Inappropriate leveraging strategies are increasingly being recommended to clients, says IIROC’s Business Conduct Compliance examination unit.
The group has come across several situations where clients were not provided with enough information about the risks of borrowing to invest. They were also not made aware of the debt servicing obligations they would have to meet after using leverage.
Any client taking the plunge should be aware that leveraging is very risky, involves repaying loans even if the product doesn’t perform, and that it can result in greater losses than traditional strategies, said IIROC in a recently released draft guidance.
The draft outlines the responsibilities of both dealer members and registered reps when recommending clients use loaned funds. It also reminds advisors of the importance of documenting any instances where they make suggestions relating to borrowing strategies.
IIROC’s points and suggestions also apply to professionals who find out an investor plans to take out a loan from third party sources without their guidance.
IIROC is asking all interested parties to submit comments on the draft by October 4, 2012.