FAIR Canada recently submitted a comment letter to IIROC, supporting its initiative to be clearer about the meaning of “suitability” obligations. In its submission, FAIR Canada noted that the suitability rules, as proposed by IIROC, although moving in a positive direction, need further clarification and do not provide sufficiently clear guidance to registrants or individual investors about suitability. FAIR Canada recommends that IIROC provide a manual for retail investors in readable, plain language that explains the rights of investors and the obligations of dealers regarding “know your client” (“KYC”) and suitability obligations; that explains the difference between these obligations and a fiduciary or “best interest” obligation; and explains to investors how they can safeguard and enforce their rights regarding KYC and suitability obligations.

Duty to Act in Client’s Best Interests

More importantly, FAIR Canada continues to urge regulators to look beyond the current concept of “suitability” and consider a framework in which registrants are required to put their clients’ best interests first. FAIR Canada believes that the current definition of “suitability” is inappropriate as a basis for the regulation of the activities of registered persons. Under the current definition of suitability, an investment may be “suitable” but not in the client’s best interests. We believe that the fundamental framework upon which a financial advisor’s activities should be regulated is one where a firm and the advisor are required to put the client’s best interests first.

International Best Practices

We recommend that Canadian securities regulators seriously consider developments in other leading jurisdictions. For example, the SEC recently issued a report about the implementation of a uniform fiduciary duty for both broker-dealers and investment advisors. In the UK, proposals have been put forward to ban trailer commissions (effective from the end of 2012) and to strengthen licensing requirements for financial advisors. In Australia, the government has proposed reforms which could introduce a statutory fiduciary duty for financial advisors and ban certain fees. The Australian package also includes a prospective ban on conflicted remuneration structures, including commissions and volume- based payments.

These leading financial centers are moving forward to enhance investor protection.

People who represent the professionalism and conscience of the financial industry have called for a mandatory duty to act in the best interests of the client. Recently, Morningstar and the new Chair of the CFA Institute added their voices, calling for action to restore the trust of Canadians in the industry.

Morningstar

In a recent article, Morningstar created a New Year’s wish list to improve investor protection, with a significant focus on current imbalances and deficiencies in the client-advisor relationship and mutual fund disclosure. Included in the list were the following:

1) The financial-services sector will support statutory changes requiring financial advisors and firms to have a fiduciary duty to their clients. According to the industry-financed consumer-advocacy group FAIR Canada, financial advisors and firms in Canada are currently required only to offer clients advice that is “suitable”. This unacceptably low standard allows advisors to suggest investments which may be considered suitable, but are not in the client’s best financial interest.

2) Financial advisors will fully disclose to clients how they are compensated. Many advisors discuss fees with clients as a standard practice, but this is by no means universal. In order to make the best investment decisions, clients need to know how their advisors are being paid, and how much.

CFA Institute

In a recent speech, Margaret Franklin, Chair of the Board of Governors of the CFA Institute, called on the Canadian investment industry to rebuild and restore investors’ trust. (The CFA Institute is a global not-for-profit organization comprising the world’s largest association of investment professionals with over 100,000 members). Putting clients’ interests first, ahead of a professional’s own interests, is an important thread of this trust, according to Ms. Franklin. She emphasized that investor protection should be the highest priority for advisors.

FAIR Canada urges Canadian securities regulators to demonstrate with concrete action that they are up to the task of protecting Canadian investors by making it a top priority to implement a uniform duty for registrants to act in the best interests of investors.