On July 15, 2021, the Canadian Securities Administrators (CSA) published final amendments (Amendments) to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and Companion Policy 31-103 (Policy). The Amendments will come into force on December 31, 2021.
The Amendments aim to protect the older and the vulnerable from financial exploitation and diminishing mental capacity by introducing new definitions and requirements:
Trusted Contact Person (TCP): The registrant must take reasonable steps to obtain from the client the name and contact information of a TCP that the registrant can reach out to on the client’s behalf about potential financial exploitation, diminishing mental capacity or further contact information. This is a new Know Your Client (KYC) step.
Temporary Holds: Registrants may place temporary holds on the purchase, sale or transfer of a client’s securities in two situations: (i) where the registrant has a reasonable belief of financial exploitation of a vulnerable client; or (ii) where the registrant has a reasonable belief that a client gave instructions while lacking mental capacity to make financial decisions.
We spoke about the Amendments in detail on May 12, 2021, in Part Two of our Securities Litigation Webinar, Trends and Challenges in the Age of COVID-19. We also published a Blakes Bulletin in April 2020, shortly after the Amendments were proposed. Below, we highlight changes to the final Amendments language, following the extended comment period.
The CSA continues to define “vulnerable client” as “a client who might have an illness, impairment, disability or aging-process limitation that places the client at risk of financial exploitation”. The CSA says it has not placed any age-marker in the definition because not all older clients are vulnerable or unable to protect their own interests. It may conduct a retrospective review of the efficacy of this definition.
The CSA has removed the definition of “mental capacity” from the Amendments. Instead, it has added guidance to the Policy, including a list of warning signs to help registrants identify a lack of mental capacity. The warning signs are not exhaustive, and the Policy states that mental capacity fluctuates over time.
In response to commenters, the CSA says it appreciates that registrants do not have the medical expertise to assess and determine whether a client lacks mental capacity. The CSA does not expect registrants to make such a determination; rather, it says registrants are in a unique position to notice warning signs in their clients.
TRUSTED CONTACT PERSON
Despite the Amendments coming into force on December 31, 2021, the CSA has clarified that it does not expect Registrants to collect TCP information from all existing clients prior to that date. It does expect that registrants will take reasonable steps to collect TCP information from existing clients the first time that they update the client’s KYC information after December 31, 2021.
The CSA has not provided any further guidance on what will constitute reasonable steps to obtain TCP information. It has confirmed that registrants are not prevented from opening and maintaining a client account if the client refuses to identify a TCP. The CSA has also removed the age-of-majority requirement for the TCP. The TCP now needs only to be an individual who is trusted, mature, and can communicate and engage in difficult conversations about a client’s personal situation.
The CSA has clarified that while the Amendments provide registrants with the ability to use a temporary hold, they do not impose an obligation to use the tool.
Many commenters asked the CSA to include a safe harbour statement that would lessen litigation risk or risk of regulatory action. However, the CSA has not added a safe harbour to the Amendments. The CSA says that an explicit protection from civil liability would require a legislative amendment and is not appropriate in these circumstances. That said, the CSA states that placing a temporary hold in good faith, according to the prescribed conditions set out in the Amendments, may assist registered firms in defending their actions, should they be challenged.
The Amendments apply to all registered firms, including members of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA). The Amendments require registrants to upgrade their technology, implement new training programs (internally and externally), and to draft several new detailed policies and procedures to obtain TCP information and impose temporary holds. The Policy provides some guidance as to what firms might include in their policies, but registrants have much work to do as all policies should be in place prior to the Amendments coming into force on the last day of the year.
For further information, please contact:
Alyssa Duke 403-260-9748
Jenna Green 604-631-5247
or any other member of our Securities Litigation group.
Blakes and Blakes Business Class communications are intended for informational purposes only and do not constitute legal advice or an opinion on any issue. We would be pleased to provide additional details or advice about specific situations if desired.
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