3.3.8 Client Relationship Model

Introduction to the Client Relationship Model

A series of rule amendments under the Investment Industry Regulatory Organization of Canada’s (IIROC) Client Relationship Model (CRM) project were introduced as part of a broader fundamental obligation of IIROC dealer members and their representatives to deal fairly, honestly, and in good faith with clients. These reforms imposed greater disclosure requirements to enhance the standards that advisors must meet when assessing the suitability of investments for their clients. The objective is increased transparency for investors regarding the fees they pay, the services they receive, potential conflicts of interest, and the performance of their accounts.

Relationship Disclosure

To better inform clients of the nature of their accounts, IIROC dealer members must provide all clients with a relationship disclosure document that includes the following information:

• The types of products and services offered by the firm
• The terms of the account relationship to which the client has consented
• The process used by the firm to assess investment suitability and the client’s Know Your Client (KYC) information
• The date on which account suitability will be reviewed
• All fees and charges associated with operating, transacting, and holding investments in the account
• The firm’s complaint handling procedures
• A description of all the reporting that the client will receive, including the date on which account statements and trade confirmations will be sent, as well as a statement describing the firm’s obligations to provide performance information

Conflict of Interest Management

Securities dealers must develop and maintain policies and procedures to identify, disclose, and address existing and potential material conflicts involving clients. All material conflict situations between advisors and their clients, and between the firm and its clients, must be addressed through one of the following three means:

Avoid the Conflict

Avoid any potential or existing material conflict of interest between the advisor or firm and the client, unless the conflict can be addressed in a fair, equitable, and transparent manner in the best interests of the client.

Disclose the Conflict

Disclose any unavoidable potential or existing material conflict of interest to clients in all cases where a reasonable client would expect to be informed.

Otherwise Control the Conflict Situation

In general, the only scenario under which an unavoidable material conflict need not be disclosed to a client is if the firm has taken other steps to control the situation, and the firm has effectively ensured, with reasonable confidence, that the risk of loss to the client has been eliminated.

Suitability Assessment

The CRM guidelines require that the suitability of an investment decision be conducted whenever any of the following trigger events occur:

• A trade is accepted.
• A recommendation is made.
• Securities are transferred or deposited to an account.
• There is a change of representative or portfolio manager responsible for the account.
• There is a material change to the KYC information for the account.

Frequently Asked Questions (FAQs)

Q1: What is the purpose of the CRM project?

A1: The purpose of the CRM project is to ensure fair, honest, and transparent dealings between IIROC dealer members and their clients by providing clear disclosure of fees, services, potential conflicts of interest, and account performance.

Q2: What constitutes a material conflict of interest?

A2: A material conflict of interest is a situation where the interests of the advisor or the firm potentially or actually contradict with the client’s best interest, necessitating clear identification, disclosure, or resolution of the conflict.

Q3: How often should suitability assessments be conducted?

A3: Suitability assessments should be conducted whenever a trigger event occurs, such as acceptance of a trade, making a recommendation, transfers or deposits to an account, changes in the representative or manager, or a material change to KYC information.

Glossary of Terms

• IIROC: Investment Industry Regulatory Organization of Canada, a national self-regulatory organization which oversees all investment dealers and their trading activity in Canada.
• KYC (Know Your Client): A standard used in the investment industry to verify the identity, suitability, and risks involved in dealing with a client.
• Material Conflict of Interest: Situations where the interests of the advisor or firm potentially or actually contradict with the client’s best interests.
• Suitability: The appropriateness of a particular investment for a client, based on the client’s financial situation, investment knowledge, objectives, and tolerance for risk.

Key Takeaways

• Transparency and Fairness: The CRM project promotes increased transparency and fairness in dealing with clients.
• Disclosure Requirements: There are comprehensive disclosure requirements about the nature of the client’s account, fees, services, potential conflicts of interest, and performance information.
• Conflict of Interest Management: Careful identification, disclosure, and management of material conflicts of interest are mandated.
• Investment Suitability Assessments: Suitability assessments are essential during any significant change or action affecting the client’s investment account.

Sample Diagram: Suitability Assessment Tiggers

    sequenceDiagram
	    Client->>Advisor: Initiates a trade
	    Advisor->>Firm: Submits trade details
	    Firm-->>Advisor: Trade reviewed for suitability
	    Advisor-->>Client: Provides trade confirmation

Further Reading

• IIROC Compliance and Registration Rules
• Guidelines on CRM for Financial Advisors