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Securities Law

NIN 97/30 - Dealers and their Salespersons [NIN - Rescinded]

Published Date: 1997-07-04
Effective Date: 1997-06-30
The purpose of this notice is to provide guidance to dealers and their salespersons on three principal issues: (1) the nature of the relationship between dealers and the salespersons who trade on their behalf; (2) the use of business and other names by dealers and salespersons; and (3) supervisory and record-keeping requirements.

1. Relationship between Dealers and Salespersons

The relationship between dealers and their salespersons should normally be that of employer and employee. Section 9(a) of the Securities Rules requires that an individual (other than a partner, director or officer) who is registered to trade on behalf of a registered dealer must be classified as a "salesperson", described either as an "investment adviser" (for an employee of a registered broker or investment dealer) or as a "registered representative" (for an employee of other categories of dealer). In each case, the salesperson is required to be an employee of the dealer.

An employee is an individual who is considered an employee under the Income Tax Act (Canada), as well as an individual who is a dependent contractor (i.e., an individual who works for a dealer providing services normally provided by an employee and is subject to the same control and direction by the dealer over the detail and methods of work as an employee of the dealer). Consistent with this interpretation, any attempt to structure a relationship between a dealer and its salespersons that is intended to limit, or has the effect of limiting, the liability of the dealer for the actions of its salespersons that would otherwise arise in an employer-employee relationship is unacceptable.

The Executive Director may be prepared to vary, using powers delegated under section 187(d) of the Securities Act, the requirement for an employer-employee relationship by permitting, on a case-by-case basis, other types of relationships between a dealer and its salespersons, 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 conforms with securities legislation; and
  • the public interest is not otherwise compromised by the manner in which the relationship is structured.
The dealer and its salespersons can describe their relationship, for purposes of the contractual arrangement between themselves, as they see fit. For example, a dealer and its salesperson may agree that the salesperson will act for the dealer as an independent contractor. Despite that fact, the Executive Director may object to any contractual arrangement between a dealer and its salespersons that suggests some form of relationship with the salespersons other than as employees or dependent contractors. Any such objection would be based on the factors outlined above.

The terms "employed", "employment" and "employee" are used in the Securities Act, Securities Rules and in other regulatory instruments to describe a relationship by which certain regulatory objectives are achieved. Some of those objectives include ensuring that dealers exercise effective supervision and control over their salespersons and that the former remain responsible and liable to the public for the actions of their salespersons, acting as salespersons. Nothing in the regulatory approach described in this notice should be taken as a reduction in the importance that the Executive Director places on the realization of such objectives.

2. Use of Business and Other Names by Dealers and Salespersons

All communications from a dealer and its salespersons to members of the public in furtherance of trading in, or advising on, securities should be made in the full name of the registered dealer, despite the terms of any agreement between a dealer and a salesperson that suggests the latter is something other than an employee of the dealer. This applies even where a salesperson may (where permitted) be conducting activities ancillary to their registrable activities through a personal company that the salesperson has established for that purpose. "Communications", in this context, should be given a broad interpretation - including advertising, letterhead, business cards and signage.

Image Advertising

In communications to the public, other business names or trademarks may accompany, but not replace, the dealer’s full registered name in a limited number of cases. For instance, the name of an unincorporated division, identified as such, of a dealer or of a company within the same group of companies as the dealer, would be permitted to accompany that dealer’s full registered name. As well, a dealer that is part of a group of related companies, and any of the dealer’s salespersons, may use a registered trademark owned by, or licensed to, the dealer and other companies in the group, in advertisements or other communications with the public. Further, although it might be permissible for a specialized division or branch of a dealer to have a trademark or business name unique to it (e.g., a division dedicated to options trading might have a special business name for that division), the Executive Director considers that for a registered individual to hold themselves out under the name of their own personal company or for their personal company to utilize a trademark tailored for its specific use may be in breach of the requirement of section 54(2) of the Securities Act to not hold out an unregistered person as being registered.

Dual Employment

Communications to the public from a dealer and its salespersons may also include, in addition to the dealer’s full registered name, the name of:
  • a financial institution where the salesperson is dually employed by the financial institution and a dealer, or where an approved networking arrangement exists between the financial institution and a dealer;
  • a company licensed with the Insurance Council of British Columbia, where a salesperson is also licensed as an insurance agent or insurance salesperson under the Financial Institutions Act;
  • a salesperson’s fee-for-service financial planning company, where that salesperson has been permitted by the Executive Director to hold himself or herself out as a financial planner;
provided that:
  • the dealer’s registered name is at least equal in size and prominence with the name of the financial institution or other company; and
  • the distinct services offered by the dealer, financial institution or other company are clear, either because the name of the dealer, financial institution or other company is adequately descriptive of the nature of its business or through further disclosure (e.g., small print under each of the names of the dealer, financial institution or other company).
Personal Companies

Where a salesperson carries on activities ancillary to the salesperson’s registrable activities through a personal company, the salesperson should not use the name of that personal company in any communication with members of the public, except as permitted by the Executive Director. This restriction would not apply to a fee-for-service financial planning company established and operated by a salesperson who has satisfied the Executive Director’s requirements to hold himself or herself out as a financial planner, as described previously in this notice. Notwithstanding the existence of any personal company, dealers have a responsibility to ensure that their salespersons make it clear in the course of their dealings with the public, that the public is dealing with a representative of a registered dealer.

Suitability for Registration

In order for the Executive Director to monitor whether a dealer is complying with sections 54(1) and (2) of the Securities Act, a dealer should notify the Executive Director of all business names and trademarks that the dealer proposes to use in communicating with the public. To comply with sections 54(1) and (2) of the Act, a dealer’s registered name should always appear in all communications with the public, whether or not the dealer uses business names and trademarks. If there is doubt as to the acceptability of a business name or trademark other than the dealer’s registered name, the Executive Director should be contacted.

The communication practices of a dealer and its salespersons generally, and their advertising practices specifically, are factors that may be taken into account when considering whether an applicant is suitable for registration, renewal or reinstatement of registration or an amendment to registration.

3. Supervisory and Record-keeping Requirements

As already stated, some of the objectives of securities legislation include ensuring that dealers exercise effective supervision and control over their salespersons and that dealers remain responsible and liable to the public for the actions of their salespersons. Section 44 of the Securities Rules requires dealers to establish and apply written prudent business procedures for dealing with clients in compliance with securities legislation. Those procedures should include effective internal review and control systems.

As an example of specific requirements, section 47 of the Securities Rules imposes an obligation on the compliance officer of a dealer, or branch managers who report directly to the compliance officer, to approve the opening of new client accounts and to supervise transactions made on behalf of clients. Approval and supervision should include, at a minimum, review of new accounts, daily trading, ongoing sales practices, advertising, adequate client disclosures, complaints, business cards, letterhead and signage. Where the compliance officer relies on branch managers to supervise there must, in order for the compliance officer to comply with his or her obligations under sections 47 and 65 of the Securities Rules, be a system in place to ensure that the supervision is effective. Branch managers should furnish regular formal reports to the compliance officer highlighting significant issues encountered in any of these areas. Such reports might also solicit confirmation that all supervision procedures set out in the dealer’s "Policy and Procedures Manual" have been performed and documented, so that review is verifiable by the compliance officer during periodic, formal, on-site review of branches. The "Policy and Procedures Manual" should set out specific, detailed procedures for the branch managers to follow.

Section 48 of the Securities Rules imposes certain "know-your-client" ("KYC") and suitability-of-investment requirements onto dealers and their salespersons. To detect recommendations that are inappropriate or purchases or sales that are unsuitable in light of the general investment needs and objectives of clients, and to ensure completeness in the review of transactions, the compliance officer and branch managers should regularly perform, or supervise, the following reviews:
  • matching of confirmations to the trading blotter (e.g., through electronic preparation of an exception report or through manual reconciliation);
  • comparison of transactions, including the leverage involved in transactions, to recorded KYC information; and
  • making required revisions to ensure KYC information is always up-to-date.

Section 27 of the Securities Rules requires that a complete set of trading records be readily available for the compliance officer’s review at the dealer’s chief place of business in British Columbia. This requirement enables the compliance officer to fulfil their obligations under sections 47 and 65 of the Securities Rules.

Subject to certain conditions, electronic access to trading records is expressly permitted by section 28 of the Securities Rules. A dealer that carries on business in more than one jurisdiction could, for example, centralize its records electronically and organize its affairs so that, although records are not physically held in British Columbia, they are readily available in the province. Section 28 of the Rules requires that the records be provided in an accurate and intelligible form, capable of being printed, within a reasonable time to any person lawfully entitled to examine the information.

Dealers and their compliance officers and branch managers will be accountable for inappropriate conduct of salespersons that should reasonably have been detected in daily trading and new account reviews, or periodic formal on-site branch reviews.

The Executive Director will amend Local Policy Statement 3-22 so that it conforms with the regulatory approach described in this notice.

DATED at Vancouver, British Columbia, on June 30, 1997

Paul C. Bourque
Executive Director