The Canadian Securities Administrators (CSA) recently released finalized amendments (the Amendments) to National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and its companion policy. The Amendments are aimed at raising investor confidence in capital markets, prioritizing client interests and improving client-advisor relationships, by aligning client interests with those of registered firms and individuals in a more seamless way.
Background and timelines
The CSA originally proposed amendments to NI 31-103 in June 2018. On October 3, 2019, after a lengthy public consultation period, the CSA released the finalized Amendments. Subject to ministerial approval, the Amendments will take effect in multiple phases during a transitional period. The first phase, relating to conflicts of interest and the associated relationship disclosure information provisions, will require compliance by the end of next year. The balance of requirements will take effect at the end of 2021.
The Amendments reflect concerns and comments received from industry participants, and differ from the initially proposed amendments in 2018 in several key ways, including:
- Removal of the proposed restrictions on referral arrangements and referral fees. However, existing requirements relating to referral arrangements remain in place and the enhanced standard for conflicts of interest will apply to referral arrangements.
- In relation to suitability determination, removal of: (i) the proposal to require consideration of “any other factor that is relevant under the circumstances”; and (ii) proposed guidance suggesting a registrant should inquire about a client’s other investments or holdings held elsewhere in order to inform the registrant’s suitability determination.
- Removal of the proposed requirement to update KYC if the registrant reasonably ought to know of a significant change in the client’s information (the requirement will still apply if the registrant becomes aware of a significant change).
- Removal of the proposed change that required a registered firm to compare the securities it makes available to clients with other similar securities in the market.
Select amendments and key changes
Some of the noteworthy updates imposed by the Amendments include:
- Know Your Client. Sufficient information is required for registrants to meet their obligations under NI 31-103. To obtain such information, the Amendments provide additional guidance on what information should be collected, including as it relates to the client’s personal and financial circumstances, risk profile and investment time horizon. A KYC update is triggered when the registrant becomes aware of a significant change. The information collected must be reviewed in accordance with certain timeframes, on a rolling basis, including: every 12 months for managed accounts, within 12 months of recommending a trade for an exempt market dealer and every 36 months in all other cases.
- Know Your Product. The onerous KYP requirements that were initially proposed in 2018 have been significantly reduced in the finalized Amendments. Nonetheless, pursuant to the Amendments, before making securities available to a client, registered firms must first take reasonable steps to assess relevant aspects of the securities (including structure, features and risks), and should monitor such securities for significant changes.
- Training and Recordkeeping. Registered firms must provide certain training to their registered individuals, including for KYC, KYP, suitability determination, and disclosure obligations. Enhanced recordkeeping obligations have also been placed on registered firms, including on the newly imposed KYP obligations outlined above.
- Suitability. Registrants must reasonably determine, prior to taking certain investment action for a client, that such action is suitable for the client based on a set of prescribed criteria. Such investment action must put the client’s interest first.
- Conflicts of Interest. The Amendments require registrants to take reasonable steps to identify any existing material conflicts of interest, and material conflicts of interest that are reasonably foreseeable, between the client and the registrant or any individual acting on behalf of the registrant. Registrants must address all material conflicts of interest between a client and itself in the best interest of the client.