Earlier this week, the Investment Industry Regulatory Organization of Canada released draft guidance regarding the responsibilities of dealers and representatives that advise clients to use borrowed money to invest or who become aware that a client intends to make such leveraged investments. In releasing the guidance, IIROC cited an increasing number of cases where inappropriate leveraging strategies were recommended to clients or where risks were not sufficiently disclosed.
The guidance thus provides a checklist of issues that registered representatives should consider before making a recommendation to invest with borrowed funds. These considerations apply whether a client is engaging in leveraged strategies through margin loans advanced by the dealer (on-book borrowing), or loans from third parties (off-book borrowing).
The guidance also sets out the minimum controls that dealers should have in place, including with respect to suitability reviews of client accounts employing a leveraging strategy. Minimum controls expected of dealers also include procedures to ensure compliance with the requirements related to permitted referral arrangements.
Comments on the draft guidance are being accepted until October 4, 2012. For more information, see IIROC Notice 12-0208.