On March 5, 2020, the Canadian Securities Administrators (CSA) announced proposed amendments (Proposed Amendments) to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and changes to its Companion Policy 31-103CP. The purpose of the Proposed Amendments is stated to be part of the CSA's initiative to enhance investor protection by addressing issues of financial exploitation and diminished mental capacity of older and vulnerable clients.
The Proposed Amendments have been published for a 90-day comment period that ends on June 3, 2020. The comment period has been extended to July 20, 2020, due to COVID-19.
TRUSTED CONTACT PERSON
The Proposed Amendments would add to "know your client" requirements. Only with respect to clients who are individuals, the CSA proposes to require that registrants take "reasonable steps" to obtain from the client the name and contact information of a trusted contact person (TCP). The TCP must be an individual of the age of majority or older in the client's jurisdiction of residence.
A registrant must also attempt to obtain the written consent of the client for the registrant to contact the TCP to confirm or make inquiries regarding: (i) possible financial exploitation of the client; (ii) concerns about the client's mental capacity as it relates to the client's financial decision making or lack of decision making; (iii) the name and contact information of certain representative persons or legal representatives of the client; and (iv) the client's current contact information.
A registrant would not be prevented from opening and maintaining an account if a client refused or failed to identify a TCP, as long as the registrant took reasonable steps to obtain the information. Other than age, there do not appear to be any limits on who may be identified as a TCP.
The second component of the Proposed Amendments enables registrants to place temporary holds on client accounts based on the registrants' own "reasonable belief" as to whether:
The client is a "vulnerable client"; and
The client has been subject to or is being subject to "financial exploitation" (this appears even to apply if a registrant believes financial exploitation may be attempted on the client in the future); or
The client has the sufficient "mental capacity" to make financial decisions.
"Vulnerable client," "financial exploitation" and "mental capacity" would all be defined terms. To apply the definitions, registrants would be required to assess complex factors, including:
The "aging process" or other limitations;
The "control or deprivation" of financial assets, and "undue influence or wrongful or unlawful conduct;" and
The "ability to understand information or appreciate the foreseeable consequences of a decision or lack of decision."
The Proposed Amendments do not contain directive language mandating such holds are placed. The proposed language in NI 31-103 states that a temporary hold "must not" be placed unless a registrant reasonably believes the criteria are met. Further, no guidance with respect to what may constitute a "reasonable belief" is given.
It would be at each registrant's own discretion to determine (a) whether any of the above factors are met and (b) whether a temporary hold should be placed. This places significant responsibility, and potentially liability, on registrants, particularly in light of the financial consequences a client may suffer if her or his investment dealer refuses to carry out instructions.
TEMPORARY HOLD REQUIREMENTS
If a temporary hold is placed pursuant to the above requirements, the Proposed Amendments would require registrants to document facts, provide notice and reasons to clients, and continuously monitor the client's situation until it decided whether to proceed or not proceed with the client's instructions. There is no stipulated timing for a registrant to decide to proceed with instruction. Depending on the time a registrant takes to make this decision, any financial benefit the client was planning to achieve could be lost.
It is currently unclear what role, if any, the designated TCP is to play when a temporary hold is placed.
WHO WILL BE IMPACTED?
The Proposed Amendments would apply to all registered firms, including Investment Industry Regulatory Organization of Canada (IIROC) Dealer Members and Mutual Fund Dealers Association of Canada (MFDA) Members.
While the Proposed Amendments are well-intentioned, they place a significant burden on Canadian securities dealers.
If the Proposed Amendments are approved, registrants would be required to assess clients on a number of subjective factors, in a broad range of individual circumstances which registrants are often not qualified to evaluate, and which do not give rise to a clear course of conduct. Presumably, the intention is that a registrant would contact the TCP for guidance in making such an assessment. If that is the case, registrants should be sure to inform clients that their selected TCP may become aware of her or his financial activities or other confidential information that may be necessary to disclose to a TCP when seeking advice.
The Proposed Amendments may put registrants at risk of legal liability for making the "wrong" decision. Registrants may be pursued for financial losses suffered due to financial exploitation if a litigant argues a temporary hold should have been implemented to protect the client. On the other hand, a registrant could be pursued for a missed financial gain if a litigant argues a temporary hold was inappropriately put in place.
The CSA is encouraging registrants to comment on the Proposed Amendments in advance of the July 20, 2020, deadline.
For further information, please contact:
Renee Reichelt 403-260-9698
Alyssa Duke 403-260-9748
Callin Sereda 403-260-9691
or any other member of our Securities Litigation group.
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