IIAC Retail/Integrated Member Considerations Checklist for CRM2 Market Value Rule
The impact of the CRM2 market value requirements will vary from firm to firm; service provider to
service provider; and, if applicable, carrying broker to carrying broker. Below is a checklist of
considerations members may use to prepare for and check their readiness for the CRM2 market value
requirements. All preparations – development, testing, data cleansing and statement notation additions
– should be in place no later than December 31, 2015.
 Read the IIROC market value requirements and related FAQs
Where do I find them? For the definition of “market value”, see IIROC Rule 200.1(c); for further
elaboration, see IIROC FAQs #s 13, 14, and 15.
 Understand the IIROC decision tree approach to security market valuation
What is this? The IIROC market value definition is a series of decision points. IIROC expects this
cascading process to be reflected in firms’ market valuation policy and/or firms’ historic/stale
matrix. Your policy or matrix sets out the valuation techniques to be used as the time since the date
of information used to value a security lengthens. Below is a high-level summary of the
requirements as a rule of thumb:
 1. Market value for liquid securities classes with adjustments, and after x days stale, then…
Non-liquid valuation options
 2.a Value using inputs other than published price quotations, and if none, then…
 2.b Value using unobservable inputs/assumptions, and, if none, then…
 2.c Cost, if data is lacking and/or there are many possible values, and if none, then…
No-value options
 3. Non-determinable (with notice), and after x months, or other information, then…
 4. $0.
 Engage early with service providers/carrying brokers and any of their user groups to understand
current functionality and planned changes
Why? IIROC staff are clear that, while there is recognition there will be some “growing pains” when
rule changes are implemented, examiners will expect firms to be knowledgeable about how their
service provider and carrying broker, if applicable, will help firms meet the requirements.
 Find out what functionality your service provider and/or carrying broker will provide and
understand the options available to your firm (for example, stale price logic to define current
pricing, rules to distinguish different security classes/markets, wording for required statement
notificationsi, etc.). Get a sense of any additional development or manual work that may be
required internally to meet the requirements. There may need to be agreement on the
approach to certain functionality aspects among all users of a common service provider or
carrying broker.
 Understand data feed pricing parameters by asking your service provider or carrying broker for
details about the data feeds you receiveii. Engage with other users of shared providers/carrying
brokers to understand the options that may be available as a group with the data vendors.
Note: Do not act on this checklist without professional advice.
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 Learn what automated reports your service provider or carrying broker might set up to help
assess and track variances and tolerances. This will help your firm assess and refine your market
valuation processes over time as required.
 Analyse client holdings, to assess potential “stale-dated” securities, bid/ask/last tolerances and
the overall nature of the securities held
How? Extract, or request your service provider or carrying broker for an extract of, data regarding
current holdings, showing last traded price, bid and ask, the aging of the security prices as well as
general characteristics about the security holdings. See Attachment 1 for a suggested model for
your analysis of the tolerance levels of bid and ask prices as compared to last.
 Prepare your periodic market value (tolerance) testing plan
Why now? The time you spend analyzing your data to see how much is out of date, variations by
asset category, etc. can be a good time to start developing a periodic review plan and thinking about
your firm’s aging matrix.
 After engaging with your service provider and/or carrying broker, you will know if they will be
using ‘bid’/‘ask’ for liquid securities or ‘last traded price’iii. If ‘last traded price’, your firm is
expected by IIROC to assess periodically that the ‘last traded price’ results in security market
values that are materially the same as last bid or ask. The frequency of this periodic review may
be a longer period (up to a year) while you complete other market valuation improvements but
could be shortened (say, six months) if differences are material or your service provider or
carrying broker has a review application that will allow you to focus quickly on problem areas.
 Firms also could consider what satisfactory percentages might be for a last traded price
remaining “comparable” to last bid/ask. For liquid securities, it might be 10%; a higher
tolerance might be appropriate for some part of the remainder (e.g., where the absolute price is
low, say $10 or less, a higher percentage would apply).
 Your service provider or carrying broker will be able to identify the flags that you may be able to
use to signal issues where you need to focus. Liquid/traded securities could be set at a five-day
notice that should cover most unusual situations including holidays adjacent to weekends. For
harder-to-value securities, you may be able to set flags to start requiring review after, say, a
year for a new issue. For other securities in your market value aging matrix, your firm could
start at six months and then reduce with experience to quarterly and then, if new data sources
are found, monthly.
 Set timelines for achieving the new market value definition date of December 31, 2015
What are the key milestones? While the list below is provided in chronological order, your firm may
also want to work back from the final implementation date to ensure your firm is able to meet the
requirements.
1. [insert date] – Date by which your service provider (and carrying broker) need your
decision(s)/sign-off on any systems solution for market value capture and to reflect “no active
market” and “not determinable” notices.
Note: Do not act on this checklist without professional advice.
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2.
3.
4.
5.
6.
[insert date] – Date for providing customization decisions to your service provider and
carrying broker.
[insert date] – Date for any testing to begin.
[insert date] – Date to start amending/cleaning up data (Note: This can start now).
[insert date] – Date to implement (with contingency).
[December 31, 2015] – Last date to implement.
 Update or develop a securities market value policy
How? Identify processes specific to your firm, including who is responsible for approvals or
activities, and how your firm will evidence performance and supervision. Look at your current policy
or consider the IIAC’s Securities Market Valuation Policy and Procedures Considerations. (Note:
IIROC’s 2014/15 Annual Consolidated Compliance Report suggests dealers consider, when drafting
procedures, not just the minimum requirements of Internal Control Policy Statements 2 – 8, but also
sources that “may suggest a higher standard, including authoritative literature, comments made by
internal or external auditors or by industry regulators, as well as industry practices”. Dealers can
expect to be asked about this and may want to have an answer ready (business model, size, etc.).iv
 Learn what specific valuation approaches under the IIROC market value decision tree may be
right for your firm. As large firms have a greater capacity in-house to value securities compared
to smaller firms, they may do more estimation (categories 2.a, 2.b, and 2.c above) than smaller
firms. A higher proportion of hard-to-value securities in online accounts may lead to resource
challenges and different approaches. Nevertheless, as a minimum all firms are expected to have
an approach covering the following:
Valuation Category
1. Liquid markets
(exchange-traded
securities, mutual
funds)
Examples
E.g., shares and other exchange-traded securities, funds (Note: It is not easy
to define’ liquid’, as it can require looking at trading frequency, volumes, etc.
Firms’ common data provider feeds may be the source of all quoted prices –
but firms must check if any are stale-dated based on their aging matrix.)
Less liquid markets
2.a Inputs other than
published price
quotes
Restricted shares linked to underlying non-restricted shares (with or without a
discount)
Physical securities linked to underlying security (with or without a discount)
Grid to price OTC fixed income securities (for firms that have such desks)
Non-exchange-traded private security linked to publicly-traded security (with
or without a discount)
Discount below national government debt for subnational debt
“Historic” or “stale” price unless new negative information is known
Option pricing model
E.g., new issues, flow-through shares
Flow-through shares
2.b Unobservable
inputs/
assumptions
2.c Cost
Note: Do not act on this checklist without professional advice.
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 Identify acceptable data sources. The obvious ones are the data feeds from data aggregators
such as SVC, IDC, etc. The data aggregators provide information on their sources and process,
and you can obtain documentation regarding these from your service provider.
Note: It is likely that, at least at inception, these feeds will be considered the equivalent of
Level or Category 1 – quoted prices. For private securities, different firms have different success
rates in getting answers from issuers (valuations needed for the transfer of securities to
registered plans has long been a problem). While some larger firms have additional resources to
contact private issuers and assess information provided, others have received prices that seem
widely at odds with the last known traded price or bid/ask, so caution must be exercised. Also,
if a valuation is provided, it is usually done on a ‘client-specific’ use basis. Other firms have been
able to get a last traded price of an arm’s-length transaction from an issue. In either of these
cases, whereas the prices received may not be appropriate or permitted for use in the security
master, they may still provide the basis for concluding an “older” market value remains
reasonable. See IIAC’s Policy and Procedures for Valuation of Securities Considerations.
 Document your market value exception process. Identify when a senior officer or officers may
be able to override the policy and matrix on rare occasions and specify the occasions. For
example, you may accept having securities values stale-dated for a period of longer than your
matrix provides at inception of the new definition, but it should be with appropriate sign-offs
and documentation. There may be market disruptions, such as 9/11, when you may push out
the 5-days for liquid traded securities to 10 days.
 Update, develop and implement a securities market value “aging” matrix
What’s that? Firms are expected to have a process – matrix– to assess whether market values are
sufficiently current. Some firms will have general security classes, possibly broken down by listed,
OTC or house range (see Attachment 2). Other members will have an extensive staledating/valuation matrix, breaking it down by asset class and subcategory.
Tip: IIAC have developed a minimum standard market value “aging” matrix, titled TARGET and
SAMPLE Market Valuation Agin Matrix by Pricing Source. The matrix will offer members a structure
against which to benchmark themselves.
 Update relevant written materials – balance plain language with protecting your firm from liability
What materials? IIROC staff have said they expect relationship disclosures will warrant updating for
new CRM2 disclosures. Members should consider other documentation as well. Client-facing
wording, which should be reviewed by legal/compliance – should be concise and use simple terms.
 Systems-based notifications: Consider pop-ups for trades in less liquid securities (‘there is no
active market for this security’).
 Account-statement-based notices: There are two required statements and other matters to
consider.
 When price quotations are not available, use the statement: “There is no active market for
this security so we have estimated its market value.” Or wording substantially similar. Note:
Some firms are not comfortable ‘estimating’ the value of less liquid securities. Using some of
Note: Do not act on this checklist without professional advice.
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the foregoing statement, a number of members may consider using a wording referencing
IIROC rule requirements; while the statement is accurate, it has not been tested with IIROC
for acceptability. “There is no active market for this security, and accurate valuation
information is not available at this time so we are reporting a value following regulatory
guidelines.”
 When there are no liquid or recent prices and it is hard to value the security (but, for
example, the issuer is not defunct), use the statement “Market value not determinable.”
 Consider boilerplate disclosure referencing uncertainty in securities values (e.g., “The value
you receive when selling or redeeming a security(ies) may be more or less than its(their)
value on your statement.”).v
 Communications to advisors: Consider a session discussing with advisors the intent of the
change, the measure of change clients will see and what written material may be helpful to
clients. While there will be no difference in a security’s value pre- and post- the market value
definition change, some securities may change from having a value to showing ND. While the
client may know the value of the security was uncertain, it may still cause some consternation.
 Communications to clients: Think about what client-facing material, explaining the purpose of
the regulatory change, would be helpful to clients. Consider explaining that: “The value of most
client securities comes from market price data feeds from recognized exchanges and other
sources [we] consider to be reliable. In the case of securities that do not trade frequently,
<insert – e.g., our firm’s policy is> or we may require third-party valuations; where these would
be at the owner’s cost, and the costs can be significant, we use ND (non-determinable) or $0.”
Tip: Members with an online option may wish to tell full-service clients who prefer to invest
through the full-service arm that they have access to more current prices between statements if
they want through the firm’s website – a value-added service.
 Relationship disclosure update: IIROC staff have said they expect updated relationship
disclosures due to CRM2 changes. RDs without reference to market value may wish to consider
adding a few sentences. For example:
“The securities in your accounts are valued using, wherever possible, reputable independent
pricing feeds that are consistent with industry standards of accuracy, timeliness, and
completeness. Where data has not been updated in some time, we follow regulatory guidelines
up to and including marking the value as ‘not-determinable’ (ND) and, after some period, $0.
The value you receive when selling or redeeming a security(ies) may be more or less than
its(their) value on your statement. Clients wishing for a security to be valued at their expense for
personal purposes, for example, to satisfy Revenue Canada requirements, can speak to their
advisor.”
 Account agreement wording: As account agreements are signed and relationship disclosure
information may not be acknowledged in writing, members may wish to include some version of
your firm’s market valuation practices (e.g., along the lines of the above wording) in account
agreements.
 Check other liability issues with legal and tax operations
What else? The combination of regulatory, investor advocate and media attention on CRM2 is likely
to lead to new situations. The likelihood is that there will be a greater concern if a security is overNote: Do not act on this checklist without professional advice.
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valued, however, there is also a risk if a security is marked to $0, disposed of to remove the asset
from the account, and then is found to have value. While this has always been a risk, it’s a good
time to review processes with your legal and tax advisors.
 Keep an eye open for sources of help
Yes, please! The IIAC shares information through its committees and on its member-only site. The
IIAC and its members are continuing to do work on hard-to-value securities in general, as well as
reaching out to CPA Canada and the Toronto CFA Society on lower-cost options than full audits for
smaller private issuers. Options to be kept apprised of any CRM2 developments include:
 Sign up for CRM2 Updates by e-mailing info@iiac.ca.
 Visit our tools page by signing in and visiting CRM Help at Your Fingertips.
Note: Do not act on this checklist without professional advice.
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Attachment 1
SAMPLE MODEL TO ASSESS VARIANCE BETWEEN BID, ASK AND LAST TRADED PRICE
This table was developed by a member firm and reviewed by IIAC CRM2 Market Value Working Group members, who
agreed it was a useful tool to analyse variances between bid, ask and last for asset holdings. The sample results are a
single firms, but included as information against which it may be interesting to benchmark.
Ask to Bid
Variance
0.00 to
< .01
0.01 to
< .02
0.02 to
< .10
0.10 to
< .50
0.50 to
< 1.00
1.00 to
< 5.00
5.00 to
< 10.00
10.00 to
< 50.00
<
50.00
% of
Total
Sample
Results
Nil (0%)
19.1%
>0%<10%
68.2%
10%<20%
3.7%
20%<30%
2.6%
30%<40%
1.8%
40%<50%
0.9%
>50%
3.8%
Last to Bid
Variance
0.00 to
< .01
0.01 to
< .02
0.02 to
< .10
0.10 to
< .50
0.50 to
< 1.00
1.00 to
< 5.00
5.00 to
< 10.00
10.00 to
< 50.00
<
50.00
% of
Total
Sample
Results
Nil (0%)
19.2%
>0%<10%
78.2%
10%<20%
1.2%
20%<30%
0.5%
30%<40%
0.3%
40%<50%
0.1%
>50%
0.6%
Last to Ask
Variance
0.00 to
< .01
0.01 to
< .02
0.02 to
< .10
0.10 to
< .50
0.50 to
< 1.00
1.00 to
< 5.00
5.00 to
< 10.00
10.00 to
< 50.00
<
50.00
% of
Total
Sample
Results
Nil (0%)
19.1%
>0%<10%
70.2%
10%<20%
2.8%
20%<30%
2.2%
30%<40%
1.5%
40%<50%
0.8%
>50%
3.3%
Note: Do not act on this checklist without professional advice.
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Attachment 2
SAMPLE MARKET VALUATION AGING MATRIX
•
Note: This is for consideration purposes only and frequencies, maximum days, etc. do NOT reflect any firm’s
current practices or such data from the industry market value aging matrix currently in preparation. See also
alternative IIAC examples: Market Valuation Aging Matrix by Pricing Source (to be linked to when ready) and
Market Valuation Aging Matrix by IIAC Asset Class Schema (to be linked to when ready). The IIAC Market
Value Working Group will be seeking comments/non-disapproval of a Market Valuation Aging Matrix with
“generous” timelines to allow firms to prepare and then there is an expectation that the timeliness will tighten
as more experience with the greater specificity IIROC seeks continues.
Security
Class &
Code
Listed, OTC
or House
Range
Listed
Shares and
Options(#)
OTC
House range
Listed
Bonds (#)
Mutual
Funds
(excluding
ETFs, CEFs)
CCPCs,
Other
Unlisted
Complete as
desired
(e.g., nontraded
options/
warrants
valued at $0)
OTC
Primary
Pricing
Source
SVC/Service
Provider
SVC/Service
Provider
Manual
SVC/Service
Provider
SVC/Service
Provider
Second
Source
Manual
Manual
N/A
Manual
Manual
House range
Manual
N/A
Listed
N/A
N/A
House range
SVC/Service
Provider
N/A
Listed
N/A
OTC
SVC/Service
Provider
House range
Manual
OTC
Pricing Method
IIROC Rule
200.1(c)(i)(A)
IIROC Rule
200.1(c)(i)(B), (C)
IIROC Rule
200.1(c)(i)(C)
IIROC Rule
200.1(c)(i)(A)
IIROC Rule
200.1(c)(i)(B), (C)
IIROC Rule
200.1(c)(i)(C)
N/A
N/A
IIROC Rule
200.1(c)(i)(B)
N/A
N/A
N/A
Manual
#
N/A
#
IIROC Rule
200.1(c)(i)(C)
Pricing
Frequency
Max.
Days
Price
Reused
Action if
Price
Stale
Daily
35
TBD
Daily
35
TBD
Ad hoc
TBD
TBD
Daily
35
TBD
Daily
35
TBD
Ad hoc
TBD
TBD
N/A
N/A
N/A
Daily
35
TBD
N/A
N/A
N/A
N/A
N/A
N/A
#
#
#
Ad hoc
365
TBD
Listed
OTC
House range
Exceptions to asset-class-specific market value aging matrix:
•
•
Trade halts: Usually will restart trading in short period so usual market value aging matrix likely to apply).
•
Delisted: Same as unlisted, but tag to monitor if still trades on bulletin board
•
GICs: No change in current practice (face plus accrued interest)
Cease-trade orders: Leave for x months, or mark ND; then mark to $0 after a further x months)
Note: Do not act on this checklist without professional advice.
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Endnotes
i
Notices under IIROC Rules include: “There is no active market for this security so we have estimated its market
value.” (200.1(c)(ii)) and “Market value not determinable.” (200.1(c)(iii)).
ii
A number of members have identified questions with respect to certain aspects of various data feeds, including
defaulting practices (where there are bid, ask and close prices) and timing questions (when market ‘snapshots’
are taken). These questions will be dealt with in time by members with their data providers, carrying brokers,
service providers, and user groups.
iii
Bid/ask is identified as the general approach to market valuation in IIROC Rule 200.1(c) IIROC FAQs.
iv
IIROC Rule 2600, Internal Control Policy Statement 1, General Matters, requires firms to develop and maintain
internal control policies and procedures to help management achieve the goal of reasonably ensuring the
“orderly and efficient” conduct of the firm’s business. These policies must be reviewed and (re-)approved at
least annually by appropriate executives. IIROC’s 2014/2015 Annual Consolidated Compliance Report said
examiners continue to find internal control policies that inaccurately or inadequately describe the firm’s policies
and procedures. The Report says some firms’ written procedures are copied, almost word-for-word from the
minimum requirements in Rule 2600, Internal Control Policy Statements 2 through 8, with minimal description of
procedures, identification of responsibilities and documentation of process performance and supervision.
v
This reference is from a FINRA/NASD document.
Note: Do not act on this checklist without professional advice.
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