; but, if that’s not possible, dealers are only responsible for ensuring the suitability of the accounts held at their firm. “It is not expected that every dealer with which the client has an account would be required to perform such an overall suitability assessment,” the revised FAQ document says.
For clients that have a particularly high risk tolerance — in an account they open simply to trade speculative securities, for example — the dealer’s approach to suitability “can be streamlined” to focus on ensuring the client is comfortable with assuming high levels of risk, the revised FAQ document says. These clients can absorb significant investment losses, and they are not entirely reliant on the advisor or the dealer to provide advice on speculative trading.