CanadaCIRO Rule 3400, suitability determination
In force since .
An AI sector rules rule binding private bodies.
- Enforcement body
- Canadian Investment Regulatory Organization (CIRO)
- Instrument type
- a regulation made under an act
- Obligation class
- Governance
- Audit expectation
- continuous
- Who audits it
- Self
As of .
What it requires
- It reaches you if you are a Dealer Member of the Canadian Investment Regulatory Organization (CIRO), which Canada's provincial and territorial securities regulators recognize as a self-regulatory organization, or an Approved Person of one, because a hearing panel that finds a Dealer Member or an Approved Person has contravened a CIRO requirement may impose sanctions on it (Rules 8209 and 8210), and the Rules exclude a Mutual Fund Dealer Member from the term Dealer Member: before you purchase, sell, withdraw, exchange or transfer-out securities or precious metals bullion, or transact in derivatives for a retail client's account, take any other investment action for a client, make a recommendation or exercise discretion to take any such action, determine on a reasonable basis that the action is suitable for the retail client, based on the client's information, your assessment of the security or derivative under Rule 3300, the impact on the account including concentration and liquidity, the impact of costs on the client's returns and a reasonable range of alternative actions, and that it puts the retail client's interest first; this does not apply to an order execution only account or a direct electronic access account (Rules 3402(1) and 3404(1)).
- Review the retail client's account and the securities, derivatives or precious metals bullion in it to determine whether those criteria are met, and take reasonable steps within a reasonable time, after a deposit or transfer-in, the designation of a new Registered Representative, Portfolio Manager or Associate Portfolio Manager, a change in the client's information or in a security or derivative in the account, or your review of the client's information under subsection 3209(4) (Rule 3402(2)).
- Determine on a reasonable basis, putting the retail client's interest first, that it is suitable for the client to continue having an account with you and that the scope of products, services and account relationships the client has access to within the account is suitable (Rule 3402(3)).
- Determine on a reasonable basis that the retail client's account portfolio of investments that would result from the investment action you take, recommend or exercise discretion to take is suitable for the client and puts the client's interest first (Rule 3402(4)).
- Carry out a retail client's instruction to take an action that does not satisfy the criteria only after you have informed the client of the basis for the determination and advised the client against proceeding, recommended an alternative action that satisfies the criteria, and received recorded confirmation of the client's instruction to proceed (Rule 3402(5)).
- For an institutional client, make a suitability determination before you accept any order and before you make a recommendation, determine whether the client is sufficiently sophisticated and capable of making its own investment decisions to fix the level of suitability owed, and determine, putting the institutional client's interest first, that continuing to have an account and the scope of products, services and account relationships are suitable, subject to the exemptions in Rule 3404 (Rule 3403(1), (2) and (4)).
- Do not delegate to any other person the responsibility for suitability assessment obligations, which rests primarily with the Registered Representative, Portfolio Manager or Associate Portfolio Manager assigned to the client account (Rule 3406).
If you get it wrong
Penalty structure
CIRO states that a Dealer Member found to have violated CIRO rules may be fined up to a maximum of $5 million per contravention or an amount equal to three times the profit made, or loss avoided.
- Rule
- Per violation only
- As of
- Currency
- CAD
- Per violation unit
- Violation
- Per violation amount
- 5,000,000
What this law does
CIRO Rule 3400 requires a Dealer Member, before it purchases, sells, withdraws, exchanges or transfers-out securities or precious metals bullion, or transacts in derivatives for a retail client's account, takes any other investment action for a client, makes a recommendation or exercises discretion to take any such action, to determine on a reasonable basis that the action is suitable for the retail client and puts the retail client's interest first.
The suitability factors are the retail client's information collected under the know-your-client rule, the Dealer Member's assessment of the security or derivative under Rule 3300, the impact of the action on the retail client's account including concentration and liquidity, the potential and actual impact of costs on the client's returns, and a consideration of a reasonable range of alternative actions available at the time of the determination.
A Dealer Member must review the retail client's account and the securities, derivatives or precious metals bullion in it, and take reasonable steps within a reasonable time, after events that include a deposit or transfer-in, a change in the client's information and a change in a security or derivative in the account.
A Dealer Member must determine on a reasonable basis, putting the retail client's interest first, that it is suitable for the client to continue having an account with the Dealer Member and that the scope of products, services and account relationships available to the client within the account is suitable.
A Dealer Member must also determine on a reasonable basis that the retail client's account portfolio of investments that would result from the investment action it takes, recommends or exercises discretion to take is suitable for the client and puts the client's interest first.
A Dealer Member that receives a retail client's instruction to take an action that would not satisfy the determination may carry it out only if it has informed the client of the basis for the determination and advised against proceeding, recommended an alternative action that satisfies the determination, and received recorded confirmation of the client's instruction to proceed.
For an institutional client a suitability determination must be made before any order is accepted and before a recommendation is made, and the Dealer Member must determine whether the client is sufficiently sophisticated and capable of making its own investment decisions in order to determine the level of suitability owed. Rule 3400 does not apply, other than clauses 3402(3)(i) and 3403(4)(i), to an order execution only account or a direct electronic access account.
Compliance with the suitability determination requirements is primarily the responsibility of the Registered Representative, Portfolio Manager or Associate Portfolio Manager assigned to the client account, who must not delegate the responsibility for suitability assessment obligations to any other person.
A Dealer Member must comply with all relevant Corporation requirements, securities laws and applicable laws that are applicable to its activities, under section 1406 of the Investment Dealer and Partially Consolidated Rules. Under the Investment Dealer and Partially Consolidated Rules the term Dealer Member has the meaning given in the CIRO General By-law and excludes a Mutual Fund Dealer Member.
CIRO states that a Dealer Member found to have violated CIRO rules may be fined up to a maximum of $5 million per contravention or an amount equal to three times the profit made, or loss avoided. The Investment Dealer and Partially Consolidated Rules replaced the IIROC Rules and became effective on . The Client Focused Reforms' enhancements to the know-your-client, know-your-product and suitability determination requirements came into force on .
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