Client Focused Reforms - Conflicts of Interest Findings and Guidance

The Canadian Securities Administrators (CSA) and the Canadian Investment Regulatory Organization (CIRO) published in August 2023 a joint staff notice (the Notice) to summarize the findings of their review of firms’ conflicts of interest (COI) practices in relation to the Client Focused Reforms (CFRs) and to provide additional guidance to securities registrants. ??

We strongly recommend that firms conduct a gap analysis of their existing policies, practices, disclosures, and documentation, against the Notice. ?

The Notice discusses the most common findings and identifies applicable rules and guidance. ?A few highlights to note about the Notice:

(1) it emphasizes that disclosure alone is not sufficient to address a material COI and that controls must be used in conjunction with adequate disclosure. ?

(2) it provides examples of specific COIs that were either not identified by firms as material or not adequately addressed by firms, and for each of these COIs, provides suggested controls. ?There is detailed discussion on the following specific COIs:

- internal compensation arrangements and incentive practices

- third party compensation

- proprietary products

- fees charged to clients?

- supervisory compensation

- director positions with issuers

- referral arrangements?

- trades alongside clients?

- gifts and entertainment

- managing and distributing prospectus-exempt proprietary issuers?

(3) it provides guidance on disclosures related to material COIs, emphasizing that disclosure must cover all three required elements of disclosure required by the Client Focused Reforms (i.e. the nature of the conflict, the impact to the client, and how the conflict is being addressed). ?

(4) it provides that 66% of the firms reviewed had inadequate policies and procedures relating to COIs, and provides guidance on what a firm's COI policies should include. ?

(5) it provides that most firms (83%) provided adequate training on COIs, but explains when training will NOT be considered adequate.

(6) it provides guidance on recordkeeping requirements for COIs, including a conflicts matrix, evidence of periodic reviews of the matrix, and evidence of specific controls for COIs.

Registrant Law would be pleased to discuss the Notice with you, and can assist in your gap analysis, and any updates to compliance manuals, disclosures, and documentation. ?Please contact Nancy Mehrad at [email protected] or 647-402-7729.

Registrant Law is a boutique law firm in the Toronto area, providing quality, practical, and cost-effective securities law and regulatory compliance advice to advisers, dealers and investment fund managers. We offer two service models: (1) advice at a competitive hourly rate or fixed-fee and (2) in-house counsel services. This article is an overview only and does not constitute legal advice. It is not intended to be a complete statement of the law or the proposed regulations. You should not act upon the information in this article without a thorough examination of the law or proposed regulations as applied to the facts of your situation. No part of this publication may be reproduced without the prior written permission of Registrant Law.