PANEL	JOYCE C. MAYKUT, Q.C.	VICE CHAIR
	PETER A. MANSON, Q.C.	MEMBER
	ROY WARES	MEMBER

APPEARING:	DARRELL BARTLETT	FOR BERKSHIRE INVESTMENT GROUP INC. AND LARRY MACLEAN LEE
	JAMES A. ANGUS	FOR COMMISSION STAFF

…our Local Policy #3-22 does not allow registration for non-residence [sic] salespersons except for Brokers and/or Investment Dealers. The latter group have self regulatory bodies to ensure that they have adequate supervision and record keeping. We have extended non-residence [sic] registration to Alberta residents under the British Columbia/Alberta Accord, however, Mr. Lee is not a resident of Alberta but rather of Manitoba and therefore, does not qualify.

McLennan testified that he considered the following factors in refusing Lee’s application for registration. Mutual fund dealers like Berkshire are not members of the Canadian Investment Protection Fund (“CIPF”) and as a result their clients are not entitled to the protection of up to $500,000 per account, although they are protected by the British Columbia Contingency Fund to the extent of $2,500 per account. On the other hand, brokers and investment dealers are members of a SRO and are therefore covered by CIPF. In addition, as a result of SRO membership, brokers and investment dealers are subject to yearly examinations by the SRO to ensure that appropriate standards of supervision are met. The Manitoba Securities Commission does not conduct compliance reviews of its non-SRO registrants similar to that conducted by staff of this Commission under section 39 of the Act. With Lee resident outside of British Columbia, Commission staff would simply be unable to attend his offices outside British Columbia to conduct a compliance review similar to that done for non-SRO registrant salespersons in British Columbia. Supervisory review of Lee’s transactions by Berkshire simply does not provide the necessary degree of independent compliance oversight.

3. SUBMISSIONS

Lee’s Submissions

Subject to subsection (2), section 35(1) of the Act requires the Executive Director to grant registration to an applicant if the fee is paid and the applicant is considered suitable for registration. Section 35(2) of the Act imposes two additional conditions on applicants who are not residents of British Columbia. First, the applicant must already be registered in the identical category and affiliated with the same firm in the home jurisdiction. Secondly, the applicant must have been so registered for at least one year before the date of the application. Lee has met these two requirements and the only requirement left for Lee to meet is ‘suitability’ as set out in paragraph 35(1)(a).

The Act, the Securities Rules, B.C. Reg.194/97, and Commission policies do not specifically indicate how an applicant’s residency affects suitability for registration. The only reference to the residency of registration applicants appears in Local Policy 3-22. These provisions only provide guidelines to individuals employed by certain brokers, investment dealers and mutual fund dealers related to financial institutions. Berkshire, as an “independent” mutual fund dealer, does not fit into any one of these three categories. Therefore Local Policy 3-22 is silent on the requirements for “independent” mutual fund dealers who wish to register non-resident salespersons.

If Berkshire’s ability to supervise non-resident salespersons is a factor in determining suitability, Berkshire and Lee believe it can provide equal or superior supervision compared to those categories of dealers specified in Local Policy 3-22 that are permitted to employ non-resident salespersons. Berkshire has complied with section 47 of the Rules, which imposes an obligation on registrants to designate appropriate individuals to supervise transactions and the opening of new client accounts. Berkshire has also complied with section 44 of the Rules, which requires the dealer to establish prudent business practices for dealing with clients and for compliance with the Act and Regulations. “Independent” mutual fund dealers like Berkshire are challenged to develop and enforce effective practices that will fulfill these two obligations as the dealers’ operations become more decentralized. Where a dealer employs non-resident salespersons, the practices must recognize not only the increased distance between the salesperson and dealer but also the fact that the salesperson may be firstly concerned with the regulatory requirements of the jurisdiction of residency which may differ from the regulatory requirements of other jurisdictions of registration. Lee says Berkshire’s proposal to ensure adequate supervision meets the Commission’s requirements and should avoid any potential risks associated with a non-resident salesperson.

Failing to grant registration to Lee in British Columbia will significantly affect the relationship Lee has developed with clients who have moved to British Columbia, and who wish to have Lee continue to manage their financial affairs.

Commission Staff’s Submissions

Commission staff argues that since “independent” mutual fund dealers are not members of an SRO, they are only subject to examination when the securities regulatory authority subjects its mutual fund dealers to compliance reviews. The securities commissions of British Columbia and Alberta conduct these compliance reviews and the Manitoba Securities Commission does not.

Brokers and investment dealers are required to establish higher capital requirements than mutual fund dealers. Further, brokers and investment dealers are required to report their capital monthly whereas mutual fund dealers report their capital quarterly. This more frequent reporting obligation of brokers and investment dealers provides further protection to clients of those dealers.

Although Berkshire has submitted that it has an adequate supervision structure that will apply to Lee, the Executive Director has the discretion to determine in the public interest that the supervision structure is not sufficient. Commission staff argue that it is in the public interest to deny registration to non-resident salespersons employed by “independent” mutual fund dealers because none of the safeguards available to clients of salespersons employed by brokers, investment dealers or mutual fund dealers related to financial institutions are available to their clients. Berkshire’s submission that it can provide superior supervision of Lee is not something which the Executive Director must accept. He is entitled to, and must, act in a wider context. It is not in the public interest to allow the registration of a person who will not be supervised by any regulatory body, but only by his employer, no matter how much the employer may argue that it is in the applicant’s best interest. The combination of section 35 of the Act and Local Policy Statement 3-22 together express the Commission policy that registration will be granted to non-residents only where sufficient safeguards are in place to protect the clients. That being the case, an applicant for registration should be considered to be unsuitable for registration where the jurisdiction in which the person is resident and registered does not provide the protection of regular compliance reviews. Clients of non-resident salespersons will not have the protection afforded by compliance reviews conducted by the British Columbia Securities Commission precisely because of that non-resident status. The fact that clients may want to deal with Lee after they have left the jurisdiction in which he is resident does not entitle him to registration elsewhere.

4. DECISION

The issue for us to determine is whether it would be prejudicial to the public interest to permit Lee, as a non-resident of British Columbia, to be registered under the Act as a mutual fund salesperson of an “independent” mutual fund dealer, where the securities regulatory authority in the jurisdiction in which Lee is resident and registered does not conduct regular compliance reviews.

The relevant legislation is as follows:

Section 35 of the Act provides:

(1) Subject to subsection (2), if an applicant:

(a) is considered by the executive director to be suitable for registration in the capacity applied for, and
(b) pays the prescribed fee,

the executive director must grant the applicant registration or renewal or reinstatement of registration or an amendment to registration, as the case may be.

(2) If an applicant or partner, director or officer of an applicant is not a resident of British Columbia on the date of application, the executive director may refuse to register the applicant unless, at the time of application, the applicant meets the requirements of subsection (1) and, in addition, the applicant or the applicant’s partner, director or officer

(a) is registered in a capacity corresponding to that of a dealer, underwriter, adviser, salesperson, advising employee, partner, director or officer under the law of the jurisdiction respecting trading in securities or exchange contracts, as the case may be, in which the applicant last resided, and

(b) has been so registered for at least one year immediately before the date of application.

(3) The executive director must not refuse to grant, renew, reinstate or amend a registration without giving the applicant an opportunity to be heard.

(1) The executive director may restrict a registration or a renewal or reinstatement of registration and may impose conditions of registration on the registrant…

Sections 2.5(a) and (e) of Local Policy Statement 3 -22, state that:

(a) The Executive Director will only register as a salesperson or advising employee an applicant who is trading or advising, respectively, on behalf of a dealer or adviser that is registered under the Act.

Dealers usually employ one or more salespersons, each of whom must also be registered under the Act as a salesperson [Act s. 34(1)(a)(ii), Ruless. 9(a)]. The relationship between a dealer and its salespersons has traditionally been that of employer and employee. However, the Executive Director is prepared to consider other relationships, including “dependent” contractors and, on a case-by-case basis, “independent” contractors, provided that:
• the dealer retains effective supervision and control over the salespersons under the arrangement
• the dealer remains responsible and liable for the actions of its salespersons, to the extent that they are acting in their capacity as salespersons
• the dealer arranges for bonding or insurance through third parties that ensures adequate coverage for the dealer and its salespersons
• arrangements for the payment of referral fees, commissions or other compensation conform with securities legislation, and
• the public interest is not otherwise compromised by the manner in which the relationship is structured
…

(e) The Executive Director may refuse an application for registration as a salesperson, or as an advising employee, if the applicant is not a resident of British Columbia [Act s. 35(2)]. The Executive Director will not require a salesperson or an advising employee to be a resident of British Columbia if the individual:

• meets the requirements set out in section 35(2) of the Act
• is employed by a registered broker or investment dealer, if the rules or bylaws of the VSE or IDA - Pacific, respectively, do not require residency, or
• in the case of a salesperson, is employed by a registered mutual fund dealer that is related to a financial institution, if the Principles of Regulation permit salespersons that are registered in, but are not residents of, British Columbia to deal with clients in British Columbia.

• capital and bonding
• record keeping and reporting
• the maintenance of client accounts
• proficiency and qualification
• branch managers and administration officers
• duration of registration
• annual financial statements, and
• other financial reports.

Clearly, the Executive Director has the authority to add conditions to any registration if he considers that would be in the public interest. We have concluded that it would not be prejudicial to the public interest to register Lee if there were certain conditions attached to his and to Berkshire’s registration that addressed the concerns caused by Lee’s non-residency and the lack of independent compliance review by the Manitoba Securities Commission.

However, we do not want to impose conditions that are not practically workable or to overlook others that the Executive Director may feel are more appropriate while Berkshire remains as an “independent” mutual fund dealer. Therefore, we are remitting this matter back to the Executive Director in order that he register Lee and impose appropriate conditions on Berkshire’s and Lee’s registration that take into account the following:

1. that Lee’s registration be restricted to named existing clients who have moved to British Columbia from jurisdictions in which he is registered as a mutual fund salesperson and to any existing clients of Lee from those jurisdictions who subsequently move here (the “Existing Clients”) ;

2. that Berkshire and Lee undertake to maintain in Berkshires’ British Columbia branch office, and promptly make available to the Executive Director on request, complete and current copies of Lee’s files regarding Existing Clients, including any complaints from Existing Clients and from any other clients of Lee in jurisdictions in which Lee is registered;

3. that Berkshire and Lee undertake to provide, at the Executive Director’s request, any information they have regarding Lee’s clients and activities relating to his registration in any other jurisdiction; and

4. that Lee undertakes to make himself available for examination at the request of the Executive Director.

Dated on August 10, 1998.

FOR THE COMMISSION