The long march toward regulatory reform of the retail investment business is grinding along, with progress being made on rules designed to improve the treatment of retail investors.

In early January, the Invest-ment Industry Regulatory Organization of Canada released the latest iteration of rule proposals that represent the core element of the long-running regulatory reform initiative known as the client relationship model.

The CRM, which began as a project to rethink regulation in the retail investment business, now aims at the less ambitious but still worthy goals of enhancing disclosure to retail clients, improving the management of conflicts of interest and beefing up performance reporting.

In addition to these basic goals, IIROC also is aiming to augment that central tenet of investor protection: suitability.

Within the latest CRM proposals, IIROC proposes amendments to these requirements that will expand the obligation to ensure suitability so that not only will investment dealers have to ensure suitability when they accept a trade or make a recommendation, they’ll also have to do so in response to “trigger events,” such as a meaningful change in the client’s circumstances, when the advisor on the account changes or when securities are deposited or transferred into the client’s account.

The purpose of these expanded requirements, says the latest proposals, is to “provide investors with an added level of protection” in situations in which the client’s risk profile and his or her account diverge over time. And the effort to bolster investor protection through more onerous suitability requirements may not end with these changes. IIROC is also considering further changes to the suitability rules beyond the confines of the CRM project.

Indeed, some other changes to the suitability requirements are already being contemplated as part of IIROC’s project to rewrite its rule book in plain language. In particular, IIROC is proposing that suitability considerations be broadened to include whether the type of account a client has, and the sort of order he or she is using, is suitable; the suitability of the client’s trading strategy; and whether the method of financing the trade is appropriate.

These proposed revisions to the suitability rule were published this past autumn and the comment period for them closed in early January, so these changes have yet to be finalized.

In the meantime, IIROC also has made a number of meaningful changes to its proposed CRM rules since they were last published in April 2009. As a result, these are out for yet another 60-day comment period.@page_break@The fact the proposed CRM rules are going out for comment once again means that the final look of the rules, and the timing of their implementation, remains uncertain. (The proposal allows for transition periods of up to three years for certain provisions.) This leaves IIROC somewhat behind the Mutual Fund Dealers Association of Canada, which finalized its version of the CRM rules last year and has received member approval for them.

The MFDA rules are slated to be implemented later this year, although it will be toward the end of 2013 before all of the various provisions have been adopted.

Not only are IIROC and the MFDA now on somewhat different delivery schedules, there also are notable differences between the current IIROC proposals and the final MFDA rules. For example, the MFDA rules allow firms to make disclosure in a variety of documents; the IIROC rule seeks more consolidated disclosure.

IIROC’s rule used to mandate that all the required disclosures be made in a single document. This now has been revised to allow previously disclosed information to be referenced in the relationship disclosure, in order to provide more flexibility for dealers.

Although most of the relationship-disclosure requirements are contained in both sets of rules, the IIROC proposal has a couple of elements that are not in the MFDA rules. For one, IIROC proposes requiring firms to tell clients whether their accounts will be reviewed more frequently than the regulatory minimum (in the event of a market disruption, for example).

IIROC explains that it is requiring this sort of disclosure because it believes that clients may assume they will receive this type of service, so the regulator wants clients to be forewarned if these services won’t be provided.

In addition, the MFDA performance reporting rule does not require individual “position cost” disclosure, while the IIROC proposal does. Nor does the MFDA require firms to report “percentage return” information to clients, which IIROC has decided to make mandatory for all retail clients.

For the most part, it appears that investor advocates are pleased with the trajectory that IIROC’s initiatives are taking toward greater investor protection — although they would like to see more. The Canadian Foundation for Advancement of Investor Rights, an investor advocacy group, suggests in its comment on the proposed changes to IIROC’s suitability rules that IIROC is heading in the right direction. However, FAIR Canada’s comment also argues that IIROC is not going far enough. The comment maintains that the concept of suitability is often poorly understood by both investors and dealers, and calls on regulators to do more to demystify it, saying it sees an “urgent need” for better guidance on the suitability rules.

Moreover, FAIR Canada would like to see regulators raise the standards of client treatment from mere suitability to require firms and advisors to act in clients’ best interests. IE