As of December 31, 2021, certain amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (the “Rule“) and its Companion Policy, known as the Client Focused Reforms (“CFRs“) are coming into force. The CFRs must be implemented by registered dealers and advisers. Registrants will be required to update their internal policies and practices to be in compliance with the CFRs. This article serves as a reminder about the upcoming changes and summarizes the amendments.
The Canadian Securities Administrators (“CSA“) first announced the amendments to the Rule and its Companion Policy on October 3, 2019. The amendments apply to all categories of registered dealer and registered adviser, with some application to investment fund managers. The first portion of the amendments, related to conflicts of interest, came into force on June 30, 2021, with the remainder coming into force on December 31, 2021.
- The amendments cover all registered dealers and registered advisers (and some investment fund managers). This includes for example: investment dealers, exempt market dealers, mutual fund dealers, and portfolio managers.
- The first set of amendments, related to conflicts of interest, came into force on June 30, 2021. The remainder are coming into force on December 31, 2021 and include changes related to: “Know Your Product”, “Know Your Client”, suitability determination, relationship disclosure information, and misleading communications.
- Registrants will need to review their internal practices and policies and take action to be in compliance with the upcoming changes.
The CSA developed the CFRs in consultation with the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA). The overarching idea behind the CFRs is to ensure that the interests of the client come first in client-registrant relationships.
The amendments were first published on October 3, 2019 and provided for a transition period. The deadline for the implementation of the first group of amendments was June 30, 2021 (originally December 31, 2020). This first group dealt with conflicts of interest provisions. The conflicts of interest amendments revised the Rule to explicitly require material conflicts to be addressed in the best interest of the client.
The remainder of the amendments will take effect on December 31, 2021. The following provides a description of each category of amendments.
Know Your Product (“KYP“)
The amendments add a new section to the Rule concerning KYP. The new section creates an obligation for registered firms to take reasonable steps to ensure that the securities that they make available to clients are assessed with regard to certain aspects like their structure, risks, features, initial and ongoing costs, and the impact of the costs. It also requires that the securities are approved by the firm to be made available to clients and are monitored for significant changes.
The KYP requirement also creates an obligation for registered individuals to take reasonable steps to understand the securities they purchase, sell or recommend to a client, in order to enable them to make a suitability determination. Registered individuals must only purchase or recommend securities approved by their firm to be made available to clients.
Know Your Client (“KYC“)
The amendments expand the current KYC requirements by clarifying the content and scope of the KYC process. The list of KYC information that must be collected by registrants has been expanded to include the client’s personal circumstances, investment knowledge, risk profile, and investment time horizon. Registrants must also take reasonable steps to get a client’s confirmation of the accuracy of their KYC information.
Registrants now have an obligation to update a client’s information if the registrant becomes aware of a significant change. Further, the amendments specify minimum time intervals when a client’s KYC information must be reviewed — 12 months for managed accounts, 12 months before making a trade or recommendation for exempt market dealers, and 36 months in other cases.
The KYP and KYC amendments are meant to enhance the registrant’s ability to conduct a suitability determination. The amendments replace old suitability determination requirements. Registrants are now required, before opening an account for a client or taking an investment action, to determine that the action is suitable for the client based on a list of factors, and that the action puts the client’s interest first. The Rule therefore explicitly states now that the registrant must put the client’s interests first when making a suitability determination.
The amendments also prescribe trigger events that will require registrants to review a client’s account and take appropriate action, including when:
- a registered individual is designated as responsible for the client’s account;
- the registrant becomes aware of a change in a security in the account; or
- the registrant has undertaken a review of the client’s KYC information.
Relationship Disclosure Information (“RDI“)
The amendments expand the current RDI requirements to better implement the principle that “a registrant must deliver to a client all information that a reasonable investor would consider important about the client’s relationship with the registrant.” The expanded requirements include informing clients about restrictions on liquidation or resale of a security, ongoing fees, limits on the selection of products offered by the registrant, and an explanation of the potential impact of charges and fees.
The amendments add a new section about misleading communications. A registrant must not hold themselves out in any manner that could reasonably be expected to deceive or mislead any person or company as to their proficiency, experience, qualifications, category of registration, the nature of the relationship with the registrant, and products or services provided.
The amendments also include certain exemptions from the Rule. Certain KYC requirements and the suitability determination obligation do not apply in respect of institutional permitted clients with managed accounts if they have provided their consent.
Further, investment fund managers are exempted from the KYC, KYP, and suitability determination provisions, unless they are acting under an additional registration in a dealer or adviser category.
Internal Controls and Systems
The amendments include changes to the requirements for training and record-keeping corresponding to the new and enhanced requirements for KYC, KYP, suitability determinations and conflicts of interest. Registered firms must provide training to their registered individuals on compliance with the amended Rules.
Further, the provision related to record-keeping is expanded to include requirements for demonstrating compliance with KYP; demonstrating how the firm has addressed, or plans to address, conflicts of interest in the best interest of clients; documenting the firm’s sales practices, compensation practices and incentive practices; and demonstrating compliance with requirements relating to misleading communications.
What Registrants Must Do by December 31, 2021
The actions that a registrant will need to take vary depending on the specific situation of each registered firm or individual. Broadly speaking, the amendments will likely require changes to the registrant’s policies, procedures, internal controls, record-keeping protocols, client-facing documents, and compliance training. The exact changes depend on the registrant’s current policies and practices.
Please reach out to us ahead of the upcoming changes to find out what steps your firm or practice may need to take in order to be in compliance with the amended Rules.