The Investment Industry Regulatory Organization of Canada has published a notice setting out how firms should deal with regulatory issues that arise when they sell proprietary products.

IIROC is seeking comment on a draft notice that details the regulator’s expectations when firms are dealing in “non-arm’s length” investment products.

A notice issued Friday expresses the regulator’s concerns regarding “conflicts of interest, product due diligence and suitability.”

“In recent years there have been specific instances where clients of IIROC dealer members have suffered losses as a result of investing in such products,” IIROC states, adding that in some cases these losses have resulted in compensation being paid by industry protection plans such as the Canadian Investor Protection Fund.

The big worry, the notice explains, is the fact that a connection between a dealer and an issuer may result in conflicts of interest that are similar “to those that arise when a member or its employee borrows money directly from a client. Where these conflicts of interest exist, it is difficult for the member to meet its legal and regulatory obligations to clients,” it says.

Existing IIROC rules and regulatory requirements, and securities legislation, are considered adequate to protect clients from the inappropriate sale of non arms length products, the notice says, although it also indicates that the IIROC intends to increase its compliance monitoring of this practice by dealers. And, the notice introduces a new requirement that dealers must notify the IIROC in advance of the initial distribution of non-arms length investment products.

The notice requests comment from dealers and other interested parties on:

• relevant criteria for determining non-arm’s length investment products;
• best practices for dealers in conducting product due diligence and addressing conflict of interest concerns in the distribution of investment products; and
• the form that the new IIROC notification requirement should take.

Comments are due within 90 days.

IE