Regulators have recently observed gaps in compliance with regard to mutual fund dealers’ and representatives’ Know Your Client, Know Your Product and suitability obligations.
The Canadian Securities Administrators (CSA) and the Canadian Investment Regulatory Organization (CIRO) made this observation on December 10, 2025, in a joint Staff Notice 31-368. Their observations stem from a review of 105 firms for compliance with Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant Obligations (Regulation 31-103).
Staff Notice 31-368 is entitled Client-Focused Reforms: Review of Registrants' Know Your Client, Know Your Product, and Suitability Determination Practices and Additional Guidance. This is Phase 2 of the Client Focused Reforms (CFRs). These Phase 2 reforms came into effect on December 31, 2021.
During Phase 1, the CSA and CIRO scrutinized industry practices with respect to conflicts of interest (see subheading below, On the heels of 2023). These Phase 1 reforms to Regulation 31-103 came into effect on June 30, 2021.
These two phases had the effect of increasing the obligations of registered firms and individuals.
Serious breaches
In joint Staff Notice 31-368 on the results of their most recent review, the regulators report that in some cases they observed deficiencies that they characterize as serious.
In addition to mutual fund dealers, exempt market dealers, and investment dealers, they also reviewed the practices of investment fund managers, portfolio managers, and restricted portfolio managers.
The CSA and CIRO note that some companies have devoted significant resources to adapting to the reforms, while others have not yet updated their processes. “For firms where compliance deficiencies were noted, we required each firm to take corrective action and resolve the deficiencies within a reasonable time frame. However, in some instances, the non-compliance issues were significant enough to warrant further regulatory action,” reads the summary of joint Notice 31-368.
On the heels of 2023
In their joint Staff Notice of December 10, the CSA and CIRO describe their approach as an extension of the guidance they published in August 2023 in their joint Staff Notice 31-363, entitled Client-Focused Reforms: Review of Registrants' Conflicts of Interest Practices and Additional Guidance.
In 2023, regulators reviewed the conflict of interest practices of 172 firms. During their review, they found deficiencies in more than half of the firms, as reported by Insurance Portal on August 9, 2023.
They found, for example, that 66% of offenders had inadequate policies and procedures for dealing with conflicts of interest. Regulators specified that only 37 companies had shown no deficiencies in their management of conflicts of interest.
Impossible to generalize
It isn’t possible to generalise the results in the same way as the initial Conflicts of Interest sweep in 2023 without sacrificing their accuracy or relevance.
– Ilana Kelemen, CSA spokesperson
The joint notice of December 10, 2025 does not present such statistics. At the request of Insurance Portal, the CSA explained why. Their spokesperson, Ilana Kelemen, noted that Phase 2 reviews of Client Focused Reforms were conducted in all CSA and CIRO jurisdictions during 2023 and 2024.
" We have not broken down the number of firms further or otherwise given metrics in the notice to quantify the extent of the compliance given the complexity of these reviews, and the variance between firms for specific reasons. As such, it isn’t possible to generalise the results in the same way as the initial Conflicts of Interest sweep in 2023 without sacrificing their accuracy or relevance,” Kelemen stated in her email response.
However, Kelemen says that regulators have still provided a significant level of detail on the issues identified during the firm reviews. “(We) also noted generally how frequently these issues were observed,” stated the CSA spokesperson.
In Staff Notice 31-168, regulators use terms such as “some” or ‘several’ to describe the frequency of non-compliance they observed among companies and their registrants. They accompany the issues raised with a list of recommendations called “guidance.”
The list of issues is long in this 40-page document, most of which is devoted to four sections:
- Knowyour client (KYC)
- Knowyour product (KYP)
- Suitability determination
- Compliance and training
The Insurance Portal has drawn some examples from this in the following sections.
Inadequate risk profile
In the section on KYC, regulators reveal that many firms did not have processes in place to collect sufficient information about clients' risk tolerance and risk capacity and use that information to establish their risk profiles.
Some registrants continued to assess only the client's risk tolerance rather than their risk capacity, according to the joint notice. “Additionally, some registrants adequately updated their risk profile process for new clients but did not follow that updated process for existing clients when updating KYC,” the notice states.
However, risk capacity has become a central element of the risk profile in Phase 2 of the Client Focused Reforms, the CSA and CIRO note.
In some cases, the registrants had not separately considered risk tolerance and risk capacity, “leading to inaccurate risk profiles,” the regulators point out.
Not enough information
The regulators also point out that some registrants did not collect sufficient information about clients’ financial circumstances.
In this regard, the regulators write that several registrants had not collected sufficient information on net financial assets, net worth, and annual income, or did so in a way that “lacked meaningful detail to make a suitability assessment in the cases reviewed.”
In their recommendations, the regulators add in their joint notice that registrants should exercise professional judgment to determine whether they have collected sufficient details about their clients.
Concentration in illiquid securities
These findings and additional guidance are intended to help registrants implement more efficient processes.
– Stan Magidson, CSA Chair
In the third section, which deals with suitability for the client, the joint notice reveals a lack of controls over concentration and liquidity at certain firms. It states that they had failed to establish or apply thresholds or limits on the concentration of securities or the liquidity of the client's portfolio.
Some Exempt Market dealers were “selling highly concentrated or illiquid investments without proper thresholds in place to assess the overall exposure that clients have to such investments,” the notice states. The joint notice also mentions that some investment dealers had not implemented any mechanisms to identify, monitor, and control illiquid securities held by clients.
The regulators write that the more concentrated a client's portfolio is in a particular security or sector, the more measures the firm should take to demonstrate that the investment is suitable for the client and their interests.
The regulators made several other recommendations on various issues they observed during their reviews. “These findings and additional guidance are intended to help registrants implement more efficient processes that are tailored to their business, further enabling them to be compliant with regulations,” stated Stan Magidson, CSA Chair and Chair and CEO of the Alberta Securities Commission, in the press release accompanying the joint notice.
