- CSA Consultation Paper Exploring Statutory Best Interest Duty for Advisors and Dealers
- November 26, 2012 | Author: David Mitchell
- Law Firm: Miller Thomson LLP - Vancouver Office
On October 25, 2012, the Canadian Securities Administrators (CSA) published for comment 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 discusses the desirability and the feasibility of introducing a statutory "best interest" duty for advisers and dealers in Canada when they provide advice to retail clients. It also examines whether the current Canadian standard of conduct framework is adequate. However, no decisions will be made without public consultation and discussion. All interested stakeholders must provide comments in writing on or before February 22, 2013. A summary of the Consultation Paper is set out below.
The review of the current standard of conduct that advisers and dealers owe to their clients has been the result of much debate following the 2008 global financial crisis. Several conferences have taken place in Canada to debate whether Canada should impose a statutory fiduciary duty on advisers and dealers, what a fiduciary duty encompasses, when it should apply and whether the current regulatory regime for advisers and dealers is functionally equivalent to such a standard. As well, other securities regulators in the United Kingdom, Australia and the European Union, have re-examined the relationship between advisers and clients and have either imposed a new standard or are considering adopting a new one.
The regulators have been following the example of the United States, which has also been considering the imposition of a uniform fiduciary standard. In January 2011, the US SEC published a study that strongly supported this change. However, the proposal has encountered stiff opposition south of the border and no draft rules have been promulgated, with the SEC instead opting for an extended consultation period. The SEC recently announced that it will likely be moving forward in 2013.
A fiduciary duty is a legal obligation for one person to act in the best interests of another person. Fiduciary relationships entail trust and confidence and require that fiduciaries act honestly, in good faith, and in the best interests of the beneficiaries.
A fiduciary duty may arise presumptively in certain types of relationships (for example, doctor/patient, lawyer/client). In all other relationships the determination of whether a fiduciary relationship exists depends on the nature of the relationship. Some of the factors the Canadian courts have considered in determining whether fiduciary obligations exist include (1) the degree of vulnerability of the client; (2) the degree of trust and confidence between the client and adviser; (3) the history of the client’s reliance on the adviser’s judgment and whether the advisor holds him or herself has having special skills or knowledge; (4) the power or discretion exercised by the adviser over the client’s accounts; and (5) any additional rules or codes of conduct which apply. However, this list is not exhaustive and the courts may also take into consideration other relevant factors.
Fiduciary duties may also be created by legislation. Examples include provincial and federal business corporations statutes that impose a duty of care upon directors and officers of a corporation and securities legislation that imposes a fiduciary duty on investment fund managers.
Under current law and industry standards, the starting point of the relationship between investment advisor and client is a contract in which the advisor is the agent carrying out the client’s instructions. The courts have recognized a spectrum to the relationship, from one in which the advisor makes all the decisions because of the great reliance and trust reposed in him or her by the client, to one in which the advisor is merely an order-taker for the client and the client does not rely on any advice. The courts already impose a fiduciary duty on advisors at the former end of the spectrum; what is being proposed is the imposition of a fiduciary duty all the way to the latter end.
For a fiduciary duty as it relates to advisers or dealers, the CSA is of the opinion that this means the adviser or dealer must act in the best interest of his or her client, which includes ensuring that the client’s interests are paramount, placing the client’s interests ahead of their own, avoiding conflicts of interest, not exploiting clients, providing clients with full disclosure, and providing reasonably prudent services.
Currently, the standard of conduct imposed by various Canadian Securities legislation applicable to registrants is a duty to deal fairly, honestly, and in good faith with their clients. However, it is not clear as to whether this existing duty is equivalent to, or falls short of, a best interest standard (i.e. a fiduciary duty).
The CSA indentifies five key investor protection concerns that arise under the current standard of conduct. These are:
- 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 asymmetry between advisers and dealers and their retail clients.
- There is an expectation gap because investors might incorrectly assume that their adviser/dealer must always give advice that is in their best interests.
- Advisers/dealers 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 believes that imposing a statutory fiduciary duty on advisers and dealers may establish a more principled foundation for the adviser-client relationship by requiring that the adviser or dealer always acts in the client’s best interests. Moreover, the CSA is seeking to harmonize the applicable standard of conduct across the country.