To hold out

“What should we do about financial planning?” has been a question that has, from time to time, kept regulators awake at night. The officials at the Investment Industry Regulatory Organization of Canada (IIROC) can be expected to sleep better once IIROC’s proposed Financial Planning Rule Minimum Standards for the Provision of Financial Planning Services comes into force.

IIROC’s Financial Planning Rule was published for comment on August 8, 2008 with comments being due within a very short 30 days of publication. It is posted on IIROC’s website, as well as the OSC’s website.

The rule is deceptively simple and is intended to “ensure that Dealer Members meet minimum standards in relation to the provision of financial planning services, as there are currently no financial planning Rules in Place.” Under the rule, an IIROC member will be required to:

• ensure that all “personnel” who provide clients with financial planning services are proficient and that only qualified personnel provide financial planning services to clients; • develop policies and procedures setting out how the member firm will supervise personnel providing financial planning services to clients; and • approve for use any software that will be used by its personnel in providing financial planning services to clients. The above-noted rules are supplemented by a longer IIROC guidance note that sets out minimum standards for the provision of financial services, including what IIROC views as important considerations for written policies and procedures, client documentation, proficiency standards and supervisory methods.

Much of the buzz about the Financial Planning Rule has to do with the definition of “what is financial planning” and the fact that it would include activities of IIROC members that are clearly outside of the traditional securities- related regulatory scope of IIROC. Earlier Ontario Securities Commission (OSC) attempts to deal with financial planning largely avoided defining “financial planning” by focusing on whether or not a registrant held him/herself out as being a financial planner. The Mutual Fund Dealers Association of Canada (MFDA) also has, to date, chosen not to define financial planning, but instead requires all “securities-related business” to be run through the MFDA member. “Securitiesrelated business” may include financial planning to the extent specific securities and products are part of a financial plan. This means that the MFDA expects its members to monitor financial planning provided by approved persons to the extent it falls within the defi- nition of “securities-related business” (an admittedly difficult determination).

IIROC has boldly attempted a definition of financial planning. Its definition would include activities that from the common sense perspective of most industry participants would be considered financial planning. However, IIROC also provides clarifications on what activities are NOT financial planning for the purposes of the rule. IIROC confirms that any financial planning that is directed to making investment recommendations is not financial planning for the purposes of the rule. An IIROC member also is not required to implement the additional procedures required by the Rule if its representatives merely implement the investment portion of a financial plan prepared elsewhere, subject to the usual suitability requirements. It’s difficult to know just what would be left as financial planning with these exceptions, although IIROC clearly expects members to use reasonable judgment in implementing the rule. However, it’s also very clear that IIROC-regulated financial planning will include much more than “securities”-related financial planning.

The Financial Planning Rule will impose additional compliance obligations on IIROC members. No longer will investment dealers be able to turn a blind eye to what their representatives are doing with clients. IIROC members will need to canvas their representatives to determine whether any of them are performing financial planning services, and then ensure that those representatives are “quali- fied” within the expectations of IIROC to perform those services. Supervision will be important, although IIROC carefully notes that IIROC members do not have to approve or review all financial plans, even though any financial planning software used by representatives must be approved. Appropriate proficiency is left to the IIROC member, but IIROC suggests minimum standards, such as holding a recognized financial planning designation or other designation coupled with experience. On going continuing education is also considered important. Client understanding of the fi- nancial planning services being provided by an IIROC member is also very important, with IIROC suggesting minimum standards for client documentation.

IIROC does not, however, suggest anything new be done about financial planning. Financial planning personnel can continue to use whatever designation a firm approves and will be required to take only whatever courses (initial and continuing) a firm imposes on its personnel. No attempt has been made at standardizing financial planning education or holding out of financial planning expertise, which of course, was the primary downfall of the earlier OSC attempt to regulate financial planning.

For all that we see as acceptable about the Financial Planning Rule, we wonder why IIROC has chosen to deal with financial planning at this time and why it has not explained its rationale to members and the public for moving ahead with rules in this area. Clearly, IIROC will not be the only regulator looking again at financial planning; given the MFDA’s and the OSC’s past forays into this area, we believe we can expect a resurgence of regulatory attention paid to financial planning.

Rebecca Cowdery and Prema Thiele are securities lawyers focusing on legal matters associated with the securities, investment management and insurance industries. They are partners in the Toronto office of Borden Ladner Gervais LLP. Their column appears regularly and deals with compliance and regulatory issues. The views expressed in their columns are their own and are not necessarily the view of other lawyers at BLG, the firm or its clients. No person should act or refrain from acting in reliance on any information found in these columns without first obtaining appropriate professional advice. rcowdery@blgcanada.com and pthiele@blgcanada.com