Guidance regarding compensation-related conflicts



Global Publication April 2016

The Investment Industry Regulatory Organization of Canada (IIROC) recently released Notice 16-0068 (the Notice), which affirmed IIROC’s intention to strengthen compliance by its members with the best interest requirements of its conflicts of interest rule, with a particular focus on managing compensation-related conflicts.

In late 2014, an IIROC review of conflict-of-interest-related issues during normal course examinations of IIROC members uncovered numerous deficiencies. As a follow-up, in June 2015 IIROC conducted a targeted survey of a representative sample of its members and found a marked improvement in members’ policies and procedures with respect to conflicts in areas such as outside business activities, separation of corporate finance and research activities from retail sales activities, and the disclosure of affiliated entities and proprietary products.

However, when it came to compensation-related conflicts, most members sampled lacked a meaningful process to identify, deal with, monitor and supervise compensation-related conflicts. For example, most firms did not have mechanisms in place to identify advisers who recommend products that yield higher fees and bonuses, when there are other suitable but less expensive alternatives available. They also did not have a process in place for implementing additional monitoring of advisers approaching compensation thresholds based on the amount of revenue generated.

The Notice indicates that IIROC will be taking specific actions to strengthen the culture of compliance among its members with respect to compensation-related conflicts of interest, including immediately enhancing its compliance test procedures concerning this subject matter, conducting a follow-up comprehensive survey of members by June 2016 and possibly issuing rule amendments and/or additional guidance on conflicts of interest that clearly and in plain language outline IIROC’s best interest requirements.

The Notice was issued shortly after the Canadian Securities Administrators announced they intend to publish CSA Consultation Paper 33-404 - Proposals to Enhance the Obligations of Advisers, Dealers, and Representatives Toward Their Clients (the Consultation Paper) toward the end of April 2016. The Consultation Paper will seek comment on proposed regulatory action aimed at strengthening the obligations that advisers, dealers and representatives owe to their clients and is expected to recommend the introduction of a statutory best interest standard for registrants.

As is evident from the issuance of the Notice and the pending issuance of the Consultation Paper, compensation-related conflicts are clearly top of mind for regulators in Canada and more developments in this area can be expected in the near future.

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