IIROC releases guidance regarding dealer outsourcing

January 16, 2014

Earlier this week, the Investment Industry Organization of Canada released guidance relating to the outsourcing arrangements commonly entered into by investment dealers.

Generally, the notice summarizes existing requirements and guidance relating to entering into and maintaining outsourcing arrangements, describes the types of business activities that may and may not be outsourced and sets out IIROC's expectations concerning due diligence procedures that must be undertaken by dealers prior to outsourcing business activities.

More specifically, IIROC notes that since current rules require that certain functions and activities be performed by Approved Persons, outsourcing is effectively prohibited in respect of most client-facing activities, such as the assessment of client information to ensure compliance with "know your client" obligations, the performance of suitability assessments and the handling of client complaints by a designated complaints officer. An exception to this general prohibition in respect of client-facing activities is the outsourcing of the performance of investment decision-making in managed accounts, which is specifically permitted by IIROC's Dealer Member Rules to be outsourced to an external portfolio manager.

Meanwhile, for those activities that may be outsourced, IIROC distinguishes between "core" activities on which IIROC intends to focus its regulatory resources (which are identified in the notice, and include such activities as the performance of certain activities that are not required by IIROC rules to be performed by an employee or agent of a dealer relating to the firm's account opening, suitability assessment and client complaint handling processes, the administration of margin loans, the preparation of client account statements, and the performance of marketing activities), and "non-core" activities, which pose less risk to members and clients (such as office service management, the procurement of external consultant services and human resources management activities) .

The guidance also sets out a number of principles for dealers to consider when contemplating whether to enter into an outsourcing arrangement, and reminds dealers that registered firms remain responsible under the NI 31-103CP for ensuring that the activities are performed properly and in compliance with relevant IIROC requirements.

As we discussed in October 2012, draft guidance was initially released in 2012, and the final version of the guidance addresses some of the comments received from stakeholders. IIROC also indicated that it will be developing a principles-based rule to codify dealers' outsourcing due diligence obligations and establish specific requirements to be met when a potential outsourcing arrangement involves either books and records, or assets of the member or its clients. As we recently noted, IIROC indicated in its recent annual consolidated compliance report that outsourcing would be one of the regulator's areas of focus for this year.

The guidance becomes effective on April 14, 2014. For more information, see IIROC Notice 14-0012.

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