IIROC releases draft guidance regarding outsourcing arrangements

The Investment Industry Regulatory Organization of Canada (IIROC) earlier this week released draft guidance regarding outsourcing arrangements into which dealers commonly enter. According to IIROC, competitive pressures to contain costs have led to the outsourcing of more business functions to third-party providers through arrangements not adequately addressed by the Dealer Member Rules. IIROC specifically mentions a growing interest to outsource the daily management of books and records by self-clearing dealers as an example of a trend that may increase credit, systemic and investor risk.

As such, IIROC has ultimately categorized activities as either:

  1. Core activities that may not be outsourced. This includes most central, client-facing activities such as the account opening process, the performance of suitability assessments and the handling of client complaints.
  2. Core activities that may be outsourced. Such activities include the performance of investment decisions in managed accounts (the Dealer Member Rules specifically allow for such outsourcing to external portfolio managers), the administration of margin loans, the preparation of client account statements and regulatory financial reports, and the preparation of research reports.
  3. Non-core activities that may be outsourced. These activities include office service management, human resources management and the procurement of external consultant services.

Of particular interest, the notice sets out a number of principles for dealers to consider when contemplating whether to enter into an outsourcing arrangement. Specifically, dealers should have a comprehensive outsourcing policy to guide the performance of due diligence assessments, and outsourcing should never be implemented where it would diminish the dealer's ability to fulfill its obligations to clients and regulators, where it would impede effective supervision by regulators or where it would unduly concentrate outsourced activities in one or a few service providers. 

Once activities have been outsourced, dealers are expected to, among other things, maintain a centralized list of outsource service providers, carry out a comprehensive outsourcing risk management program to monitor risks and provide an audit report to IIROC where applicable.

IIROC is also currently working on proposed rules to codify the general due diligence obligations of dealers with respect to outsourcing and to set out specific obligations regarding the maintenance of books and records.

Comments on the notice are being accepted until January 20, 2013. For more information, see IIROC Notice 12-0311.

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