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Richard J. Corner

Vice President, Member Regulation Policy

416 943-6908

Member Regulation Policy

Introduction

This Rules Notice provides notice of approval by the applicable securities regulatory authorities of amendments to the IIROC Dealer Member Rules to adopt the core elements of Client Relationship Model (CRM) Project for investment dealers. The approved amendments address four regulatory objectives and copies are enclosed as follows:

1. Relationship disclosure - Attachment A

2. Conflicts of interest management/disclosure - Attachment B

3. Suitability assessment - Attachment C

4. Account performance reporting - Attachment D

This Rules Notice also announces the implementation of three of the above four sets of CRM-related amendments in accordance with the implementation schedule enclosed as Attachment E. Implementation of the fourth set of CRM-related amendments relating to account performance reporting has been deferred in order to comply with a Canadian Securities Administrators (CSA) approval condition that application of the approved account performance reporting requirements be suspended. It is anticipated that IIROC’s performance reporting proposals will be implemented once the CSA’s performance reporting requirements, currently under development, have been finalized, and IIROC has made any necessary changes to harmonize with the final CSA performance reporting requirements.

The remainder of this Rules Notice provides a summary of the nature and the purpose of the three sets of CRM-related amendments for which implementation has been announced.

Summary of the nature and purpose of the amendments

Relationship disclosure – New Dealer Member Rule 3500

Pursuant to the requirements in new IIROC Dealer Member Rule 3500, every Dealer Member will provide its retail clients with the following information regarding the relationship they are entering into with the client:

a description of the types of products and services offered by the Dealer Member;
a description of the account relationship to which the client has consented;
where applicable, a description of the process used by the Dealer Member to assess investment suitability, including a description of the process used to assess the client’s “know your client” information, a statement as to when account suitability will be reviewed and an indication whether or not the Dealer Member will review suitability in other situations, including market fluctuations;
a statement indicating material Dealer Member and adviser conflicts of interest and stating that future material conflict of interest situations, where not resolved, will be disclosed to the client as they arise;
a description of all fees, charges and costs associated with operating the account and in making or holding investments in the account; and
a description of account reporting the client will receive, including a statement identifying when account statements and trade confirmations will be sent to the client and a description of the Dealer Member’s obligations to provide account performance information and a statement indicating whether or not percentage return information will be sent.

The obligations of Dealer Members to provide certain specific disclosures regarding suitability will vary for order-execution service accounts and managed accounts, in that there is no suitability obligation regarding order-execution service accounts and managed accounts must be monitored and supervised according to the specific, more rigorous standards imposed under Dealer Member Rules 1300 and 2500.

IIROC is not mandating the format of the disclosures, but will require that the information be:

Provided to the client in writing at the time of account opening;
Written in plain language; and
Included in a document entitled “Relationship Disclosure”.

Dealer Members are obligated to provide some of the relationship disclosure information under the current Rules. The new Rules allow for information already provided to clients to essentially be incorporated by reference as long as the relationship disclosure contains a description of this information and the client is specifically referred to the other documents.

Conflicts of interest management / disclosure – New Dealer Member Rule 42

Rules relating to the management of specific conflicts of interest are already in place. To supplement these existing requirements, the general requirements in new IIROC Dealer Member Rule 42 require that all material conflict situations between the Approved Person and the client and between the Dealer Member and the client be addressed by either: avoiding the conflict, disclosing the conflict or otherwise controlling the conflict of interest situation.

Account suitability - Amended Dealer Member Rule 1300

In addition to the current suitability requirement for trades accepted and recommendations made on retail client accounts, IIROC is now requiring that an account suitability review must be performed when certain “trigger” events occur (i.e., transfers/deposits into an account, material change in client circumstances, change in the account representative).

IIROC is also clarifying how suitability assessment reviews are to be performed. Specifically, amended rules 1300.1(p) through (r) make it clear that all suitability assessment reviews must be performed by taking into consideration the client’s “investment objectives and time horizon” and the “account’s current investment portfolio composition and risk level.”

Date of IIROC Board of Directors approval

These amendments were approved for implementation by the IIROC Board of Directors on June 24, 2010. The text of the amendments is set out in Attachments A through D.

Response to public comments received

These amendments were republished for comment with the issuance of IIROC Rules Notice 11-0005 on January 7, 2011. IIROC staff has considered all of the comments received and thank all of the commenters. A summary of the comments received and IIROC staff’s response is enclosed as Attachment F.

Summary of revisions

These amendments reflect revisions made to address CSA and public comments received. The only material revision made to the previously published proposed rules is to remove the requirement for the Dealer Member to obtain client acknowledgement of receipt of the relationship disclosure information - the requirement for the Dealer Member to obtain client acknowledgement of receipt of a copy of the “know your client” information collected remains as part of the amendments. Minor clarification changes have also been made throughout the amendments, none of which represent changes in substance to the previously published proposals. A black-lined copy of the revisions made since the publication for comment of the proposed amendments in January, 2011 is enclosed as Attachment G.