Rules will evolve as regulators give extra guidance and lawyers become familiar with industry norm
Rule modifications and compliance in securities regulation will need to improve as regulators release more client-focused reform guidance, and Nancy Mehrad, CEO at Registrant Law, says that lawyers will have to help clients navigate the new rules.
As securities registrants adopt client-focused reform (CFR) changes to protect retail investors, Mehrad says investment companies should by now have processes in place to monitor securities for significant changes and consider a reasonable range of alternatives when determining if an action is suitable for their client.
The Canadian Securities Administrators (CSA) introduced the CFRs in 2019, which became effective on June 30 and December 31, 2021. The CFRs amended rules on conflicts of interest, the ‘know your client’ and ‘know your product’ obligations, suitability determination, compliance training, misleading communication, relationship disclosure information and record keeping.
CFRs are the fundamental concept that a client’s interest comes first. As interpretations of CSA requirements continue to evolve, Mehrad says lawyers must continually observe regulatory decisions to assist registrants. “Securities registrants must resolve any material conflicts of interest in their client’s best interest and ensure that the actions taken are suitable for the client.”
Changes to the rules are enhancements to existing provisions. For example, Mehrad says, suitability has always been an obligation, but it is now enhanced to ensure that the action puts the client’s interests first. “When you make a suitability obligation, you also have to compare your action against comparable products.”
The CFRs also require changes to securities registrants’ compliance manuals, client disclosures, and account opening documentation. Mehrad says lawyers must ensure that these documents are current and comply with the rules and any future regulatory guidance.
“The plus side is that a lot of these disclosures will be available on the internet soon, and firms will have a better appreciation of what other firms are disclosing to have a better barometer of their disclosure compared to their peers.”
While there has been negative publicity about certain aspects of the CFRs, Mehrad says the proliferation of technology tools in the wake of the CFRs gives advisors a more scientific and comprehensive comparison than before.
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“Many technology platforms will automatically issue a list of the comparable securities available for advisors to select,” she says, “so an advisor can compare recommendations against an objective list of similar products and help demonstrate that the suitability obligation has been satisfied.”