The Investment Industry Regulatory Organization of Canada (hereafter “IIROC”) published a Rules Notice on June 13, 2013, introducing the new Dealer Member Rule 43 which governs outside business activities and personal financial dealings. IIROC also announced amendments to Dealer Member Rule 18.
Since 2010, IIROC has been examining the issues of outside business activities and personal financial dealings of Approved Persons. Following the implementation of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, the regulatory framework for conflicts of interest has been significantly revised by the regulator.
Managing outside business activities is a part of this general movement towards a stricter regulation of conflicts of interest and towards greater transparency in the interest of clients.
Content of the new rules
The objectives of the amendments are twofold: to highlight the bar to conducting personal financial dealings with clients, except in rare circumstances, and to impose a rigorous disclosure and authorization process for outside business activities.
With regards to personal financial dealings, it is worth recalling that the Rules forbid Approved Persons from accepting any consideration, entering into a settlement agreement with a client without the approval of their employer, or borrowing from or lending to a client, including receiving or providing a guarantee. The possibility for an Approved Person to act as a power of attorney, trustee, executor, or to exercise full or partial control or authority over the financial affairs of a client is also greatly circumscribed.
Concerning outside business activities which fall under regulatory purview, they are no longer limited to other gainful occupations. IIROC stipulates that these activities now include any activity, for which an Approved Person might expect any advantage or consideration, whether direct or indirect, with the exception of professional services rendered for the Dealer Member. The same applies to activities which might create a risk of a conflict of interest or confusion with the client.
Factors to consider
In order to determine whether an outside business activity should be authorized, IIROC suggests certain non-exhaustive factors to consider:
The time spent on the outside business activity;
The impact that the outside business activity will have on the Approved Persons’ ability to give informed and impartial advice to their clients;
The possibility of using client’s information, either directly or indirectly, which is prohibited in either case.
It should be noted that clients must be able to easily distinguish between the activities of the Dealer Member and the outside business activity of the Approved Person. Using the premises, name or logo of the Dealer Member should be prohibited in the context of outside business activities.
A less tangible element of the outside business activity is the position of power or influence that the Approved Person gains from the activity. Particular attention should be paid to outside business activities performed for charitable, social or religious organizations.
Indeed, even if the Approved Person has no ill-intentions, acting as clergy or sitting on the board of directors of a social or charitable organization could place the Approved Person in a position of power or give them influence over potential clients, particularly those who might be vulnerable. Such delicate situations should be examined with particular care. The same applies for any outside business activity which would permit the Approved Person to obtain privileged or confidential information which might be useful in their business with the Dealer Member.
These new provisions will enter into force on December 13, 2013. However, IIROC has permitted that existing arrangements which allow certain Approved Persons to act as power of attorney, trustee or executor, may be unwound or authorized as late as June 13, 2014. The same applies to existing cases where an Approved Person exercises full or partial control or authority over the financial affairs of a client.
Impact of the new rules
Approved Persons must be made aware of the broadened scope of the new Rules concerning the disclosure and approval of outside business activities. Because each Approved Person must try to identify the potential conflicts of interest that apply to them, particular attention should be paid to outside business activities which might place the Approved Person in a delicate situation, even if no ill-intention can be discerned. There is a clear desire in the new Rules to clarify which outside business activities are authorized, but there will always remain a grey area.
As for Dealer Members, IIROC has many times reiterated that as a function of their duty to supervise, they should ensure that their internal policies and procedures allow for an adequate supervision of personal financial dealings and outside business activities. Moreover, IIROC has reserved its right to evaluate whether there is sufficient evidence of due diligence in the control of outside business activities.
You may consult the IIROC Rules Notice here. Do not hesitate to contact our Securities and Financial Services Litigation Practice Group with any questions.