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Bulletin

CSA Proposes Amendments to NI 31-103 to Enhance Protection of Older and Vulnerable Clients

Fasken
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Investment Management Bulletin

Securities regulators and self-regulatory organizations have identified the protection of older and vulnerable clients as an important industry issue.[1] In an effort to provide a uniform regulatory framework for addressing this issue, the Canadian Securities Administrators (the CSA) has published a notice of consultation(pdf) regarding proposed amendments to National Instrument 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and to the Companion Policy to NI 31-103 (31-103CP) (the proposed amendments will be referred to as the Proposed Amendments to NI 31-103, the Proposed Amendments to 31-103CP and, together, the Proposed Amendments).

The Proposed Amendments result from the CSA's "initiative to enhance investor protection by addressing issues of financial exploitation and diminished mental capacity of older and vulnerable clients." The measures proposed are (i) the requirement for registrants to take reasonable steps to have the client provide the name and contact information of a trusted contact person (a TCP) and (ii) the establishment of a framework allowing registrants to determine if and when they should place a temporary hold on a client's account.

This bulletin provides an overview of the Proposed Amendments as well as an identification of potential challenges that registrants may face in carrying out their responsibilities, as these would be modulated by the current formulation of the Proposed Amendments.

Trusted Contact Person

Pursuant to the Proposed Amendments, the provisions regarding the TCP will require registrants to take reasonable steps to obtain the name and contact information of a TCP from the client, as well as the written consent of the client to contact the TCP in connection with the client's account.

The key function of the TCP is to serve as a contact if the registrant notices signs of financial exploitation of the client or if the client manifests signs of decreased mental capacity that the registrant believes may impact the client's capacity to make financial decisions. The TCP may also be contacted in order to obtain the client's current contact information, or for assistance in contacting the client's legal guardian, an executor of an estate or a trustee of a trust under which the client is a beneficiary, or any other legal representative of the client.

Amendments to the Relationship Disclosure Information

As part of the relationship disclosure information that must be delivered to a client, a registered firm must provide the client with a description of the circumstances under which information about the client, or the client's account, may be communicated to the TCP.

Form

The Proposed Amendments to 31-103CP propose that registered firms develop a form (or make changes to an existing form) in order to:

  • Provide clients with an overview of the circumstances under which the TCP may be contacted;
  • Document relevant information regarding the TCP;
  • Obtain the client's written consent to have the registrant contact the TCP;
  • Specify that a client may withdraw the consent to have the registrant contact the TCP; and
  • Let clients know how to change the TCP.

Steps to Obtain TCP Contact Information

While the client's failure or refusal to provide a TCP is not an impediment to the opening of a client account, the Proposed Amendments provide that the registrant must nevertheless have taken reasonable steps to obtain the information, the Proposed Amendments to 31-103CP providing some examples of such steps.

If the initial attempt to obtain the identity and coordinates of a TCP from the client fails, the registrant may make further inquiries regarding the client's refusal.

The Proposed Amendments to 31-103CP caution that registrants should first speak to the client about any concerns they may have regarding the client's mental capacity or a potential financial exploitation, before speaking with any other person, including the TCP.

In addition, the Proposed Amendments to 31-103CP warn against contacting the TCP if the latter is suspected of being involved in the financial exploitation of the client. In such a case, the CSA proposes that consideration be given as to whether more appropriate resources are available for assistance.

Policies and Procedures

Lastly, the CSA expects registrants to have written policies and procedures in place that

(i) address the collection, documentation and maintenance of TCP information,

(ii) establish methodologies for obtaining the client's written consent to contact the TCP, documenting restrictions on contacting the TCP and clearly delineating what type of information can be shared, and

(iii) specify how to document discussions with a client's TCP.

Temporary Hold

The CSA indicates that there is nothing in Canadian securities legislation that prevents registered firms and individuals from placing a temporary hold on a client's account, or some part thereof. In fact, the CSA is of the view that placing a temporary hold on a client's account may in fact be necessary under certain circumstances, in order for registrant firms to fulfill their duty to act in accordance with their standard of care derived from applicable securities laws. As the Proposed Amendments require registrants to establish a reasonable belief of financial exploitation or a lack of mental capacity before placing a temporary hold on a client's account, the CSA believes the Proposed Amendments provide an appropriate balance between a client's autonomy and investor protection.

Conditions of Placing A Temporary Hold

With that as a starting point, the proposed additions to NI 31-103 are drafted so as to require registrants to only place a temporary hold on a client's account if they reasonably believe that the client is a vulnerable client and there is financial exploitation or, with respect to an instruction given by the client, that the client does not have the mental capacity to make financial decisions.

The Proposed Amendments to 31-103CP provide the following examples of warning signs that a client may be subject to financial exploitation:

  • unexplained or sudden withdrawals from accounts or account closures;
  • unexplained changes in the risk profile of an account from low risk or capital preservation to high risk;
  • sudden reluctance to discuss financial matters;
  • being accompanied to meetings by new or unknown caregivers, friends or family members, or having difficulty communicating directly with the client without the interaction of others;
  • sudden or unusual requests to change ownership of assets (for example, requesting that investments be transferred to a joint account held by family members, friends or caregivers);
  • sudden or unexplained changes to legal or financial documents, such as power of attorneys and wills, or account beneficiaries;
  • an attorney under a power of attorney providing instructions that seem inconsistent with the client's pattern of instructions to the firm;
  • unusual anxiety when meeting or speaking to a firm employee (in-person or over the phone);
  • unusual difficulty with, or lack of response to, communications or meeting requests;
  • limited knowledge about their financial investments or circumstances when the client would have been customarily well informed in this area;
  • increasing isolation from family or friends, or
  • signs of physical neglect or abuse.

The following examples of warning signs of the loss of mental capacity are also provided:

  • memory loss, such as forgetting previously given instructions or repeating questions;
  • increased difficulty completing forms or understanding disclosure documents;
  • increased difficulty understanding important aspects of investment accounts;
  • confusion or unfamiliarity with previously understood basic financial terms and concepts;
  • reduced ability to solve everyday math problems;
  • exhibiting unfamiliarity with surroundings or social settings or missing appointments;
  • difficulty communicating;
  • changes in personality; or
  • increased passivity, anxiety, aggression or other changes in mood, or an uncharacteristically unkempt appearance.

Lastly, the Proposed Amendments to 31-103CP provide the following guidelines regarding vulnerable clients:

Vulnerable clients are those clients that may be at risk of being financially exploited because of an illness, impairment, disability or aging process limitation. Registered firms and individuals should recognize that not all older clients are vulnerable or unable to protect their own interests. Vulnerability can affect a client of any age, take many forms, and can be temporary, sporadic or permanent in nature. It is important to recognize vulnerabilities in clients because vulnerable clients may be more susceptible to financial exploitation.

Amendments to the Relationship Disclosure Information

The Proposed Amendments will require registered firms to provide the client, in its relationship disclosure document, with a general explanation of the circumstances under which a temporary hold may be placed on the client's account.

Subsequent Obligations

Once a temporary hold has been placed, the registered firm must (i) document the facts that led to the temporary hold, (ii) provide notice of the temporary hold to the client, (iii) further review the facts that led to the temporary hold, (iv) within 30 days, make a decision as to the termination of the temporary hold or its continuation, while providing the client a notice and the reasons for its decision, and (v) ultimately terminate the temporary hold and proceed with the client's instruction, or proceed to the withdrawal of the assets in the account.

Focus On Client Protection

The CSA indicates that it does not expect registered firms and registered individuals to be the final arbiter in matters of vulnerability, financial exploitation or mental capacity, but that registrants may want to place temporary holds in order to protect their clients. Such decisions are expected to be made by the Chief Compliance Officer or other supervisory, compliance or legal staff.

Policies and Procedures

Furthermore, the CSA expects registered firms to have written policies and procedures setting out:

(i) detailed warning signs of financial exploitation and lack of mental capacity,

(ii) who at the firm is authorized to place temporary holds and who is responsible for supervising client accounts when a temporary hold is in place,

(iii) steps to take once a concern regarding financial exploitation or lack of mental capacity has been identified,

(iv) lines of communication within the firm to ensure proper reporting, and

(v) an outline of when suspected abuse of a power of attorney should be escalated to the relevant external authorities.

Challenges for Registrants

Contractual Limits to Temporary Holds

Despite the steps suggested in the Proposed Amendments to NI 31-103CP to guide registrants in ensuring that a given set of circumstances warrant the placing of a temporary hold on a client's account, registrants will nevertheless need to ensure that their contractual arrangements with the clients allow the registrant to do so in the case of suspected financial exploitation of the client or the client's loss of her or his mental capacity.

In addition to developing a form for the identification of a TCP, taking the required steps to obtain a TCP's contact information, and the drafting of policies and procedures to determine the circumstances under which a TCP may be contacted and a temporary hold may be placed on a client's account, registrants will need to review their existing arrangements with their clients and determine, on a case-by-case basis, if they have the power to put temporary holds on their accounts.

Temporary Hold With No Safe Harbour

The Proposed Amendments regarding the temporary hold do not provide registrants with any form of "safe harbour". In the absence thereof, registrants may very well be hesitant to apply temporary holds, except in the most extreme cases.

Without a "safe harbour", when considering not following a client's instructions, good faith registrants acting in what they perceive to be the best interest of the client, may risk exposing themselves to civil liability should that temporary hold subsequently prove to be unjustified and to result in losses to the client.

The Proposed Amendments to 31-103CP clarify that having written policies and procedures in place detailing when a temporary hold should be placed will show that firms have a system in place to address concerns that may result in a temporary hold. While having such policies in place may be useful in demonstrating that a registered firm acted in good faith, it may prove to be insufficient to shield the registrant from civil liability.

The Proposed Amendments state that registrants are among the first to witness people's declines in mental capacity, and that they are consequently uniquely placed to assist clients going through such changes. The Proposed Amendments impose on them a burdensome responsibility, while providing no corresponding protection from the adverse effects that may result from registrants' attempts to be helpful. It is inevitable that registrants, who are without formal training in making assessments as to clients' mental capacity, will err in their judgements in some of the cases. As such, they will likely subject themselves and their firms to civil liability.

Legislative "safe harbours" are not uncommon in situations where an untrained person is asked to provide aid or assistance to a person in distress. For example, the legislator of each Canadian province and territory has adopted legislation to protect a person who voluntarily provides aid to victims of an accident from civil liability.[2] Another example comes in the form of whistle-blower protection provisions such as those in Quebec,[3] which provides protection from civil liability and employer reprisals, and Ontario,[4] which provides protection from employer reprisals.

In preparing the Proposed Amendments, the CSA drew inspiration from the frameworks put forward by the North American Securities Administrators Association (NASAA) and the Financial Industry Regulatory Authority (FINRA) to protect vulnerable clients. The NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation (Model Act) enables broker-dealers and investment advisers to place temporary holds on disbursements out of a client's account, while providing immunity to the applicable broker-dealer or investment adviser from the administrative or civil liability that could result from their efforts to protect the elderly from suspected financial exploitation.[5] FINRA's Rule 2165 regarding Financial Exploitation of Specified Adults provides broker-dealers with a safe harbour from administrative liability.[6]

It remains unclear why the CSA, despite using the Model Act as a source of inspiration, did not choose to propose a similar statutory immunity from civil liability to good faith registrants, thereby encouraging them to do what is best for the client while being protected.

The implementation of the Proposed Amendments will therefore be challenging for registrants, although the intentions of the CSA are indeed commendable.

Recognition That the TCP May Be the Source of Financial Exploitation

As identified in the Proposed Amendments to 31-103CP, prior to contacting the TCP in relation to financial exploitation, the client's mental capacity, or the placing of a temporary hold, registrants must assess whether there is a risk that the TCP is somehow involved in the financial exploitation.

The Proposed Amendments impose procedures on registrants to ensure compliance with the new TCP provisions, while requiring them to review their contractual and statutory privacy obligations before contacting the TCP with the intention of sharing or obtaining personal information regarding the client, and then make an assessment as to whether or not to contact the TCP due to concerns that they may be the source of financial exploitation. The Policy Statement also suggests that understanding the relationship between the client and the TCP will provide insight into the client's support network, allowing the registrant to assess whether it is appropriate to contact the TCP. However, when the time comes to actually call the TCP, it may well be that the additional efforts required of registrants under the Proposed Amendments will be for nought, as any difficulties in ascertaining whether the TCP is involved in the financial exploitation will inevitably lead to a decision not to contact the TCP, in order to ensure client protection.

Finally, it bears mentioning that the NASAA Model Act mentioned above also provides immunity from administrative and civil liability resulting from a broker-dealer or investment adviser communicating with the TCP.[7] A safe harbour mechanism should also be considered for unwanted consequences resulting from a registrant contacting the TCP.



[1] See, for example, the Autorité des marchés financiers' Protecting vulnerable clients: A practical guide for the financial services industry, 2019, the CSA's Staff Notice 31-354 - Suggested Practices for Engaging with  Older or Vulnerable Clients and the Investment Industry Regulatory Organization of Canada ("IIROC") Priorities for 2021, which states that "IIROC will continue our work with the CSA in support of a safe harbour rule and developing additional tools to help dealers protect vulnerable investors."

[2] See : Good Samaritan Act, 2001. S.O. 2001, Chapter 2 (Ontario); article 1471 of the Civil Code of Québec, CQLR c CCQ 1991; The Good Samaritan Protection Act, C.C.S.M. c. G65 (Manitoba); the Good Samaritan Act, RSBC 1996, c 172 (British Columbia); Volunteer Services Act, RSNS 1989, c 497 (Nova Scotia); Emergency Medical Aid Act, RSA 2000, c E-7 (Alberta); Emergency Medical Aid Act, RSNL 1990, c E-9 (Newfoundland and Labrador); Volunteers Liability Act, RSPEI 1988, c V-5 (Prince Edward Island); The Emergency Medical Aid Act, RSS 1978, c E-8 (Saskatchewan); Volunteer Emergency Aid Act, RSNB 2016, c 17 (New Brunswick); Emergency Medical Aid Act, RSY 2002, c 70 (Yukon); and Emergency Medical Aid Act, RSNWT (Nu) 1988, c E-4 (Northwest Territories and Nunavut).

[3] Sections 17.0.5 and 17.1 of the Act respecting the regulation of the financial sector, CQLR c E-6.1.

[4] Section 121.5(1) of the Securities Act, RSO 1990, c S.5.

[5] Section 8 of the Model Act (pdf)

[6] Supplementary Material .01 Applicability Rule of Rule 2165. Financial Exploitation of Specified Adults

[7]  Section 6 of the Model Act 

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