It is very important to know the standard of conduct as well
as the specific business conduct requirements. Many people get
into trouble not because they are dishonest but simply because
they do not know what is expected of them.
The standard of conduct is basically the same in all
jurisdictions of Canada, except Quebec. In British Columbia, it is
found in section 14 of the Securities Rules.
• Subsection (1) requires registrants to deal fairly, honestly and
in good faith with their clients.
• Subsection (2) requires registered representatives of a dealer
or adviser to deal fairly, honestly and in good faith with the
clients of the sponsoring dealer or adviser. Here, “adviser”
means “portfolio manager”.
The key words are “fairly, honestly and in good faith”.
The Standard of Conduct of SROs
IIROC and the MFDA, as self-regulatory organisations (SROs),
have elaborated on the statutory standard of conduct. I know: you
will tell me that the SROs have no authority over you since EMDs
are under the tender loving care of the securities commissions
themselves. Bear with me for a moment and you will see why I am
taking you on this detour.
The first requirement of the SROs simply repeats securities
legislation. It says that members and their representatives must
deal fairly, honestly and in good faith with clients.
The subsidiary requirements elaborate on the fundamental
requirement to deal fairly, honestly and in good faith with clients.
SRO members and their representatives must:
• observe high standards of ethics and conduct in the
transaction of business
• not engage in any business conduct or practice which is
unbecoming or detrimental to the public interest
• be of proper character and have proper business repute, and
• have appropriate experience and training
These subsidiary requirements are instructive because they
provide an operational context to the fundamental requirement
to deal fairly, honestly and in good faith with clients. They give
a more concrete character to the fundamental requirement and
make it easier to visualise.
Examples of Proper Conduct
Here are some examples of business practices which follow
from the statutory standard of conduct for dealers:
• Understand the personal and financial circumstances of clients.
Otherwise, your recommendations are unlikely to be suitable.
• Always make recommendations which are suitable to the
client. For example, do not sell a product which will lock in
the client’s money for the long term when you know that the
client will need access to the money in the near future. Bear
in mind that many exempt market products are illiquid.
• Present all investment recommendations fairly and without
false or misleading statements. For example, when
recommending a security, do not say that it will be listed on an
exchange unless the issuer has actually made an application
to an exchange to have the security listed.
• Clearly distinguish fact from comment when making
recommendations. For example, if you are showing
projections of future results, make sure the client understands
that these are just projections.
• Protect the confidentiality of client information. For example,
when trying to close a deal with Mr. Smith, do not try to
impress him by saying that Mr. Jones, who is a savvy investor,
has bought the product.
Some of these practices have been codified into specific
rules but they all follow logically from the standard of conduct.
Examples of Improper Conduct
In the interest of balance, let us now provide some examples
of improper conduct. In the course of compliance reviews of
exempt market dealers, the securities commissions have found
common deficiencies in the following areas:
• trading in securities without registration
• making unsuitable recommendations, including failure
to observe know-your-client and know-your product
• selling products under the accredited investor exemption to
clients who do not qualify
• handling conflicts of interest inadequately, including lack of
disclosure; we will have more to say about this in a moment
• not making adequate disclosure when recommending the
securities of related issuers; again, we will have more to say
• using improper marketing materials
The Fiduciary Standard
So far, we have been discussing the standard of conduct
required by securities legislation. It is the standard which the
regulators will use to assess your conduct and decide whether