IIROC, the self-regulatory body for securities dealers, reviewed its Rule 42 last year dealing with conflicts of interest, uncovering some problems related to disclosures and compensation.
IIROC surveyed firms in June 2016 to assess the effectiveness of the new conflict of interest rule. Ian Russell, head of IIAC, the industry advocacy group for IIROC members, has assessed the review in a letter to members this week.
“The review uncovered four problems: inadequate disclosure of compensation-based conflicts of interest; reliance on disclosure without firms first addressing the specific conflict; lack of firm “review” or focus on the conflict problems related to compensation; and the lack of proper monitoring and supervision of the unique risks in fee-based and managed accounts related to fee or compensation conflicts,” Russell writes.
He says extensive reliance on disclosure to deal with compensation-related conflicts shouldn’t be surprising given the complexities of conflicts and various ways to address them. He says there’s been a lack of industry guidance on how to deal with specific conflicts.
He writes: “For example, the review refers to differences in advisor payouts between third-party fund products and in-house funds. These relative payouts are explained as cost differences. Beyond disclosing the payout differences, how should the third party and in-house funds be treated in terms of adjusting payouts and client charges? What about concerns regarding the independence of supervisors? Should supervisors be entitled to a portion of advisor revenues even if fully disclosed, and what should the portion be?”
Russell says compensation conflicts must be addressed in the best interests of the client but questions what firms should be doing to address specific cases of compensation-related conflicts, beyond any precedent-setting standards.
The IIROC compliance survey suggests firms need to do a better job addressing compensation conflicts between fee-based and transaction accounts, Russell writes.
“The regulatory focus here is on transaction activity in fee-based and managed accounts, and corresponding appropriateness of the account fee. However, the conflict related to relative fee charges may have been addressed, not through specific policies related to the principles-based conflicts rule, but through Know-Your-Client and suitability obligations, and appropriateness of the fee-based or managed account for the client,” he says.