Conflict of interest guidance for captive EMDs published by CSA

20 novembre 2015

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The Canadian Securities Administrators (CSA) published CSA Staff Notice 31-343 Conflicts of Interest in Distributing Securities of Related or Connected Issuers (the Notice) on November 19, 2015. The Notice applies to “captive dealers” being firms registered solely as exempt market dealers (EMD) that distribute securities of related or connected issuers with common mind and management. The guidance is not directed at firms that have more than one category of registration, such as portfolio managers and investment fund managers that also have an EMD registration.

The guidance is meant to address CSA concerns that captive dealers are in a conflict of interest between their financial incentive to sell securities of the related or connected issuer and their regulatory obligations. To respond to such conflicts, captive dealers are encouraged to implement CSA procedures outlined in the Notice (or their own alternatives) including: developing policies and procedures that describe how they will identify and respond to conflicts of interest and a potentially onerous obligation of establishing an independent review committee to conduct a variety of tasks, including product due diligence. This committee is also expected to identify those products that pose too severe a conflict of interest to be distributed generally.

Whether or not a captive dealer adopts the practices set out in the Notice will be considered during compliance reviews.

While most of the guidance is directed at incumbents, the CSA advise that new applicants for registration as captive dealers will be subject to additional scrutiny. The key factors in a review of a registration application will be the likelihood of harm to investors and to the capital markets.

The CSA advise that the Notice may be useful to other registrants too. This suggests that the guidance may eventually be considered best practice for EMDs that are not “captive dealers” but distribute securities of related or connected issuers.

The Notice is silent on key issues such as the composition of the proposed independent review committee or which products pose conflicts of interest so severe that they should not be distributed. As a result, absent further CSA guidance, it may take some time for consistent market practices to emerge.

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