NIN 97/49 - Proposed National Instruments 33-102, 33-103, 33-104, Related Companion Policies and National Policy 33-201, All Governing Activities of Dealers that Carry on Business in Retail Branches of Financial Institutions [NIN - Rescinded]
| Published Date: | 1997-11-28 |
|---|---|
| Effective Date: | 1997-11-27 |
The proposed national instruments and policies are initiatives of the CSA. The proposed national instruments are expected to be adopted as a rule in each of British Columbia, Alberta, Ontario and Nova Scotia, as a Commission regulation in Saskatchewan and as a policy in all other jurisdictions represented by the CSA. The related policies are expected to be adopted as policies in all jurisdictions represented by the CSA.
Background
As a result of amendments to Canadian securities legislation in 1987 relating to the removal of ownership restrictions on registrants, a number of financial institutions invested in existing registrants or incorporated registrants as subsidiaries. As a result of regulatory issues arising from these investments, a subcommittee of the CSA submitted to the CSA for their consideration a series of "Principles of Regulation".
In November 1988, the CSA adopted the Principles of Regulation Re: Full Service and Discount Brokerage Activities of Securities Dealers in Branches of Related Financial Institutions (NIN#88/40). These Principles permit dealers to carry on securities activities in branch offices of a registrant located within retail offices of a related financial institution, subject to conditions that are intended to limit potential public confusion and conflicts of interest.
At that time, most of the CSA also adopted the Principles of Regulation Re: Distribution of Mutual Funds by Financial Institutions (NIN#88/48, as modified by NIN#90/7), which permit the sale, in retail offices of a financial institution by persons who are dually employed by the financial institution and the registrant, of mutual fund securities issued by a mutual fund that is sponsored by the financial institution or an affiliate of the financial institution. The sale of mutual fund securities under these Principles is subject to conditions that are intended to limit potential public confusion and conflicts of interest.
In June 1990, the CSA adopted a third set of Principles of Regulation, the Principles of Regulation Re: Activities of Registrants Related to Financial Institutions (NIN#90/16), which deal with several issues arising out of the ownership by a financial institution of registrants, including selling arrangements, disclosure of confidential client information and settling of securities transactions through a client’s account at a related financial institution. These Principles also established a national clearing system for the review of networking notices and advised registrants that the CSA viewed a selling arrangement as akin to a networking arrangement.
Substance and Purpose of Proposed National Instruments and Policies
The proposed national instruments and policies update and replace the three Principles of Regulation and a blanket order, BOR#93/4, which provides relief from the requirement to file a notice of a networking arrangement where the activities contemplated under the arrangement are permitted under the Principles of Regulation. The Principles of Regulation and the blanket order will be revoked at the time the proposed national instruments and policies come into effect.
The proposed instruments remove certain arbitrary requirements no longer considered necessary and will provide much-needed guidance to dealers that carry on business in retail branches of Canadian financial institutions and to Canadian financial institutions that permit dealers to carry on such activities in their branches. The proposed instruments will also harmonize requirements between jurisdictions more extensively than is currently the case under the Principles of Regulation (subject to a limited number of exclusions by certain jurisdictions, including British Columbia, based on investor protection concerns) and create a more level playing field between dealers that are related to Canadian financial institutions and those that are not.
The proposed national instruments and policies implement, in part, the recommendation of the CSA Task Force on Operational Efficiencies that Canadian securities regulatory authorities increase the co-ordination of regulation, including the standardization of requirements.
Terms used in the proposed policies that are defined or interpreted in the proposed national instruments or a definition instrument in force in the jurisdiction should be read in accordance with the national instrument or the definition instrument, unless the context otherwise requires.
Summary of Proposed National Instrument 33-102 and Companion Policy 33-102CP
Proposed National Instrument 33-102, entitled "Distribution of Securities at Financial Institutions", sets out conditions applicable to a registrant conducting securities related activities through a branch office located within a retail office of a Canadian financial institution, including having identifiably separate premises and separate telephone lines.
The proposed National Instrument
- expands the application of the Principles of Regulation to cover the branch office operations of a registered dealer in retail offices of a Canadian financial institution that is not related to the dealer;
- prohibits employment of registered partners, directors, officers and salespersons of registered dealers with a Canadian financial institution unless the dealer implements and maintains prudent business guidelines and supervisory procedures to prevent conflicts of interest;
- removes the blanket requirement that mutual fund dealers related to a Canadian financial institution be restricted to the sale of funds sponsored by that financial institution;
- removes the provision in the Principles of Regulation that permits mutual fund salespersons, partners, directors and officers to file a simplified registration application form - Staff of the securities regulatory authorities generally agree that there should be one form for all registration applications from individuals;
- removes the provision in the Principles of Regulation that permits certain mutual fund dealers to carry on compliance functions through an administration officer instead of a branch manager;
- permits the use of so-called roving registrants in a retail office of a Canadian financial institution, provided that roving registrants are present in any one location for no more than 50 days in a calendar year;
- provides an explicit registration exemption for certain acts in furtherance of a trade conducted on behalf of a registered dealer by a Canadian financial institution and its employees in retail offices of a Canadian financial institution where no registered dealer has a branch office, including assisting an investor in completing an application form for opening an account, receiving an order form for securities or a redemption request for mutual fund securities and distributing offering documents - under the Principles of Regulation, the CSA specifically prohibited the distribution of offering documents by non-registered personnel; and
- provides an exemption from the networking notice requirements for networking arrangements that comply with the Instrument, except in British Columbia, where a notice will still be required where a registrant intends to enter into a networking arrangement with an unrelated Canadian financial institution.
The proposed National Instrument requires a dealer to provide clients with a written statement advising them whether the dealer is a separate entity from the Canadian financial institution and that, unless otherwise advised by the dealer, securities purchased from or through the dealer are not insured by a government deposit insurer, are not guaranteed by the Canadian financial institution and may fluctuate in value. The Instrument also prescribes written disclosure of any referral fees paid to or by a dealer.
In addition, proposed National Instrument 33-102 requires a dealer to ask a client whether the client has borrowed funds from the Canadian financial institution in which the dealer is carrying on business and, if so, to provide a written statement to the client that the full amount of the loan must be repaid even if the value of the security purchased declines.
With respect to the provisions in the Principles of Regulation that currently allow for a limited exemption from the normal branch manager requirements, the CSA are of the view that this accommodation is no longer justified, given the increase in the volume and dollar value of mutual fund securities sold in these branch offices, the introduction of the sale of third party funds and the difficulty in supervising dually-employed personnel. The CSA are also concerned that Canadian financial institutions may have less incentive to supervise properly the sale of third party mutual fund securities than they do for the sale of their own mutual fund securities.
Mutual fund dealers that are currently operating with administration officers should note that these arrangements will not be acceptable under the proposed National Instrument and will be reviewed by the CSA on renewal of registration or the dealer’s annual filing date, by which time the mutual fund dealer should ensure that branch managers are in place or an exemption from that requirement in Canadian securities legislation has been obtained from the appropriate Canadian securities regulatory authority. In British Columbia, the proficiency requirements for branch managers and administration officers are the same and, as a result, local mutual fund dealers will likely only need to change the title of their administration officers.
The proposed Companion Policy sets out guidelines on what is considered identifiably separate premises and contains cautions about activities that have not been exempted by the proposed National Instrument from the registration requirements of Canadian securities legislation. The proposed Companion Policy also provides guidance on supervision and training of registered partners, directors, officers and salespersons.
Summary of Proposed National Instrument 33-103
Proposed National Instrument 33-103, entitled "Distribution Networks", sets out conditions for the operation of toll-free telephone lines and the electronic trading of securities by registered dealers. For example, the proposed National Instrument continues the Commission’s requirement that a call made by or to a client in British Columbia on a toll-free line operated by a registered dealer must be answered by an individual registered in British Columbia, notwithstanding where that registered individual resides. The proposed National Instrument expands the current requirements, however, by permitting the use of toll-free lines during normal business hours by an individual who is registered, but not necessarily resident, in the jurisdiction in which the client resides.
The proposed National Instrument removes the prohibition, set out in the Principles of Regulation, on the sale of securities through electronic means. Sale of securities through electronic means is permitted provided that the system limits access to a client’s account to that client, does not accept transactions outside the suitability range for the client established by the dealer, refers any order to purchase or sell securities outside the suitability range to a registered individual, and cannot be used to open an account. The proposed National Instrument permits dealers to obtain account opening information from clients electronically.
The proposed National Instrument does not provide an exemption from any of the normal conditions of registration including the "know your client" and suitability rules, nor does it provide an exemption from the requirement in Canadian securities legislation to deliver a prospectus.
Summary of Proposed National Instrument 33-104 and Companion Policy 33-104CP
Proposed National Instrument 33-104, entitled "Selling Arrangements", establishes a requirement that registered dealers file with the regulator, for non-objection, a notice prior to entering into certain selling arrangements. No notice is required, except in Quebec, where the proposed selling arrangement relates to an inducement and the inducement doesn’t result in the client paying more for the product or service provided by the dealer. In British Columbia, a notice will still be required where a registrant intends to enter into a selling arrangement with an unrelated Canadian financial institution.
While the proposed National Instrument removes the prohibition, currently set out in the Principles of Regulation, on certain "tied selling" arrangements (selling arrangements under which a dealer requires a client, as a condition of dealing with or purchasing a product or service from the dealer, to deal with or purchase a product or service from the Canadian financial institution), the Companion Policy indicates that both British Columbia and Quebec will normally object to these arrangements.
The proposed Companion Policy indicates some of the factors a regulator will consider in its review of a selling arrangement to determine whether the nature of the inducement and the conditions proposed to be implemented in connection with the arrangement afford an adequate level of investor protection or otherwise raise public interest concerns.
Notices for selling arrangements carried out in more than one jurisdiction should be submitted in accordance with the guidelines of National Policy 33-201.
Summary of Proposed National Policy 33-201
Proposed National Policy 33-201, entitled "Networking and Selling Arrangement Notices", establishes guidelines with respect to the process by which the Canadian securities regulatory authorities intend on a national basis to review and respond to networking and selling arrangement notices. These guidelines are substantially similar to those contained in the current Principles of Regulation Re: Activities of Registrants Related to Financial Institutions.
Consequential and Related Amendments
In order to avoid inconsistencies between the Securities Rules and the proposed national instruments, certain consequential amendments to the Securities Rules will be required. For example, the provision in the Securities Rules that permits an administration officer to fulfil the compliance function of a branch manager, where the dealer carries on business in a branch of a financial institution, will require amendment. The proposed amendments relate to the definition of "branch office" in section 1(1) and to sections 53(3), 60, 66 and 84(2) of the Securities Rules.
Anticipated Costs and Benefits
Proposed National Instrument 33-102
The proposed National Instrument will reduce costs for dealers by permitting the use of roving registrants and relieving registrants from the requirement to file networking notices in certain circumstances. It will also benefit dealers related to Canadian financial institutions by permitting them to sell third party funds. The proposed National Instrument will benefit investors by requiring written disclosure relating to leveraged investing, referral fees and differences in the treatment of securities compared with deposits at financial institutions.
The proposed National Instrument may increase costs for mutual fund dealers controlled by Canadian financial institutions by no longer permitting the use of specialized registration application forms or of administration officers, rather than branch managers, in certain circumstances. On the other hand, this will result in all mutual fund dealers, whether or not related to or carrying on business in a Canadian financial institution, being required to use the same registration application form and to meet the same branch manager requirements.
In addition, certain costs may be incurred due to the requirement in certain jurisdictions that there be floor to ceiling separation between a retail office of a Canadian financial institution and a branch office of a registered dealer that is not a mutual fund dealer.
The CSA believe the benefits outweigh the anticipated costs.
Proposed National Instrument 33-103
The ability to use technology for certain trading activities may reduce the costs of these activities for both investors and dealers and will increase ease of access to dealers by investors. Dealers may incur certain costs associated with designing systems to meet the security requirements listed in the proposed National Instrument. The CSA believe the benefits outweigh the anticipated costs.
Proposed National Instrument 33-104
Proposed National Instrument 33-104 will benefit investors by providing regulatory oversight of arrangements that affect investors’ relationships with registrants and Canadian financial institutions with which the registrant is offering a joint product or service. The proposed National Instrument may result in certain costs to registrants who are required to provide notice of selling arrangements. The CSA believe the benefits outweigh the anticipated costs.
Specific Requests for Comment
In addition to welcoming submissions on any provision in the proposed national instruments and related policies, the CSA seek comment on the specific matters referred to below.
Specific Requests Concerning Proposed National Instrument 33-102
A Canadian financial institution is defined in National Instrument 14-101, entitled "Definitions", to include an insurance company, but not an insurance agency. The CSA request comment on whether the proposed National Instrument should be expanded so as to include securities related activities carried on in an insurance agency.
As noted above, the proposed National Instrument provides an explicit exemption from the registration requirement of Canadian securities legislation for certain acts in furtherance of a trade conducted on behalf of a registered dealer by a Canadian financial institution and its employees in retail offices of the financial institution where no registered dealer has a branch office.
The CSA invite comment on three aspects of this exemption:
(b) are these activities being carried on by unregistered staff at dealers operating other than in branches located in retail offices of Canadian financial institutions; and
(c) if so, should the exemption be selectively conferred on activities within retail offices of Canadian financial institutions or should it be contained in an instrument applicable to the wider universe of market participants?
Also as noted above, proposed National Instrument 33-102 requires written disclosure of the relationship between the dealer and the related financial institution and of differences in the treatment of securities compared with deposits at financial institutions.
The CSA seek comment on the following aspects of the form of disclosure to clients prescribed in the proposed National Instrument:
(b) should the dealer be required to draw these provisions to the client’s attention verbally;
(c) should the dealer be required to use a document separate from the account opening form and to obtain the client’s acknowledgement of the disclosure through the use of initial boxes; and
(d) should the dealer be required to make sufficient inquiries of the client in order to satisfy itself that the client adequately understands the provisions?
The CSA request comment as to whether the caution relating to borrowing funds from a related financial institution, which a dealer is required to give to a client, should also be given where the client has borrowed funds from sources other than the Canadian financial institution in which the dealer is carrying on business. The CSA also invite comment as to whether dealers should always be required to provide clients with disclosure relating to leveraged investing.
Comment is invited on whether the CSA should defer the elimination of the modified application form for mutual fund dealers related to Canadian financial institutions pending the development of a short form registration form to be used by all individual registrants of all categories of dealers.
The CSA also seek comment about the proposed elimination of the branch manager exemption and invite suggestions regarding any alternative methods of achieving effective supervision of securities related activities carried on in retail offices of Canadian financial institutions.
Finally, the proposed National Instrument permits the sale of mutual funds in branches of a Canadian financial institution, whether the mutual fund is sponsored by the Canadian financial institution or by a third party, provided that the compensation paid to registered personnel does not create an incentive to sell third party funds in preference to related funds (or vice versa). A rule consistent with this provision is contained in proposed National Instrument 81-105, entitled "Mutual Fund Sales Practices", which was published for comment on July 25, 1997. Proposed National Instrument 81-105 provides that a principal distributor of a mutual fund that is also a participating dealer of another mutual fund shall not provide an incentive for any of its representatives to recommend a mutual fund of which it is a principal distributor over a mutual fund of which it is a participating dealer. The CSA received comments on this proposed rule and is considering what changes, if any, will be made to respond to these comments.
Specific Requests Concerning Proposed National Instrument 33-103
As noted above, the proposed National Instrument requires that a call made by or to a client on a toll-free line operated by a registered dealer must be answered by an individual registered in the jurisdiction in which the call originates, notwithstanding where that registered individual resides.
The registration provisions in Canadian securities legislation require dealers that offer their services in more than one jurisdiction over toll-free lines to bear the costs of registration in each jurisdiction. To meet all of the registration requirements, the dealer may also incur other costs, such as having to operate more than one call centre to meet residency requirements.
The CSA requests comment on whether the registration requirement should be relaxed so as to require salespersons to be registered only in the jurisdiction in which the call centre is located.
Specific Requests Concerning Proposed National Instrument 33-104
Except as noted above, no notice is required where a proposed selling arrangement relates to an inducement and the inducement doesn’t result in the client paying more for the product or service provided by the dealer. The CSA request comment on whether a notice should be required where the inducement doesn’t result in the client paying more for the product or service provided by the Canadian financial institution.
Comment is also invited on whether selling arrangements under which a dealer requires a client, as a condition of dealing with or purchasing a product or service from the dealer, to deal with or purchase a product or service from the Canadian financial institution should be prohibited, given that section 7.4 of National Instrument 81-105 prohibits certain "tied selling" arrangements for mutual funds.
Comments
Interested parties are invited to make written submissions with respect to the proposed national instruments and related policies and the proposed consequential and related amendments to the Securities Rules. Submissions received by February 27, 1998 will be considered.
Submissions should be made to all of the Canadian securities regulatory authorities listed below, in care of the Ontario Securities Commission, in duplicate, as indicated below:
British Columbia Securities Commission
Alberta Securities Commission
Saskatchewan Securities Commission
The Manitoba Securities Commission
Ontario Securities Commission
Office of the Administrator, New Brunswick
Registrar of Securities, Prince Edward Island
Nova Scotia Securities Commission
Securities Commission of Newfoundland
Securities Registry, Government of the Northwest Territories
Registrar of Securities, Government of the Yukon Territoryc/o Daniel P. Iggers, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8
Submissions should also be addressed to the Commission des valeurs mobilières du Québec as follows
Claude St. Pierre, Secretary
Commission des valeurs mobilières du Québec
800 Victoria Square
Stock Exchange Tower
P.O. Box 246, 17th Floor
Montréal, Québec H4Z 1G3
A diskette containing the submissions (in DOS or Windows format, preferably WordPerfect) should also be submitted. As securities legislation in certain provinces requires that a summary of written comments received during the comment period be published, confidentiality of submissions cannot be maintained.
Questions may be referred to any of the following:
Ross McLennan
Director, Registration
British Columbia Securities Commission
(604) 899-6685
0r 1-800-373-6393 (in B.C.)
David Sheridan
Legal Counsel
Alberta Securities Commission
(403) 297-2630
Barbara Shourounis
Director
Saskatchewan Securities Commission
(306) 787-5645
David Cheop
Counsel
The Manitoba Securities Commission
(204) 945-2548
Tanis MacLaren
Associate General Counsel
Ontario Securities Commission
(416) 593-8259
Renée Piette
Financial Analyst
Commission des valeurs mobilières du Québec
(514) 873-5009
Elaine Anne MacGregor
Deputy Director, Capital Markets
Nova Scotia Securities Commission
(902) 424-7768
Ruth DeMone
Registrations Officer
Registrar of Securities, Prince Edward Island
(902) 368-4550
DATED at Vancouver, British Columbia, on November 27, 1997
Douglas M. Hyndman
Chair