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Posted by Mr. Joel W. on Nov 15th, 2016 9:26pm



                                                       the last nail on best interests  



While the securities industry, the investing public and securities regulators have engaged in an interminable series of conferences, roundtables, debates, submissions and consultations regarding the introduction of what is commonly referred to as a ‘best interests standard’ into what is required of dealers and investment advisers in their dealing with their clients, the end of days seems close at hand. 


Depending on your position, the question is either ‘why’ or ‘what took so long’.  I stand in the latter group, somewhat mystified at the consternation as to why the four words ‘in the best interests’ has caused such turmoil and controversy.


Rule 31-5056 of the Ontario Securities Act, which deals with Registration Requirements of dealers and advisers, and particularly with the General Duties mandated of dealers and advisers, requires them to ‘deal fairly, honestly and in good faith with their clients’.  It is inconceivable how these duties do not encompass the duty to act in the best interests of clients.  As that concept appears to be not universally or even generally accepted, clarification of the definition of these general duties is required by the inclusion of these words within Rule 31-505.


An historical example of a similar situation in securities regulation is when the ‘know your product’ rule was made explicit, even though the existing suitability rule obviously encompassed an obligation to know the investment product.  How could an adviser’s investment advice to a client as to the suitability of a recommended investment be suitable for that client if the adviser didn’t know the attributes and understand the risks of the investment product?  How could dealer supervision and compliance be effective in reviewing a client’s trading and account for suitability issues if, again, the ‘product’ was not known.  However, in the early 2000’s it became clear that clarity was required; that the meaning of the suitability obligation and how it manifested in the context of the then prevailing securities markets dictated the explicit enunciation of a ‘know your product’ obligation on the part of dealers and advisers.


A best interests duty might affect the structure of the industry, its practices and civil and regulatory liability exposures.  Do we have to know all of the possible ramifications before the addition to the existing duties is made explicit, and then deal with them in regulatory policies and regulations?  The duties of acting ‘fairly, honestly and in good faith’ were not similarly rope-fenced, and there is no good reason to do so now.  In any event, bit by bit, Judges (and even dealers and advisers) have begun the interpretation of a best interests duty in specific Court cases (see my Comment piece of August 2014).  The securities industry is only harming its own reputation and needlessly alienating clients, the investing public and securities regulators in fighting the obvious future. 



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