Firms are told to revise retail client agreements that seek to exclude liability for losses or relieve them from securities law obligations
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The Investment Industry Regulatory Organization of Canada (IIROC) has advised firms to review their retail client account agreements after a review uncovered clauses that seek to limit their accountability or duty to comply with regulatory requirements.
“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,” said IIROC President CEO Andrew J. Kriegler.
In a guidance note, the self-regulatory organization reported finding questionable clauses in certain dealers’ retail client account agreements. In particular, they said the clauses completely exclude the dealer’s liability for account losses (including those caused by the dealer), and relieve the dealer from securities law obligations such as suitability.
The note included some examples of clauses that IIROC considered contrary to OSC Rule 31-505, which defines a duty to deal with clients fairly, honestly and in good faith. Aside from distancing the dealer from responsibility for losses clients from following its advice, the presented examples sought to completely waive dealers’ liability, or placed arbitrary limits on compensation that is to be paid as a result of damages.
According to the IIROC guidance, such clauses are considered violations of dealers’ obligations under subsection 1402(1) of its Consolidated Rules). It said the same for clauses that seek to shift the dealer’s responsibilities to its clients, or purport to protect the dealer, registered representative, portfolio manager, or associate portfolio manager at the expense of the client.
Touching on the role of technology systems, the note said for untoward events that are within the dealer’s control, such as those involving functionality of the platform or services provided by the dealer, it is inappropriate for dealers to unilaterally limit their liability.
“If a Dealer has automated, or outsourced, certain tasks that relate to their regulatory obligations, they cannot disclaim liability simply on the basis that the process was automated or outsourced,” IIROC said.
It added that the responsibility of system testing, monitoring, and conducting due diligence reviews of vendors when outsourcing critical functions should remain with dealers.
The guidance also urged dealers to reconsider the use of the phrase “gross negligence” in liability clauses, noting how subsection 1402(1) of the Consolidated Rules specifically uses “negligence” to refer to conduct that results in a breach of regulatory standards.
“Effective immediately, firms are encouraged to review and revise inappropriate limitation of liability clauses in retail client agreements, and to notify clients of changes,” IIROC said in a statement.
Agreements will be also be reviewed for inappropriate liability clauses in future examinations, the self-regulator said, with the most egregious violators being referred for investigation and possible disciplinary action
“Investor protection is a core obligation of all IIROC-regulated firms and clauses like this that attempt to absolve firms of this obligation are simply unacceptable,” Kriegler said.
