The Investment Industry Regulatory Organization of Canada is proposing to explicitly ban personal financial dealings between brokers and their clients.

A notice published Friday seeks comment on the proposed new rule, which has been approved by IIROC’s board.

In the notice, the regulator explains that the proposals will clarify that, subject to specific exemptions, personal financial dealing with clients will be outlawed.

The banned activities include:

– lending money to clients, or borrowing from them;

– entering into private settlement agreements;

– having control or authority over the financial affairs of clients; and

– “receiving any direct or indirect benefit or consideration from clients”, other than through the dealer.

There will be some exemptions under the rules against borrowing and lending with clients for reps dealing with relatives and other related parties, although these arrangements will have to be made in accordance with their dealers’ policies.

The proposals will also specify that acting as a power of attorney, trustee, executor or otherwise having control over the financial affairs of a client is prohibited unless the control or authority is granted pursuant to a managed account or discretionary account arrangement.

“The primary objective of the proposed Personal Financial Dealing Rule is to clearly articulate that any personal financial dealing with clients, subject to limited exemptions, is considered inappropriate conduct, a conflict of interest and a violation of the general business conduct standards,” it says. The secondary objective is to codify IIROC’s existing expectations relating to personal financial dealing with clients.

In addition to the prohibition against personal financial dealing with clients, the proposals will also codify IIROC’s expectations regarding outside business activities by imposing a specific obligation on registered reps and investment reps to: disclose any outside business activity to their dealer; and, obtain the dealer’s approval before engaging in any outside business activity.

The notice says that IIROC staff take the position “that any personal financial dealing with a client creates an unacceptable conflict of interest” between a rep and their clients, but that this situation is not specifically addressed in IIROC’s rules. The only specific guidance is set out in the Conduct and Practices Handbook. As a result, IIROC staff believe “that a specific rule which prohibits personal financial dealing with clients is important to enhancing IIROC’s ability to meet its investor protection objective.”

The proposals are now out for a 90-day comment period.

http://docs.iiroc.ca/DisplayDocument.aspx?DocumentID=F382CB664A13415C858E1EF41B1E0E36&Language=en