With respect to new products, IIROC notes that it is part of a Dealer Member's gatekeeper responsibilities to review and monitor new products before they are offered to clients. Otherwise, the dealer cannot determine suitability.
IIROC's examined 14 dealers. Two did not have written new product due diligence policies and many of the others were materially deficient. Some of the common deficiencies identified were:
- No clear definition of "new product" that would trigger a review to determine retail and institutional suitability.
- No appropriate level of internal review. At a minimum, the review should include the Chief Compliance Officer and the firm's relevant "subject matter experts" who have knowledge of the product.
- Lack of a framework to ensure that the subject matter experts ask the right questions about the product and receive satisfactory answers.
- Lack of consideration of conflicts of interest (such as a non-arm's length product) and how they should be addressed.
- No analysis of proficiency issues arising that must be addressed to ensure advisors and their supervisors fully understand the product.
- No process to monitor and follow up on customer complaints concerning the product.
- No controls to ensure that all new products are reviewed. The notice states that this should include new products that come into the firm by a transfer or client deposit in addition to products identified by advisors
Principal protected notes
IIROC's review of PPN sales practices was a result of the freezing of the market for asset backed commercial paper in 2008. The review found the following:
- Distribution of the required disclosure to clients was inconsistent. Although dealers stated this was the PPN issuer's responsibility, many dealers did not have a due diligence procedure to ensure that the issuer in fact sent the disclosure.
- Dealers were unable to produce evidence that their clients received notice of monetization (i.e. that a protection event had been triggered affecting the product) as they did not have an agreement with the issuer whereby the issuer would send the notice.
- Key information about products was missing from marketing material.
- There was evidence that the many registered representatives did not understand the risks inherent in the products, particularly for elderly investors holding an investment that might be locked in for as long as ten years. There was no uniformity of training of RRs.
- Client statements did not contain enough information to allow clients to identify their security holdings and monitor their investment.