IIROC to continue CFR review with focus on KYC and suitability

The Investment Industry Regulatory Organization of Canada (IIROC) is prioritizing reviews related to the client-focused reforms and service at order-execution-only firms as it prepares for consolidation with the Mutual Fund Dealers Association of Canada.

In a report released Thursday outlining its compliance priorities, the regulator said it’s conducting a sweep of the client-focused reforms (CFRs) related to conflicts.

“The objective of the review is to determine if firms have met the spirit of the new COI [conflict of interest] rules and have implemented controls to address material conflicts in the best interest of clients, rather than continuing to default to disclosure, which is not sufficient,” the report says.

The regulator’s next CFR review will focus on KYC and suitability compliance, it says.

Regarding the CFRs and misleading communications and titles, client-facing registrants aren’t supposed to use corporate officer titles unless they legally hold such positions. When reviewing the use of a corporate title, IIROC said it will assess such things as a registrant’s functions and responsibilities to ensure they align with the title.

The report also notes that IIROC updated its exam processes to assess dealer compliance with collecting information from clients on trusted contact persons and placing temporary holds on client accounts in cases of mental incapacity or financial exploitation.

Other compliance priorities include assessing service at order-execution-only (OEO) firms amid a rise in client complaints — especially about helpline wait times.

“As retail investors become increasingly reliant on automated online services, we are considering the extent to which failures in the provision of such services should be considered an investor protection issue,” the report says.

A working group is considering possible regulatory responses.

In the coming year, IIROC will also focus on how OEO firms interact with social media platforms and use them for advertising. The concern is that online activity can include inaccurate information, possibly to manipulate markets.

“Dealers are reminded that existing IIROC rules and guidance pertaining to advertising and conflict of interest management continue to apply regardless of the communication technology that is being used,” the report says.

Also regarding OEO firms, IIROC’s exam processes will be updated to test for compliance with the upcoming ban on trailer commissions, effective June 1.

On IIROC’s consolidation with the Mutual Fund Dealers Association of Canada, the report says IIROC is working toward the timeline established by the Canadian Securities Administrators, which aims for completion by year’s end.

For firms that received exemptions from IIROC rules because of Covid-19, the report notes that those exemptions are set to expire on March 31. IIROC said it will continue to evaluate its rules to identify cases where permanent changes may be warranted.

The regulator is also considering what a return to normal will look like following the pandemic. IIROC will assess the extent to which exams will be conducted remotely, reducing the amount of time that exam teams spend onsite at dealers.

For full details on IIROC’s compliance priorities and highlights of its various regulatory initiatives, read the 2021–22 report.