Advocate says provisions that undermine investor protections should be investigated and nullified
The Investment Industry Regulatory Organization of Canada (IIROC) must do more to prevent dealer firms from using contract provisions to limit their liability, according to one investor advocate.
In a letter to IIROC, Kenmar Associates referred to IIROC’s October 2019 notice on limitation of liability clauses, which some dealers reportedly used to shield themselves from liability for account losses, relieve themselves of securities-law obligations, arbitrarily limit the damages they would pay to aggrieved clients, or unduly contain their accountability for technology systems malfunctions.
“This is an outrageous violation of IIROC rules and a slap in the face to IIROC,” Kenmar said, asserting that such agreements “undermine fundamental investor protections in securities laws and regulations.”
Those same clauses also undermined the investor complaint-handling process, the group said, arguing that certain provisions allowing no complaints or limiting damages were designed to keep complainants from approaching the Ombudsman for Banking Services and Investments (OBSI).
IIROC has encouraged dealers to assess whether their client agreements contained any inappropriate clauses, to rectify any non-compliance, and advise clients of any changes to their account agreements.
But Kenmar maintained “that ‘encouragement’ and mere client notification are insufficient investor protection or deterrence measures.”
It recommended several actions, including:
- Investigating how such provisions passed scrutiny at the legal, compliance, and board governance security levels;
- Sending a letter to every member firm’s chief compliance officer, copying in the chair of the board, asking the firm to certify that they have reviewed all their client agreements, removed any offending clauses, and informing the clients affected;
- Doing selective audits and reporting findings on dealers’ use of such exclusions;
- Confirming that dealers have issued plain-language notices informing investors that the offending provisions will not be relied on and will be stricken from contractual agreement updates;
- Confirm that cases where such clauses informed responses to investor complaints are revisited, with dealers notifying all relevant investors of the error and reissue historical complaint responses that relied partly or wholly on the improper use of exclusions;
- Confirm that civil claims relying on such inappropriate exclusions will not rely on them moving forward, with plaintiff counsel being clearly and unequivocally informed of that fact; and
- Launch enforcement actions where appropriate.
“We also recommend that IIROC advise OBSI to be alert to oppressive contract provisions and to disregard them in assessing loss calculation,” Kenmar said.
“At a time where a review of the merits and value of self- regulation is underway, it is more important than ever that SRO’s address and be seen to address such egregious violations of the fundamental obligation to deal fairly, honestly and in good faith with clients,” the group added.
