Canada’s investment-industry regulator says firms must stop inserting clauses in their contracts with investors that limit the firms’ liability for losses – even in cases where the firm’s employees have broken rules and recommended unsuitable investments.
The Investment Industry Regulatory Organization of Canada (IIROC) issued what is known as a guidance note on Thursday after it said it noticed the problem in its reviews of firms’ client agreements.
“It is inappropriate for any contractual clause to unreasonably limit or waive a firm’s liability for losses when that firm is in breach of its regulatory obligations to IIROC and to securities laws,” Andrew Kriegler, IIROC’s president and chief executive, said in a statement announcing the new guidelines. “Canadian retail clients should not be put at risk because of a firm’s own mistakes.”
IIROC is not a government regulator; instead, it’s a self-regulatory organization with industry participants filling half the seats on the board of directors.
IIROC’s action plan is to tell firms that “effective immediately,” they are “encouraged” to revise inappropriate limitation-of-liability clauses and to notify clients of changes. IIROC will “flag any issues” in coming examinations of firms. Depending on the severity, IIROC says, it will recommend corrections, or, “in egregious cases, refer the matter for investigation and possible disciplinary action.”
Ermanno Pascutto, executive director of The Canadian Foundation for the Advancement of Investor Rights (FAIR Canada), commended IIROC for examining the problem, but said “on the face of it, the approach taken seems to indicate a kinder, friendlier, members’-best-interest-focused regulator as opposed to one acting in the interest of investors.”
Mr. Pascutto said the guidance note “should be a directive to comply as soon as possible and definitely by a certain date,” as opposed to a message that firms are “encouraged” to comply.
“Why are there no sanctions on the firms whose agreements clearly violated the rules [as opposed to borderline cases] and may have done so for many years?” Mr. Pascutto asked. “With the teams of lawyers and compliance personnel the larger firms have, they either were aware of the problematic client agreements or should have been aware.”
He also said FAIR Canada believes the firms should be required to review client complaints to see how many clients were not compensated based on the defective agreements. “There is no mention of harm to investors and any remedial action that will be taken to correct this.”
Ken Kivenko, a prominent investors-rights advocate, said: “This is a very positive sign from IIROC and hopefully there’s more to come. Could it go further? Sure. But you know bank-owned [investment] dealers likely pushed back, and you know their power."
Greg Pollock, president and CEO of Advocis, the Financial Advisors Association of Canada, said in an e-mailed statement: “Advocis supports IIROC’s guidance. … We believe that dealers and advisers should not be able to ‘contract out’ of fundamental obligations, including assessing suitability, absent the client’s explicit consent. However, we also believe there should be reasonable limits to dealer and adviser liability.”
In its Thursday guidance note, IIROC gave examples of contract language that it says are contrary to its rules – and also violate Ontario Securities Commission rules on the duty to deal “fairly, honestly and in good faith” with investment clients.
IIROC says a clause that says “customer agrees not to hold dealer responsible for losses incurred through following dealer’s trading recommendations or suggestions or those of its employees, agents or representatives” is an attempt to relieve investment firms from their regulatory obligations, such as only selling investments that are suitable for clients’ risk profiles.
Other such clauses attempt to completely waive the firm’s liability, such as “We shall not be liable to you or any third party for loss or revenue or profits, failure to realize expected profits or savings, missed investment opportunities or other items of economic loss, of any nature whatsoever, or any special, indirect, consequential, exemplary, or incidental damages arising out of the services, however caused, and whether arising under contract, tort (including negligence) or any other theories of liability, even if we have been advised of the possibility of such damages.”
Says Mr. Kivenko: “Trying to get immunity by having lawyers write up inappropriate clauses is improper.”
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