Backgrounder: Investor Roundtable - Canadian Securities Administrators’ (CSA) Consultation on a Best Interest Standard

CANADIAN SECURITIES ADMINISTRATORS’ (CSA) CONSULTATION ON A BEST INTEREST STANDARD
INVESTOR ROUNDTABLE – BACKGROUNDER

JULY 23, 2013

The CSA is considering the potential benefits and competing considerations of introducing a statutory fiduciary, or ‘best interest’, standard for securities advisors when they provide advice to retail clients. We are trying to determine whether a statutory best interest standard should be adopted, whether another policy solution would be more effective or whether the current Canadian regulatory framework is adequate.

Under the current regulatory framework, securities advisors must: 

• deal fairly, honestly and in good faith with their clients
• collect know-your-client (KYC) information, conduct know-your-product (KYP) due diligence and perform suitability analysis when their clients buy or sell securities
• identify and respond to conflicts of interest by avoiding, controlling, and/or disclosing them
• comply with various other principle and rule-based requirements

A fiduciary duty is a duty to act in your client’s best interest. This generally means that: 

• client interests are paramount
• conflicts of interest are avoided
• clients are not exploited
• clients are provided with full disclosure
• services are performed reasonably prudently

Securities advisors in Canada are generally not subject to a statutory fiduciary duty in securities laws. However, the courts may determine that a fiduciary duty exists at common law (also known as “judge-made” law). The courts make this determination based on several factors, including the degree of vulnerability, trust and reliance of the client, the level of discretion of the advisor and the professional rules or codes of conduct to which the advisor is subject. 

The CSA has identified five areas of concern with the current regulatory framework: 

• there may be an inadequate principled foundation for the standard of conduct owed to clients
• the current standard of conduct may not fully account for the information and financial literacy imbalance between advisors and their retail clients
• there is an expectation gap because investors incorrectly assume that their advisor must always give advice that is in their best interests
• advisors must recommend suitable investments but not necessarily investments that are in the client’s best interests
• the application in practice of the current conflicts of interest rules might be less effective than intended

The CSA has also identified several competing considerations related to a statutory best interest standard, including: 

• the current regime may be functionally equivalent to a fiduciary duty
• it may impose greater costs on providing advice
• it may have a negative impact on investor access to, and choice and affordability of, advisory services
• it may have a negative impact on certain business models
• it may have an uncertain impact on advisor compensation practices
• it may require more guidance with respect to its application and operation in specific circumstances

On October 25, 2012, we published CSA Consultation Paper 33-403 The Standard of Conduct for Advisers and Dealers: Exploring the Appropriateness of Introducing a Statutory Best Interest Duty When Advice is Provided to Retail Clients (the Consultation Paper). The Consultation Paper explores the potential benefits and competing considerations of introducing a statutory fiduciary, or ‘best interest’, standard for advisers and dealers when they provide advice to retail clients.  

The Consultation Paper describes a possible statutory best interest standard. Under this standard, every securities advisor that provides advice to a retail client with respect to securities or derivatives must, when providing this advice, act in the best interests of the client, and exercise the degree of care, diligence and skill that a reasonably prudent person or company would exercise in the circumstances. The term “retail client” is defined to include any individual with net financial assets of $5 million or less. 

The roundtables are part of the CSA’s ongoing effort to explore the potential benefits and competing considerations of introducing a statutory fiduciary, or ‘best interest’, standard for advisers and dealers when they provide advice to retail clients. We want to hear investors’ views on: 

• what they see as the benefits and competing considerations of introducing a statutory best interest standard, and
• whether a statutory best interest standard should be adopted, whether another policy solution would be more effective or whether the current Canadian regulatory framework is adequate.

We are expecting an informative and interactive discussion at the July 23 roundtable. If you would like to participate, please send an e-mail to [email protected].