The Obama administration proposed in June 2009 that the fiduciary obligation to act in the client’s best interest be applied to all financial professionals. The specific language to be employed is now the subject of contentious debate and considerable lobbying as the financial reform legislation starts to take shape. This article in the U.S. trade publication Investment News argues that all financial advisors should be called salespeople.
The regulatory environment in Canada is somewhat different (as described below). FAIR Canada has called for an exploration of applying the obligation to always act in the client’s best interest to all Canadian financial service representatives.
Differences in Regulating Financial Advisors between Canada and the U.S.
In Canada, financial professionals (including both individual representatives and firms) have a duty to satisfy their suitability obligations to their clients. Specifically, CSA Staff Notice 33-315 Suitability Obligation and Know Your Product (33-315) states that anyone selling or advising in securities must determinate whether the purchase or sale of a security recommended to an investor is suitable for the investor. The suitability umbrella encompasses two key obligations: (1) financial professionals must understand their client’s general investment needs and objectives (“know your client”); and (2) financial professionals must understand the attributes and risks of products they recommend (“know your product”).
The only Canadian financial professionals who are under fiduciary obligations, whereby they are required to act in the best their clients’ best interests, are those registered as portfolio managers with discretionary authority over their clients’ accounts. Notably, case law has established that other financial advisors can in effect have such an obligation, depending on the knowledge of the client and the past pattern of dealings between client and advisor: in the Markarian decision, for example, the Quebec Superior Court held that the defendant CIBC was under a heightened duty to supervise an investment adviser employee because of the latter’s past questionable conduct. Further, it noted that civil law mandataries have a duty to act faithfully, honestly and with integrity, and must subordinate their interests to those of their clients.
The American Environment
The situation in the US is slightly more complicated. Prior to engaging in this analysis, it is relevant to briefly introduce some key American jargon:
Currently, broker-dealers in the US are subject to the suitability standard, under which they must have “reasonable grounds for believing that the recommendation is suitable”, based on the facts of the customer’s situation. However, investment advisers are subject to stricter fiduciary duties of due care, loyalty and good faith: they are legally required to act in their client’s best interests at all times.
The differences between the current suitability standard for American broker-dealers and the stricter fiduciary standard for American investment advisers may be better illustrated through the following examples: