Further issues to consider from IIROC's compliance report

19 décembre 2013

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IIROC recently released its annual compliance report, which we discussed last week, highlighting the results of recent compliance reviews and setting out key priorities for the next year.

Below is a more detailed discussion highlighting certain aspects of that report.

Social Media

According to IIROC, dealers are expected to have robust policies and procedures for communicating with clients and the public through advertisements and sales literature, including through social media. According to the compliance report, IIROC intends to review dealers' social media policies and procedures over the course of the next year, with the results contributing to the development of policy in this area.

OSC Mystery Shopping Project

Of further interest, IIROC noted that it is working with the OSC on the mystery shopping project, described in the OSC's Statement of Priorities for 2013-2014. The project is intended to research the quality of investment advice provided to retail investors in Ontario. According to the OSC, the mystery shopping project will gauge the suitability of advice and identify areas of concern.


IIROC stated in the report that some dealers have failed to maintain sufficient written evidence of due diligence processes and analyses, and IIROC staff intend to meet with dealers to provide specific feedback.

Meanwhile, the report noted inconsistent practices in respect of the arrangements made between carrying brokers that provide back-office operations and portfolio managers. Specifically, IIROC expressed concern with the written services agreements governing such arrangements and the terms of those agreements, and highlighted the importance of demarcating the responsibilities between the dealer as custodian of client assets and the portfolio manager as discretionary investment manager to clients. The report also noted that carrying brokers are not permitted to act as agent or provide books and records for any party that is not also an IIROC-regulated firm.

IIROC further identified underwriting deficiencies in respect of margin requirements. Specifically, IIROC observed instances where: (i) the CFO failed to review the supporting underwriting agreements to verify accuracy of the underwriting margin provision; (ii) public/private partnership deals were not properly considered as a commitment requiring capital at the "request for financing bid" stage of the project; (iii) underwriting concentration was not considered for commitments where margin was reduced for expressions of interest or the use of a standard form new issue letter; and (iv) margin was reduced for sales assumed to be ticketed by the lead underwriter without receiving appropriate confirmation from the lead.

The report also cited instances of inadequate controls in respect of private placements to accredited investors. Specifically, in some cases, information on the New Client Application Form failed to support the exemption claimed in the subscription agreement. As such IIROC reminded dealers of the obligation to verify accredited investor qualifications prior to permitting clients to participate in private placements.

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