On December 18, 2014, the Investment Industry Regulatory Organization of Canada (IIROC) released its final Guidance Note 14-0299 (the Guidance), which sets out suggested principles and practices that should be followed by Dealer Members conducting due diligence in public securities offerings. Although IIROC has made some clarifications in the Guidance, the structure, substance and content are generally consistent with what it proposed in March 2014 when it published an initial draft for comment. IIROC’s stated intention with the Guidance is to promote more consistent and enhanced underwriting due diligence by Dealer Members.

The Guidance describes common due diligence practices and suggestions for Dealer Members involved as underwriters of public offerings by setting out and discussing in detail nine “principles” and for each principle, some suggested practices:

  1. Dealer Members should have written policies and procedures in place relating to the underwriting process, with effective oversight of these activities. Effective due diligence is said to constitute going beyond prescriptive checklists alone, as such an approach is considered to be superficial and often incomplete.
  2. Dealer Members should have appropriate due diligence plans that reflect the context of the offering and the level of due diligence that will be reasonable in the circumstances.
  3. Due diligence “Q&A” sessions, available to the full syndicate, should be held at appropriate points, which sessions should be reflected in the applicable due diligence plan. Appropriate follow up should be conducted.
  4. Business due diligence should be performed  to ensure the Dealer Member understands the business of the issuer and the key internal and external factors affecting the issuer’s business. Dealer Members should determine whether and when certain material facts should be verified independently. Red flags should be identified and dealt with appropriately, which may mean
    consideration of additional prospectus disclosure.
  5. Underwriters’ legal counsel may perform supervised legal due diligence, but matters that pertain to business due diligence should be reviewed by representatives of the Dealer Member.
  6. Reliance on expert opinions is a contextual determination and Dealer Members should take into account the qualifications, expertise, experience, independence and reputation of the expert in order to decide whether or not to rely on the expert’s report or opinion.
  7. Syndicate members are each subject to the same liability under securities legislation and should satisfy themselves that the lead underwriter has adequately carried out the required due diligence investigation.
  8. Each Dealer Member that is part of a syndicate should document the due diligence process to demonstrate compliance with its policies and procedures, IIROC requirements and applicable securities laws.
  9. A Dealer Member’s execution of the prospectus certificate signifies that it has participated in the due diligence process through appropriate personnel and internal processes consistent with such member’s IIROC required compliance framework. This reinforces the need for a comprehensive and effective supervisory framework to ensure compliance with policies and procedures, IIROC requirements and applicable securities laws.

IIROC suggests that underwriters should view the principles and the common practices set out in the Guidance in light of the contextual factors of their business and each offering. IIROC acknowledges that due diligence is a fluid and evolving process and that the principles and common practices may not be applicable or appropriate in all cases. Underwriters must not put “form over substance” and IIROC expects Dealer Members to exercise professional judgment to determine the appropriate level of due diligence in each set of circumstances.

In response to comments submitted in respect of the March draft Guidance, and in particular, concerns that the Guidance may create new requirements in respect of what constitutes a “reasonable” due diligence investigation, IIROC reiterated that   the Guidance (i) describes common practices and suggestions which may not be relevant or appropriate in every case, (ii) is not intended as a minimum or maximum standard of what constitutes reasonable due diligence, and (iii) does not, and is not intended to, create new legal obligations or modify existing ones. IIROC believes that the Guidance identifies only appropriate matters as being mandatory and that many of the statements concerning Dealer Members’ policies and procedures are appropriately prescriptive with ample room for Dealer Members to reflect the contexts of their businesses and the offerings. IIROC suggests that the level of detail included in the Guidance is provided in order to deliver practical guidance on the subject.

The Guidance was prepared specifically in relation to the participation of Dealer Members in public offerings, a fact that was further clarified in the final version of the Guidance. IIROC has agreed that different considerations apply in respect of Dealer Members’ participation in private placements.

The Guidance has been provided to promote more consistent and enhanced underwriting due diligence by Dealer Members. Despite the multiple references in the Guidance to the contextual nature of underwriter due diligence and the hesitation to refer to due diligence “standards”, more robust due diligence processes should be expected. Dealer Members will have to review their policies and procedures in light of the Guidance, which IIROC has indicated will inform its compliance reviews of Dealer Members. It is obvious that IIROC intends for Dealer Members to significantly enhance their compliance procedures and written policies and procedures around due diligence practices for public offerings. This can be expected to impact on a Dealer Member’s compliance program, including the duties of and oversight provided by the Chief Compliance Officer and UDP of the Dealer Member.

Other Author

Linda Tu


Securities, Capital Markets and Public Companies
Investment Management