CanadaNational Instrument 31-103, suitability determination
National Instrument 31-103, s. 13.3
In force since .
An AI sector rules rule binding private bodies.
- 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 registrant, other than where the client is a registered firm, a Canadian financial institution or a Schedule III bank, other than a registered dealer buying or selling securities for the client only as directed by a registered adviser acting for the client, and other than a dealer or dealing representative relieved by Part 3 or Part 9 as a member of a self-regulatory organization: before you open an account for a client, purchase, sell, deposit, exchange or transfer securities for a client's account, take any other investment action for a client, make a recommendation to a client or exercise discretion to take any such action, determine on a reasonable basis that the action is suitable for the client and puts the client's interest first (section 13.3(1), (3) and (4)).
- Base the suitability determination on the client's information collected under section 13.2, your assessment or understanding of the security consistent with section 13.2.1, the impact of the action on the client's account including the concentration of securities within the account and the liquidity of those securities, the potential and actual impact of costs on the client's return on investment, and a reasonable range of alternative actions available to you through the registered firm at the time you make the determination (section 13.3(1)(a)).
- Review a client's account and the securities in it to determine whether the criteria in subsection 13.3(1) are met, and take reasonable steps within a reasonable time, after a registered individual is designated as responsible for the account, after you become aware of a change in a security in the account or in the client's information that could result in the security or account not satisfying those criteria, and after you review the client's information under subsection 13.2(4.1) (section 13.3(2)).
- Carry out a client's instruction to take an action that does not satisfy subsection 13.3(1) only if you have informed the client of the basis for the determination that the action will not satisfy it, recommended an alternative action that does, and received recorded confirmation of the client's instruction to proceed (section 13.3(2.1)).
If you get it wrong
Criminal exposureYes
Criminal exposure note
Contravening Ontario securities law is an offence under clause 122(1)(c) of the Securities Act (Ontario), punishable on conviction by a fine of not more than $10 million or imprisonment for a term of not more than five years less a day, or both.
Penalty structure
Administrative penalty of not more than $5 million for each failure to comply with Ontario securities law, under the Securities Act (Ontario).
- Rule
- Per violation only
- As of
- Currency
- CAD
- Per violation unit
- Violation
- Per violation amount
- 5,000,000
Who enforces it
Enforcement body
The securities regulatory authority of each province and territory, listed in Appendix C of National Instrument 14-101 (in Ontario, the Ontario Securities Commission)
What this law does
Section 13.3 of National Instrument 31-103 requires a registrant, before it opens an account for a client, purchases, sells, deposits, exchanges or transfers securities for a client's account, takes any other investment action for a client, makes a recommendation to a client or exercises discretion to take any such action, to determine on a reasonable basis that the action is suitable for the client and puts the client's interest first.
The factors for suitability are the client's information collected under section 13.2, the registrant's assessment or understanding of the security consistent with section 13.2.1, the impact of the action on the client's account including the concentration of securities within the account and the liquidity of those securities, the potential and actual impact of costs on the client's return on investment, and a reasonable range of alternative actions available to the registrant through the registered firm at the time the determination is made.
A registrant must review a client's account and the securities in it to determine whether the criteria are met, and take reasonable steps within a reasonable time, after a registered individual is designated as responsible for the account, after the registrant becomes aware of a change in a security in the account or in the client's information that could result in the security or account not satisfying the criteria, and after the registrant reviews the client's information under subsection 13.2(4.1).
A registrant may carry out a client's instruction to take an action that does not satisfy the criteria only if it has informed the client of the basis for the determination, recommended an alternative action that satisfies the criteria and received recorded confirmation of the client's instruction to proceed. Section 13.3 does not apply if the client is a registered firm, a Canadian financial institution or a Schedule III bank.
Section 13.3 does not apply to a registered dealer in respect of a client if it purchases or sells securities for the client only as directed by a registered adviser acting for the client. Section 13.3.1 provides that section 13.3 does not apply to a registrant in respect of a permitted client that has requested in writing that the registrant not make suitability determinations, if the client is not an individual or, if the client is an individual, the account is not a managed account.
The text current to relieves a dealing representative of an investment dealer that is a member of IIROC from section 13.3, if the individual complies with the corresponding IIROC provisions that are in effect. It relieves a dealing representative of a mutual fund dealer that is a member of the MFDA from section 13.3 on the same condition as to the corresponding MFDA provisions. The 2019 amending instrument replaced subsection 13.3(1). It also added section 13.3.1.
The Canadian Securities Administrators provided that the amendments other than those on conflicts of interest and relationship disclosure information would take effect on . In Ontario a registrant is a person or company registered or required to be registered under the Securities Act.
The Canadian Securities Administrators stated in 2019 that amendments to National Instrument 31-103 would be implemented as a rule in each of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island and Yukon. In Québec the amendments were to be adopted as a regulation made under section 331.1 of the Securities Act (Québec). In Saskatchewan they were to be implemented as a commission regulation.
Section 143 of the Securities Act (Ontario) lets the Commission make rules prescribing requirements for registrants, including standards of practice and business conduct in dealing with clients and requirements for the prevention or regulation of conflicts of interest. The Act defines regulations as the regulations made under the Act and, unless the context otherwise indicates, the rules.
The Act defines Ontario securities law as the Act, the regulations and, in respect of a person or company, a decision of the Commission, the Tribunal or a Director to which the person or company is subject. A person or company that contravenes Ontario securities law is guilty of an offence and on conviction is liable to a fine of not more than $10 million or to imprisonment for a term of not more than five years less a day, or to both.
The Act provides for an order requiring a person or company that has not complied with Ontario securities law to pay an administrative penalty of not more than $5 million for each failure to comply. The offence and penalty amounts above are those of the Securities Act (Ontario), and National Instrument 14-101 lists a separate securities act for each other province and territory.
Guidance on this law
How the bodies that enforce this law read it. Guidance binds nobody by itself, so LexLint never raises a finding from it; the duty is this law's.
- CSA Staff Notice 31-342, guidance for portfolio managers regarding online advice, the Canadian Securities Administrators
When LexLint raises it
When your app profile says your app provides financial services or makes high-risk automated decisions.