Industrial Alliance Securities Inc. (“IAS”) offers a wide range of products and services to individuals, companies and institutional investors. In the context of its varied activities, IAS is committed to ensuring that the interests of its customers always have precedence. Moreover, as a securities brokerage firm and member of IIROC, IAS must ensure effective management of any situation which could give rise to a conflict of interest.
The organizational structure of IAS is designed to effectively control conflicts of interest:
The Research Department is partitioned in a part of the branch where only authorized persons have access via a magnetic card. Accordingly, Retail Representatives and members of the Corporate Finance Department have no access to confidential information that may be circulating among analysts;
Employees of the Operations Department are physically separated, so no confidential information can be heard by the representatives at the branch;
IAS declares to its clients the important conflicts of interest about which an investor would expect to be informed;
IAS delivers a protocol of conflict of interest to every new account. Also, the IAS account application form contains a statement of principal which is delivered to every client;
The reference "related issuer’s security" is written on the client’s notice of execution when transactions are done on investment products on which IAS is considered as a related issuer;
A referral arrangement to clients is also given to any client who is referred under such an arrangement. Notice of the referral arrangement is provided to the client in writing before any services are provided to him/her.
Despite the above means of control, no firm or employee is free from conflicts of interest. This policy therefore aims to provide tools to identify, monitor and manage conflicts of interest.
At all times, IAS employees recognize the primacy of client interests. This policy aims to enable them to identify, investigate, appropriately correct or avoid, whenever possible, any situation that could give rise to an actual, potential or apparent conflict of interest. This policy aims to raise awareness among employees with respect to an honest and responsible conduct. Every employee should be concerned, at all times, of potential conflicts of interest and of their impact on the interests of IAS’s clients.
To these ends, this policy provides a definition of what constitutes a conflict of interest and sets out the obligations of IAS employees as to such conflicts. It then provides examples of conflicts of interest that IAS and its employees may face.
The primary objective of this policy is to increase employee awareness with regards to the primacy of client interests.
Precisely, this policy aims to help appropriately identify, prevent and resolve any condition that would constitute a real and potential conflict of interest. This policy also helps determine when and how certain material conflicts of interest that cannot be avoided or resolved should be communicated to the concerned clients.
Employees may need to refer to the following regulations:
IIROC Rules, particularly Rule 42;
Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant Obligations, particularly sections 13.4 and following;
Policy Statement to Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant Obligations, particularly the part pertaining to articles 13.4 and following of the Regulation 31-103;
IIROC Notice 12-0107 – Client Relationship Model – Implementation;
IIROC Notice 12-0108 – Client Relationship Model – Guidance; and
IIROC Notice 12-0109 – Know your client and suitability – Guidance.
A conflict of interest arises when the interests of different people, including those of a client and those of IAS or any of its employees (representatives, directors, officers, partners, staff members, agents) are inconsistent or divergent. A conflict of interest may be real, potential or apparent.
Precisely, an IAS employee is in a conflict of interest when in a situation, of any kind whatsoever, which encourages him (real), could encourage him (potential) or could be perceived as encouraging him (apparent) to act in his personal interest or that of another person, including a person related to him.
Obligations of IAS and its employees regarding conflicts of interest
Obligation to identify conflicts of interest
Conflicts of interest can take many forms and can occur in various contexts. It is impossible to make an exhaustive list of all situations that could give rise to a conflict of interest and all employees of IAS, whether or not registered representatives, must exercise judgment and take all reasonable steps to identify conflicts of interest, whether apparent or real.
Obligation to evaluate the consequences of conflicts of interest
IAS and each of its employees must evaluate the consequences of any real, apparent or potential conflict of interest in order to determine its significance. Employees must be aware of the circumstances leading to conflicts of interest in order to understand how they may affect their relative importance and lead to different measures to avoid or resolve them. All conflicts of interest must be identified and evaluated by employees with the same level of attention. No employee should assume that a situation, activity or way of doing is automatically acceptable or legal, simply because others in the financial services industry act or proceed in this way.
Obligation to notify the Compliance Department
When an employee identifies an actual, potential or apparent conflict of interest, he must notify the Compliance Department, without delay and in writing. The same stands for any other situation which may reasonably be expected to interfere with the employees’ duties and obligations towards IAS or its clients or with their ability to provide them with objective and impartial advice.
Each employee has an obligation to follow up on issues relating to conflicts of interest, by transmitting them to the supervisor. The supervisor who is informed of such a situation must then take the necessary steps to deal with it or to inform the Branch Manager.
Thenceforth, the Compliance Department has an obligation to evaluate the situation and, if necessary, to provide IAS’S senior management members with their recommendations regarding the considered conflict of interest, so that they may take the necessary actions.
Obligation to avoid conflicts of interest
Real, potential or apparent conflicts of interest between IAS or any of its employees and a client that cannot be addressed in a fair, equitable and transparent manner, consistent with the best interests of the client, must be avoided. In such a situation, informing the client of the conflict’s existence and obtaining his consent are not adequate alternatives. This obligation may have as a consequence that the relevant service ceases to be provided or that the business relationship with the client be discontinued.
Obligation to resolve conflicts of interest
The obligation of IAS employees is not limited to identifying conflicts of interest and notifying the Compliance Department of their existence. Employees also have an obligation to resolve conflicts of interest, together with their immediate supervisor or with the Branch Manager and the members of the Compliance Department.
The management of conflicts of interest is based on the fundamental principle of primacy of client interests. In all cases, the real, potential or apparent material conflicts of interest must be resolved in a fair, equitable and transparent manner, consistent with the best interests of the client.
Depending on the circumstances, IAS and its employees must clearly inform affected clients of the general nature and source of a conflict of interest. Such is the case when a client, reasonably placed in the same circumstances, would expect to be informed of the existence of the conflict. This is in addition to any other method used to manage conflicts.
How information should be given to the client may vary depending on situations or circumstances affected by a conflict of interest. The terms of disclosure are defined in consultation with the Chief Compliance Officer.
Disclosure to clients must be manifest and drafted accurately, clearly and explicitly. It should explain the conflict and its potential effect on services to clients.
Disclosure must be made quickly. Wherever possible, it should be done before the product or service associated with the conflict of interest is sold or supplied to the client. If necessary, the information may be transmitted back to the client later.
Some conflicts of interest may involve confidential or commercially sensitive information, or information amounting to inside information under the provisions of securities regulation relating to insider trading, thereby making the disclosure inappropriate. Employees must be sensitive to this problem and notify their supervisor, their Branch Manager or the Compliance Department where appropriate, in order to assess whether other methods can be used to treat the conflict fittingly.
Examples of conflicts of interest
There are several types of conflicts of interest. Although it is not possible to provide an exhaustive list of all conflicts of interest that may arise, the following sections provide examples of real, potential or apparent conflicts of interest that IAS and its employees may face, as well as certain measures to manage said conflicts. Employees must use their judgment to identify any real, apparent or potential conflict of interest that may occur and that is not listed in this policy.
Potential conflicts of interest between clients
Although the following list is not exhaustive, it contains examples of situations where the interests of some clients may conflict:
Late assignment of the response to an order given to one or more clients, hence creating some advantage or disadvantage. Orders must always be pre-stamped and assigned in order to avoid such conflicts of interest;
The preferential allocation of operations for issuance, initial public offerings or private placements to certain portfolios. IAS and its employees must ensure equal treatment of clients. IAS and its employees cannot allow a client to have privileged access to such issuance and private placements;
Mandates are received from clients or competitors whose interests conflict. For example, there may be a conflict between the interests of clients of the Corporate Finance Department, which, depending on the context, may seek the highest price, the lowest interest rates or the most advantageous terms for the issuance of securities, and those of individual clients who purchase said securities. In such a case, IAS and its employees must properly inform individual clients, assess whether the product offered meets their needs and is competitive with other products on the market;
When a customer has guaranteed the obligations of another client’s account.
Employees must ensure they properly inform both clients involved and ensure the protection of their respective interests.
Potential conflicts of interest between a client and an employee
Although the following list is not exhaustive, it contains examples where a client's interests and those of an IAS employee may conflict:
The transmission and/or use of privileged or confidential information. Employees who receive privileged or confidential information, whether from a client or a third party, in the normal course of business or otherwise, shall in no circumstances share this information or use it for their benefit or the benefit of another person;
An employee advises a client to buy, sell or hold a security on which he has a financial or other interest (property right over security, option on the security, commission/remuneration, financial agreement regarding the security, etc.) which may affect his ability to advise clients in an objective and impartial manner. It is necessary to inform the client of this potential conflict of interest before or when making said recommendation;
A conflict of interest may also arise whenever IAS or any of its employees is likely to make a financial gain or to avoid a financial loss at the expense of a client with respect to securities. It is forbidden for employees to give trade orders that conflict with the interests of clients;
The remuneration of IAS or its employees may give rise to real, potential or apparent conflicts of interest. IAS and its employees must verify whether certain remunerative practices, including benefits or compensation, are inconsistent with their obligations to clients. Registered representatives, in particular, should also make sure to avoid multiple transactions involving excessive commissions. Employees, in determining whether a product or service is suitable for the client, must ensure that related costs are fair and are properly communicated to the client;
Entering into a personal financial transaction with a client is prohibited. Among other things, an IAS employee cannot borrow money, extend a loan or credit, or engage in any other similar financial transaction with a client. It is also prohibited for an employee to accept to be a client’s beneficiary or to receive a gift from a client if such appointment or gift is made because of the personal relationship established with the employee in the context of his employment;
An employee gives or receives, directly or indirectly, a benefit, pecuniary or otherwise, that could influence his decisions. Employees are prohibited from placing themselves in such a situation. Some benefits, however, remain acceptable. Benefits that are negligible in value, that do not consist of money or negotiable securities, and which are part of accepted business practices may be acceptable. Such is the case for meals, business gatherings, tickets to events, participation in conferences or souvenirs, provided they are neither significant nor frequent enough to create undue influence. Employees are therefore called to exercise their best judgment and, when in doubt, to contact their supervisor, their Branch Manager or Compliance Department personnel;
No employee shall act as the promoter of any issuer, as defined in the securities regulations;
No employee, alone or with others, shall purchase or otherwise acquire, directly or indirectly, an inoperative company (“shell”) in order to obtain financing on public markets;
IAS may be called upon to act as an underwriter or member of a syndicate for the offering of an issuer’s securities, and its employees are likely to acquire an interest thereof. To avoid any potential conflict of interest, issuance, when aimed at clients of IAS, should be approved by the New Name Committee. Any member of the Committee who has a conflict of interest – that is to say, any Committee member who owns or will own securities of the issuer – must disclose his interest and abstain from voting on the Committee's decision, or otherwise approve any related decision, but he may still participate in discussions relating thereto. IAS’s participation will be first offered to clients and it may only be available to employees once clients no longer have an interest (which may not be before the expiry of a period of 24 hours). Once the client demand fulfilled, IAS’s participation will be first offered to IAS, which will have a right of first refusal to purchase participation in whole or in part. If IAS does not purchase its stake in full, the balance may be purchased by employees and IAS will endeavor to provide the balance of its interest to as many of them.
Potential conflicts of interest between a client and IAS
Although the following list is not exhaustive, it contains examples where a client's interests and those of IAS may conflict:
Potential conflicts of interest may arise due to the IAS’s proximate contact with related or connected issuers. As part of its activities, IAS can purchase or sell securities of connected issuers on behalf of its clients, exercise its discretion to purchase or sell such securities under discretionary management agreements, or make recommendations on them;
Potential conflicts of interest can also arise in the context of relations between IAS and other issuers that are neither connected nor associated, such as trusts, partnerships, host structures or conduits that issue commercial paper backed by assets. This is particularly important if IAS or its affiliates sponsors, conceive, underwrite or invest the securities of such issuers;
IAS may be called upon to act as an underwriter or member of a syndicate for the offering of securities of such issuers. In such a case, to avoid certain conflicts of interest, a restricted list is issued buy the Corporate Finance Department on behalf of IAS. It is forbidden for employees to transact on behalf of IAS for their own account or on behalf of their spouses or persons living under the same roof, the securities of an issuer whose name appears on the Corporate Finance restricted list.
In all situations described above, IAS takes the necessary measures so that regulation is respected and the clients' interests are protected. IAS employees should however remain vigilant and exercise good judgment in order to determine if and when it is reasonable to take additional steps to protect client interests.
Potential conflicts of interest between an employee and IAS
A situation is prone to generate a conflict of interest between an employee and IAS when it may interfere or conflict with the employee’s duties towards IAS or when it may otherwise be capable of impeding the exercise of independent judgment, or jeopardize his duty of loyalty to IAS. Each employee is expected to exercise judgment in order to identify such situations. Although the following list is not exhaustive, it contains examples where an employee's interests and those of IAS may conflict:
An employee engages in outside business activities. Such a situation may give rise to a conflict of interest, particularly because of the compensation received, the duty of loyalty and the time that must be devoted to it. Conflicts of interest may arise when an employee serves on the board of directors of a company. Employees are prohibited from exercising an external activity, hold an interest in any business or participate in any association which may interfere or conflict with their duties towards IAS or that may otherwise be likely to impede their independent judgment. Employees must submit in writing to the Branch Manager their intention to work in another activity by completing the “Other professional activities, officer and director” Form (Appendix 15). The Branch Manager will submit the request to the President, Executive Vice President or Chief Compliance Officer for approval;
No employee shall give transaction orders with regards to his personal account that conflict with the interests of IAS or of its clients, or that could tarnish IAS’s reputation or harm its business;
When an employee is in an important conflict of interest, he must, after notifying in writing the Compliance Department, abstain from voting or making a decision on any matter concerning this situation and avoid influencing the vote or decision relating thereto. He must also withdraw from the meeting for the duration of discussions and from the decision-making process regarding this situation. A reference to the declaration of conflict of interest and to the withdrawal from the meeting is then recorded in the minutes of the meeting;
Personal exchange trading activities conducted steadily during normal business hours are incompatible with the normal functions of an employee. Each employee must devote the time and attention reasonably required for the exercise of his normal duties.
Potential conflicts of interest arising from referral arrangements
A referral arrangement means any arrangement under which a registrant agrees to pay or receive a referral fee, both for the provision of investment products and for financial services. A referral arrangement also covers the provision of a client’s contact details in exchange for a referral fee. Disclosure of the arrangement allows the client to make an informed decision regarding the referral and to assess potential conflicts of interest.
Disclosures to clients regarding the referral arrangement include:
The name of the entity with which the client does business;
The services it can expect to receive from the entity;
Its representative’s main responsibilities towards him;
Restrictions on the category of registration of its representative as appropriate;
Any conditions to which the registration is subject;
The referee’s financial interest;
The nature of any potential or real conflict of interest resulting from the referral arrangement.
The commission sharing agreement signed between IAS and the other party must be approved by the President or Executive Vice President following an audit of the qualities of the person receiving the referral. The person in charge of registration proceeds with the due diligence that is required and keeps a record in the file for consultation and inspection purposes.
Special case of managed or discretionary accounts
Any person exercising discretionary authority in respect of an account must meet the general obligations regarding conflicts of interest mentioned above. Securities regulations establish additional specific standards that must also be followed by any person exercising discretionary authority in respect of an account. These standards are intended among other to prevent or manage specific situations of conflicts of interest, real, potential or apparent.
The fiduciary nature of management services for the benefit of others strengthens, if need be, the importance of identifying conflicts of interest, their prevention or management. Several situations are likely to generate a potential conflict of interest in the case of managed account or of a discretionary account. Although the following list is not exhaustive, it contains examples of potential conflicts of interest in the context of managed or discretionary accounts:
As part of the management of discretionary accounts of its clients, IAS can purchase, sell or make recommendations with respect to the following:
i) Securities of an issuer that it or someone from its group has;
ii) Securities, the investment of which IAS or someone of the same group is involved in;
iii) Securities of a related or connected issuer.
IAS will always act in accordance with the regulations applicable to these transactions and in the best interest of its clients;
Neither IAS nor any of its employees shall negotiate as principal or on behalf of IAS, or knowingly allow a person with whom they have ties or an affiliated broker thereof to make or take steps to ensure that operations are conducted in reliance on information relating to transactions or to be made for a discretionary account or a managed account (Section 18 of IIROC Rule 1300);
As mentioned above, employees are prohibited from using confidential information to perform to their benefit, or to the benefit of an associate or client. Such prohibition has even more resonance in the context of a managed or discretionary account, as the employee already knows what transactions he intends to conduct in the managed or discretionary accounts. Employees should not perform any operation using information on operations executed or to be executed in a managed or discretionary account;
When a portfolio manager uses a portfolio in order to provide a guarantee or loan to himself, to an associate or a related person, he finds himself in a conflict of interest. It is forbidden to provide such a guarantee or loan through the managed or discretionary account (Section 19 of IIROC Rule 1300);
When a portfolio manager purchases securities of an issuer of which he or one of his partners/directors or a person with ties to the manager is a partner, officer or director, he also finds himself in conflict of interest. It is therefore illegal to purchase these securities, unless said purchase is communicated to the client and the client's written consent is first obtained. It should be noted that if the client is an investment fund, communication must be made to each security holder and the consent of each should be obtained (Section 19 of IIROC Rule 1300);
When a portfolio manager uses the portfolio to purchase - or sell - securities held by him, by one of his associates, or by a person related to an investment fund he advises, he is also considered to find himself in a conflict of interest. It is therefore forbidden to use the managed portfolio in order to purchase such securities. However, this does not preclude a person to subscribe for shares of investment funds, or to prohibit an investment fund from purchasing shares of another fund which has the same counselor (Section 19 of IIROC Rule 1300);
When IAS is a manager in respect of a managed account and it conducts operations between the inventory account and the managed account, there is a conflict of interest. Policies must be implemented to ensure that transactions are executed at the best rate and at a fair price, that they conform to the objectives set out for the managed account and comply with regulatory requirements applicable (Section 19 of IIROC Rule 1300).
Special case of analysts and research reports
Any analyst, as well as anyone involved in the process of preparation or approval of research reports or having access to research reports must meet the general obligations regarding conflicts of interest mentioned above. Securities regulations establish other standards to be met by analysts in the publication of research reports or when making recommendations. These standards are the requirements to be met in order to consider that IAS has established adequate procedures to minimize real, potential or apparent conflicts of interest that are more specific to this industry.
Research reports, when poorly managed, can generate a significant amount of conflicts of interest. Analysts are particularly prone to be in situations where their interests conflict with those of their clients and of IAS. Internal controls are necessary to ensure that analysts’ activities are carried with complete independence and diligence. Disclosure of all elements that may affect the independence or objectivity of the analyst when drafting a report is therefore crucial.
For example, it is prohibited to publish a research report on shares/securities of an issuer for which IAS acted as leader for an initial public offering (“IPO”) or a secondary offering for 40 days following the date of closing of the IPO or 10 days following the date of closing of the secondary offering (Section 14 of IIROC Rule 3400).
In a research project, IAS and its analysts should disclose information that could reasonably indicate a potential conflict of interest for IAS or the analyst when making a recommendation with respect to an issuer (IIROC Rule 3400).
IAS should also state in its research reports if, over the last 12 months, the analyst responsible for preparing the report received compensation based on revenues from IAS’s investment banking services (IIROC Rule 3400).
IAS must indicate in its research reports if an analyst has visited the issuer's main facilities and to what extent. IAS should also state whether the issuer has paid or reimbursed the analyst’s travel expenses for the visit (IIROC Rule 3400).
Special case of trading activities
Anyone involved in trading activities must meet the aforementioned general obligations regarding conflicts of interest. Securities regulations establish rules and other specific standards governing trading activities. These rules and other standards aim, among other things, to avoid or manage specific situations of real, potential or apparent conflicts of interest which are related to this industry.