Securities Law

BCN 2001/18 - Adoption of Rules Requiring Membership in a Self-Regulatory Body [BCN - Rescinded]

Published Date: 2001-03-22
Effective Date: 2001-03-21
Related Document(s):

The Commission has adopted amendments to the Securities Rules, B.C. Reg. 194/97 and the Registration Transfer Rules, B.C. Reg. 193/97 that:

  • require every securities dealer and mutual fund dealer to apply to join a self-regulatory organization by April 30, 2001,
  • require each dealer to be a member of a self-regulatory organization by its next registration renewal date,
  • eliminate the category of securities dealer as of October 1, 2002,
  • create a new category of dealer called “special limited dealer” and
  • remove references to the obsolete dealer category of “broker”.

The rule amendments are attached at the end of this Notice.  They are effective on March 16, 2001. 

Similar rules to require membership in a self-regulatory organization are planned in Alberta, Ontario and Saskatchewan.  Other jurisdictions (except Québec) also plan to require membership in an SRO.

Background

The Commission published drafts of the proposed amendments for comment on July 10, 1998 and July 21, 2000.  We received a total of 9 comment letters.

Details of the comments received, our responses and specific changes made to the published drafts are attached to this Notice as Appendix A.

Substance and Purpose

The amendments require that securities dealers and mutual fund dealers apply to join either the Investment Dealers Association of Canada or the Mutual Fund Dealers Association of Canada by April 30, 2001.  Each of these organizations is a self-regulatory body recognized by the Commission under s. 24(1) of the Securities Act.  The amendments also remove all references to the registration category of “broker” which became obsolete when the IDA assumed all responsibility for member regulation from the Canadian Venture Exchange in December 1999.
 
The category of securities dealer will be eliminated effective October 1, 2002.  By then, every existing securities dealer must register as another type of dealer.

Each mutual fund dealer is required to become a member of the MFDA by its next registration renewal date.  Where the renewal date is less than 12 months from the application date of April 30, 2001, Commission staff will consider, as part of the renewal application, any request for an extension to April 30, 2002, to give the dealer time to complete the membership application process. 

A new dealer category of registration called “special limited dealer” has been added for any current or future dealers whose businesses may not be suited to being regulated by either the IDA or the MFDA.  Applications for this new category of registration will only be considered where the nature of the business of the dealer is unique and outside the normal scope of activities regulated by the IDA or MFDA.  Virtually all existing securities dealers and mutual fund dealers conduct activities that are suited to regulation by the IDA or MFDA. 

An exception may exist for those mutual fund dealers who are also registered as portfolio managers.  We are attaching a copy of a letter, sent in December 2000 to all mutual fund dealers who were also registered as portfolio managers, which describes circumstances in which exemptions from either registration as a dealer or the requirement to join the MFDA will be considered. 

Please note that unless the Commission provides specific exemptive relief from its rules, dealers must comply with them even if they differ from the MFDA or IDA rules.  Over the next few months, we will be issuing further notices and instruments providing exemptions to remove as many as possible of the differences between commission rules and MFDA rules.


DATED at Vancouver, British Columbia, on March 21, 2001.

 

 


Joyce C. Maykut, Q.C.
Vice Chair

Ref: NIN#2000/31
BCN#2001/05

This Notice may refer to other documents. These documents can be found at the B.C. Securities Commission public website at www.bcsc.bc.ca in the Commission Documents database or the Historical Documents database.


Appendix A

Summary of Comments - Proposed Amendments Requiring Membership of Mutual Fund Dealers and Securities Dealers in a Self-Regulatory Organization

 

CommentatorSectionCommentProposed Response
Global Futures Corporation
(requested that comment be kept private)
GeneralBelieves the proposed rule will require this exchange contracts dealer to join the Investment Dealers Association of Canada.  Global notes that its current structure, whereby it acts as an introducing broker for a U.S. carrying broker, will not be permitted by the Investment Dealers Association of Canada.  Global further notes that there is only one Canadian commodity futures carrying broker.  To effectively force introducing brokers such as Global to contract with this one Canadian carrying broker will result in the carrying broker being able to negotiate unfairly with the introducing broker.  Requests Commission assistance to permit existing introducing/carrying arrangement to continue if become members of the IDA. At the current time, the proposed amendments do not affect exchange contracts dealers, but only securities dealers and mutual fund dealers.  Consideration of requirements for exchange contracts dealers to join a self-regulatory organization is the subject of another commission initiative.  These comments will be considered during the course of developing those requirements.
The Rogers Group Financial Advisors Ltd.Notice, and provisions in proposed amendments requiring MF Dealers to join the MFDA.Believes provisions in the notice requiring mutual fund dealers to join the Mutual Fund Dealers Association inadvertently omitted an option for mutual fund dealers to join the Investment Dealers Association of Canada.Mutual fund dealers who do not meet the registration requirements to be an investment dealer, were intentionally limited to being required to apply to become members of the MFDA.  Any mutual fund dealer may apply to change their registration to a securities dealer (such that the proposed amendments requiring membership in either the MFDA or the IDA and a corresponding change of dealer registration category to either a mutual fund dealer or an investment dealer would apply) or an investment dealer (requiring membership in the IDA).  Staff believe it is appropriate to limit mutual fund dealers to joining the MFDA.
Anonymous (comment letter signed concerned)GeneralCommentator notes several concerns about the sale of insurance products, and the bias of salespersons to sell products that will provide greater compensation and/or other bonuses.  Additional concerns are expressed about length of time to transfer accounts or investment products from one company (life insurance and/or mutual fund, and between dealers) to another.  Feels requirements establishing transfer times are ignored.  Commentator also notes that offering memoranda for many limited partnerships do not adequately focus on the risk associated with the investment.Comments noted.  No changes to the proposed amendments are required.
Lawson Lundell Lawson & McIntosh on behalf of Swift Trade Securities Inc.1.   Requirement for securities dealers to apply to join either the IDA or the MFDA
2.   s. 24(1) of the Securities Act Proposal to recognize the NASD as a self-regulatory organization under s. .24(1) of the Act.
3.   Applications under Ontario Rule 31-507
1.   Commentator suggests that securities dealers who are members of a U.S. self-regulatory organization should be exempt from the requirement to join the IDA or another Canadian SRO, provided membership in the U.S. self-regulatory organization provides equivalent or greater protection to the investing public.  The commentator further noted that the unique business of its client means it is competing with IDA members and it would be inappropriate for its competitors (via the IDA’s self regulatory model) to be regulating it.  
2.   The commentator requested that the Commission recognize the NASD as a self-regulatory organization under s. 24(1) of the Securities Act.
3.   The commentator notes that its client has applied for relief from similar requirements to join the IDA found in Ontario Rule 31-507.  It has made application on the basis that it is regulated by a US SRO, which provides protection from loss to its clients under an investor protection fund.   
1.   Requiring securities dealers to join a Canadian self-regulatory organization provides benefits in addition to an investor protection plan.  As the Canadian self-regulatory organization will be more knowledgeable about the securities industry in Canada, it can react more quickly to changes in the securities marketplace and to regulatory changes, and impose rules and enforce policies against its members which are appropriate in the Canadian regulatory regime in a timely manner.  A U.S. based regulator, without this connection to the marketplace, is not in a position to ensure compliance by its members with Canadian securities regulation, nor will it ensure that its rules and bylaws do not conflict with Canadian Securities Regulation.  The Commission does not believe that membership in a U.S. SRO is an adequate proxy for membership in a Canadian SRO.  
2.   Before the Commission can consider an application for recognition as an SRO, application must be made by the entity that wishes to be considered, in accordance with appropriate recognition criteria.  Without the NASD making such application, or directing an application to be made on its behalf, the Commission cannot consider recognition.
3.   The OSC has advised that as of October 10, 2000, the application is on hold at the request of legal counsel for the commentator.
Boughton Peterson Yang Anderson on behalf of the Forest & Marine GroupGeneralCommentator notes that it's client, a securities dealer, operates a unique business, distributing only securities of several special issuers under a consolidated prospectus.  The commentator suggests that the proposed rule requiring all securities dealers to join either the MFDA or the IDA may not be appropriate for such a specialized dealer.  The commentator proposes that dealers in this situation are more appropriately regulated directly by the Commission. Staff notes that there is a new category of limited dealer proposed, the "special limited dealer" that is available to existing or prospective dealers whose businesses are unique or highly specialized and are not suited to regulation by the IDA or the MFDA.
Stikeman Elliott on behalf of the Federation of Independent Mutual Fund Dealers, Iqon Financial, Martell Henderson Financial Services Inc.,Comment submitted on proposed OSC Rule 31-506 regarding membership by mutual fund dealers in the MFDA1.   The comments are specific to the proposed OSC rule, however the commentator submitted this comment letter as a comment on similar rules being adopted in B.C. to the extent applicable or for informational purposes.  
2.   The commentator, on behalf of the Federation, expressed concern that the proposed rule, together with the proposed rules of the MFDA, will substantially damage or destroy their business.  Much of the comment letter provides specific comment on a number of proposed MFDA rules or bylaws.
3.   The commentator also submitted that a three year  maximum sunset clause be imposed on the proposed rule as it represented a major structural change in the industry whose costs and benefits can't be determined. 
1.   Noted.
2.   The Commission believes that requiring membership in an appropriate SRO will further enhance the integrity of the markets and the reliance investors place on registrants.  Where business structures need to be adjusted to ensure the structure is properly regulated, it is appropriate for those changes to be required.  
3.   The Commission is of the view that this is an overly cumbersome way to regulate.  The Commission will oversee the activities of both the IDA and the MFDA, and through this oversight will assess the impact of the rule on both mutual fund and securities dealers.
Members of the Investment Counsel Association of Canada, Philips Hager and North Membership requirement for firms dually registered as advisers and mutual fund dealers.Membership in the MFDA is inappropriate for companies registered as advisers in the category of portfolio manager and who are also registered as mutual fund dealers.  Certain of these registrants also sell units of mutual funds that are managed by them and sold to clients who have signed discretionary management agreements with them.  ICPM's may also manage assets on a  fully discretionary basis, and distribute pooled funds in reliance on prospectus and registration exemptions.  It was suggested that membership in the MFDA should be required, and fees charged, only to the extent that the ICPMs in question offer mutual funds on a non-discretionary basis (in respect of the non- discretionary portion of their business).The Commission has not amended the Rule to  differentiate between the various companies registered as mutual fund dealers.  However, the Commission, together with staff in other CSA jurisdictions, will consider further what guidance can be given to advisers also registered as mutual fund dealers as to (i) the need for registration as mutual fund dealers in respect of certain activities carried on by such registrants and (ii) the possibility of exemptive relief being granted for a portion of their businesses.  Similarly, portfolio managers who need to continue to operate as a mutual fund dealer, could consider other corporate structures which would enable them to separate that business from their business as a portfolio manager.  The MFDA may also consider whether adjustments are necessary to the manner in which it will assess fees for investment products which are otherwise managed on a fully discretionary basis. 
Group of 11 securities dealers registered in B.C.GeneralComment received following the initial publication of the proposed amendments.  The commentator noted at that time that if the MFDA did not permit its members to sell securities under certain registration exemptions, those dealers would have to apply to join the IDA.  Discussions with the MFDA at that time indicated they might not accept members who sold securities in reliance on certain exemptions.  The commentator was concerned about the impact of this on its business.The MFDA will, together with staff of the Commission where appropriate, monitor trading under exemptions and compliance with any conditions of registration imposed relating to the sale of securities in reliance on an exemption.  MFDA rules do not exclude members selling securities in reliance on an exemption.  The Commission notes the issuance by the Executive Director of NIN #2000/27 which proposes conditions of registration for limited dealers who sell securities in reliance on an exemption.  The Commission would expect limited dealers to comply with any such conditions, once imposed by the Executive Director.
Balcom FinancialGeneralComment received in response to the initial publication for comment of the proposed amendments.  The commentator acknowledged the time had come for a mutual fund dealer SRO, but wished to ensure the MFDA recognized their uniqueness, including relative size, risk to the public and contribution to business in British Columbia.  In particular, the commentator was concerned that any contingency fund that might be developed by the MFDA might be prohibitive or unnecessary if all accounts were registered in client name directly.The MFDA rules do not purport to mandate in which name mutual fund accounts must be registered, and it intends to permit either client name or nominee name.  Regardless of how registered, the Commission believes that it is important for all accounts to have the protection of a contingency fund similar to the Canadian Investor Protection Fund.  The Commission believes that the MFDA will fairly consider differences between types of dealers and either have, or will, adjust their rules and bylaws accordingly to account for these differences.