The Investment Industry Regulatory Organization of Canada (IIROC) is proposing new guidance, and also planning new rules, to deal with the sorts of outsourcing arrangements that dealers can use, and their responsibility to oversee that activity.
In a notice published Monday, IIROC is proposing draft guidance, which spells out the existing requirements for firms’ outsourcing arrangements, lists activities that may not be outsourced, and outlines the sort of due diligence that dealers must undertake before outsourcing any business activity. It also indicates that IIROC plans to propose new rules relating to outsourcing too.
The prospect of outsourcing raises a number of regulatory concerns, including added strategic, reputational, compliance and operational risks whenever a dealer hands off a function to an outside firm.
The new rules would aim to codify: the general due diligence obligations of dealers that must be met when outsourcing of particular activities is being considered, and outsourcing arrangements have been entered into. The notice indicates that the new rule, which will be principle-based, will also set out specific obligations to ensure ongoing access to and control over books and records, including client account records; and, client assets held by, or under the control of, the dealer.
In the meantime, the draft guidance indicates that dealers cannot outsource certain core activities, including: the account opening process, assessing suitability, or handling client complaints.
Certain other “core” activities may be handed off however, including: investment decisions in managed accounts; certain account-related operations activities, such as the clearing and settling client trades; administering margin loans; preparing various reports including account statements, regulatory reports; research and marketing; among other things.
However, IIROC expects dealers to formally assess the initial and ongoing appropriateness of the outsourcing service provider; and, it stresses that firms still have responsibility for ensuring compliance with IIROC rules.
Separately, IIROC also published draft guidance on clearing arrangements, which describes the services provided under a clearing arrangement; explains why entering into a clearing arrangement does not require compliance with rules regarding broker-carrying broker relationships; and, describes the issues that should be considered before entering into a clearing arrangement.
Comments are due by January 20, 2013.