COVID-19: five issues investment dealers should consider

The COVID-19 pandemic has had a severe impact on the capital markets. The market downturn has been deep and swift. These unfortunate circumstances increase the prospect of investor loss litigation and regulatory action for investment dealers and advisors. While the situation continues to evolve and dealers adapt to the new reality of working remotely and a bear market, here are five key issues that dealers should consider with a view to mitigating exposure.

1. Client complaint and litigation risk

With any market correction, dealers should expect to see an increase in client complaints and litigation as clients focus on the decline in the value of their portfolios. Drawing on experience from the market corrections of 2001 and 2008, taking the following steps will help mitigate or eliminate client complaints:

1. Frequent and meaningful personal contact. Advisors are encouraged to proactively, meaningfully and frequently communicate with their clients.¹ Email blasts of useful resources are helpful, but tailored emails or telephone calls are even better. Conversations may be difficult given the losses that clients are likely facing, but documented and frequent individual contact will help avoid complaints.
2. Presentation of reasonable alternatives. Depending on a client’s investment time horizon, holding an existing portfolio may be the best strategy. However, this advice may not be suitable for all clients. Advisors should consider whether there are aspects of a portfolio that can be adjusted and discuss all reasonable options with their clients.² Advisors should encourage their clients to speak with their tax advisor to consider the impact of any capital losses.
3. Vigilant note-taking. During these emotionally difficult times, it is easier for messages to be mis-communicated or misconstrued. Advisors should be even more vigilant about note-taking to ensure they maintain a clear record of what has been conveyed to their clients.
4. Careful portfolio review. The markets are evolving rapidly. If changes to a client’s portfolio or strategy are warranted, the advisor should ensure that the rationale for these changes has been carefully considered, discussed and documented.
5. Proactive review of security risk-ratings. A change to the risk rating of a particular security or class of securities may be necessary in light of the drastic market changes. Dealers should continue to monitor and evaluate risk-ratings, and update where required.
6. Contact with regulators. Dealers should remain in close contact with their regulator or self-regulatory organization to stay on top of evolving issues and expectations. Regulators have already begun to consider new approaches to conducting reviews and assessments. We expect that regulatory approaches will continue to change in response to the pandemic and open lines of communication will assist dealers in knowing what to expect.

2. Material contract review

Key client-facing agreements may contain clauses that have been triggered as a result of the pandemic. For example, depending on the language used, clauses relating to severe and unforeseen market circumstances may now be relied upon. For details, see our bulletin on COVID-19 and force majeure clauses.

3. Remote client and account servicing

Social distancing requirements prevent advisors from having face-to-face meetings with clients. IIROC has acknowledged that dealers will need to support remote work, but expects that minimum regulatory requirements will continue to be met (for example, confidentiality and supervision requirements).³ Dealers should consider whether they have policies in place to support scanned signatures instead of original signatures, and review regulatory guidance with respect to electronic signatures.⁴ While original (wet ink) signatures may be required for beneficiary designations (including on RRSPs) and powers of attorney, scanned signatures may be sufficient evidence that a client account agreement form has been accepted and agreed to, provided the dealer has a reasonable basis to believe the signature is authentic and reflects the client’s acceptance of terms. Receipt of a scanned contract from an email address known to be the client’s or a telephone conversation with the client confirming that the agreement has been executed could be considered. Dealers may also wish to consider making exceptions for signature witnessing requirements (outside of beneficiary designations or powers of attorney/trading authorities) where there is no legal requirement that a signature be witnessed.

4. Enhanced gatekeeper obligations

The pandemic has created opportunities for fraudsters to prey on investors’ fears. The CSA has already begun to warn investors about companies claiming to have products or services that will prevent, detect or cure COVID-19.⁵ Cyber-attacks are also expected to increase during this period of uncertainty (click here for our latest insights on data security and pandemic planning). Dealers must remain vigilant about “too good to be true” investment opportunities and the possibility of pump and dump securities fraud schemes. It is important for dealers to monitor reputable sources of information on COVID-19 and remind their advisors to be cautious about investment or cyber schemes.⁶

5. Fee sensitivity

Clients may determine they need to liquidate some or all of their investments, either to reflect their personal risk tolerance or to support immediate cash flow needs. In accordance with their CRM2 obligations, advisors should review their fee schedules and clearly communicate to clients the fees, commissions, taxes and other transaction costs that may be associated with a decision to liquidate. Dealers may also wish to review any portfolio value thresholds for fee-based accounts and consider whether temporary exceptions may be warranted from a client-relationship perspective.

_________________________

¹ AMF News Release: COVID-19 – AMF pursues its mission (March 19, 2020) (https://lautorite.qc.ca/en/general-public/media-centre/news/fiche-dactualites/covid-19-lautorite-continue-de-remplir-sa-mission/).

² AMF News Release: COVID-19: information you need to know about travel insurance and investments (March 24, 2020) (https://lautorite.qc.ca/en/general-public/media-centre/news/fiche-dactualites/la-covid-19-et-lassurance-voyage/).

³ IIROC Notice 20-0044: Guidance on COVID-19 (https://www.iiroc.ca/documents/2020/edc14745-f303-47ee-aae6-b02b450ad09b_en.pdf). See also MFDA Bulletin #0815-M – Coronavirus disease (COVID-19) (https://mfda.ca/bulletin/bulletin0815-m/).

⁴ IIROC Guidance Note 19-0051: E-Signatures (https://www.iiroc.ca/documents/2019/4926ed1b-b31f-4a48-ae84-7aff9fa05363_en.pdf).

⁵ CSA News Release: Canadian securities regulators warn public of coronavirus-related investment scams (March 19, 2020) (https://www.osc.gov.on.ca/en/NewsEvents_nr_20200319_csa-warn-public-coronavirus-related-investment-scams.htm).

⁶ MFDA Bulletin #0816-M – Cybercriminals Currently Exploiting the COVID-19 Pandemic (March 19, 2020) (https://mfda.ca/bulletin/bulletin0816-m/).

Read all our coronavirus-related updates on our COVID-19 guidance for organizations resource page.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2024 by Torys LLP.

All rights reserved.