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January 2021 NEWS Are you the keymaster?
New regulations will amplify investment dealers’ roles as product gatekeepers
INVESTMENT EXECUTIVE
| 7
BY GREG DALGETTY
when new know-your-
product (KYP) requirements come into effect at the end of this year, investment dealers will have to prove they’re acting as product gatekeepers.
Under the Canadian Securities Administrators’ client-focused reforms (CFRs), dealers will be required to approve all products they make available to clients and mon- itor those products for material changes. These requirements take effect at the end of this year.
Dealers already have processes in place for approving products and monitoring them — but under the CFRs, they’ll have to make those processes auditable.
“Firms need to play that gate- keeper function — or do a more robust job [of proving] that they’re meeting that gatekeeping function — when it comes to the products they’re making avail- able to their advisors and end clients,” said Parham Nasseri, vice-president of regulatory strat- egy with Toronto-based software developer InvestorCOM Inc.
The new KYP rules also mean that “open” product shelves won’t meet regulatory require- ments, since products must be approved before they can be recommended to clients. But will this limit advisors in terms of what they can offer clients?
“I don’t think firms will have toseverelyrestricttheirshelves,”
said Adrian Walrath, director with the Investment Industry Association of Canada.
Walrath noted that the rules coming into force at the end of this year are far less onerous than thereformsinitiallyproposedin 2018, which may have required investment dealers to perform a “security-by-security” analysis of every product on their shelves.
“Now the rules are quite clear that that’s not required in all cir- cumstances,” Walrath said, not- ing that the revised rules will, for example, allow firms to approve publicly listed common shares “in buckets,” rather than require firms to approve individual securities.
Scott Sullivan, principal, Canadian products with Edward Jones, said he doesn’t anticipate the new KYP rules will shrink his firm’s product shelf.
“We already have a pretty open shelf, but I would say it is not completely open. We’re very selective about what we put on our platform,” Sullivan said. “We steer clear of products that don’t exhibit fair costs or lack clarity.”
Firms may face challenges, however, when it comes to mon- itoring products for material changes. The risk ratings of mutual funds and ETFs, for example, change frequently — and those changes may affect the suitability of a client’s portfolio.
“We see 20,000 changes across the Canadian mutual fund
universe in a given week,” Nasseri said. “Risk-rating changes are just one variable. What about fees? What about minimum investment amounts? What about investment objective? What about the asset allocationoftheproducts?”
Many firms use software to monitor products for changes that could affect suitability. And technology will be key to com- plying with new KYP rules, said Maria Jose Flores, chief compli- ance officer with Carte Financial Group: “Unless you leverage tech- nology, there’s no way a human can actually do all of that.”
According to a report from InvestorCOM, 60% of secur- ities dealers at a November 2020 roundtable said they were planning to adopt new technol- ogy — rather than use existing technology — to meet new KYP requirements.
Michael Williams, chief risk and compliance officer with Richardson Wealth, said his firm is currently considering technol- ogy options for complying with the new regulations.
Most Richardson Wealth advisors are portfolio managers and have a fiduciary duty to put the best interest of their clients first — the ultimate goal of the CFRs. Richardson also is rela- tively nimble, Williams said.
“Ithinkwehaveabitofa competitive advantage [comply- ingwiththeCFRs]becausewe’re
a pure-play wealth manager,” Williams said. “We have a very streamlined systems architecture, and we already have a fiduci- ary culture.”
Williams added
that Richardson and
other investment
dealers already have processes for approving and monitoring prod- ucts. The challenge, he said, will be integrating technology that can document those processes.
“Wehavetolookathowwecan
ELIGIBLE FOR
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Class A - MAJ710 Class F - MAJ711
integrate systems to make it eas- ier to provide that evidence on a real-time basis,” Williams said. “The more technology you can get to make it seamless for advis- orsandclients,thebetter.” IE
“We see 20,000 changes across the Canadian mutual fund universe
in a given week”
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