The second phase of the client relationship model (CRM2), suitability and conflict management will be the top priorities for the Investment Industry Regulatory Organization of Canada (IIROC) for 2017 as it goes through its compliance reviews in the year ahead, according to a notice published on Thursday.
The implementation of the final CRM2 requirements —which will see IIROC focus on whether dealers are providing annual cost and account performance reporting to clients, along with quarterly reporting of certain off-book client holdings — top the list of issues the self-regulatory organization (SRO) will be focusing on for 2017.
IIROC is also pledging to step up its efforts to ensure dealers’ compliance with their “know your client” (KYC) and suitability obligations in the year ahead. Specifically, the SRO’s exams will look at the processes that firms are using to ensure that the KYC information they collect is “precise, accurate and consistent” and that both individual trades, and the overall portfolio, are suitable.
At the same time, IIROC aims to strengthen compliance with the requirements that conflicts of interest be resolved in the “best interest” of clients. With that in mind, the SRO notes that it’s currently analyzing the results of its recent review of compensation-related conflicts “to determine whether rule amendments, additional guidance and/or enhanced [compliance] test processes are required.”
In addition to these major issues, senior clients will also remain a focus for IIROC compliance. The SRO says its account suitability testing will continue to include a percentage of seniors’ accounts.
“Our reviews will focus on their investment objectives and time horizon, and the adequacy of supervisory processes to ensure their investments are suitable,” IIROC says.
The SRO’s notice also flags an issue with certain dealers improperly shorting the stock of their underwriting clients.
“We’ve observed a growing trend with some small dealers that are part of the selling group of an underwriting syndicate to borrow freely-traded securities of the issuer and short-sell their assigned allocation into the market without making any bona fide effort to solicit expressions of interest or build an order book for sales to their retail clients,” IIROC’s notice reports. “On closing date of the underwriting, the newly issued securities are used to cover their short position.”
As a result, IIROC’s examiners will be on the lookout for this activity and will be referring any instances for enforcement.
Finally, cybersecurity will also be a key issue for the SRO in the year ahead, the notice indicates. IIROC says cybersecurity specialists will be following up with firms that don’t appear to have adequate security measures in place to “advise firms on how to improve their preparedness for the overall protection of customer data and market integrity.”
IIROC also notes that it’s undertaking a comprehensive review of its risk models this year “to ensure they remain current and achieve their intended predictive purpose.” The review may result in the regulator recalibrating certain risk attributes, metrics and/or weightings, the notice says.
Finally, starting this year, the SRO’s business conduct compliance team will also be holding meetings with each dealer that doesn’t have to undergo a full compliance review.
“The meeting will help IIROC determine whether there have been any significant changes that may impact the risk rating of the firm,” the SRO says.
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