NIN 98/39 - Proposed Rule Amendments to Require Membership in a Self-Regulatory Organization for Mutual Fund Dealers and Securities Dealers [NIN - Rescinded]
| Published Date: | 1998-07-10 |
|---|---|
| Effective Date: | 1998-07-09 |
Background
The Proposed Amendments are intended to strengthen the regulatory oversight of mutual fund dealers and securities dealers and to improve protection of investors who are clients of those dealers. The Proposed Amendments effectively expand the application of existing National Policy No. 49, entitled "Self-Regulatory Organization Membership" ("NP 49"), to all mutual fund dealers and securities dealers. Mutual fund dealers are not currently required to be members of an SRO under NP 49. A securities dealer is currently required to become a member of an SRO only if it is affiliated with an SRO member and they carry on business together in more than one jurisdiction. The Proposed Amendments will require mutual fund dealers and securities dealers to obtain membership in an SRO recognized by the Commission.
In British Columbia, mutual funds are currently sold by mutual fund dealers and securities dealers, as well as by brokers and investment dealers. While brokers and investment dealers are members of and regulated by the Vancouver Stock Exchange (the "VSE") and the Investment Dealers Association of Canada (the "IDA") respectively, mutual fund dealers and securities dealers are currently regulated directly by the Commission. About half of all mutual fund dealers in British Columbia are members of the Investment Funds Institute of Canada ("IFIC"), which is an industry association that provides some guidelines on industry practices for its members. The other half, as well as all securities dealers, are not subject to any guidelines other than those set out in securities legislation and policies. IFIC, unlike the IDA, is not an SRO and does not have any examination or audit function. Commission staff currently conduct examinations of mutual fund dealers and securities dealers.
OSC Commissioner Glorianne Stromberg, in a report issued in January 1995 (the "Stromberg Report"), recommended that a national self regulatory body be established for all mutual fund dealers and that the regulatory structure for mutual funds be simplified by combining provincial resources into a single centralized regulatory body.
Following their consideration of the recommendations contained in the Stromberg Report, the members of the CSA (other than the Commission des valeurs mobilières du Québec) are currently working with the IDA and IFIC to establish an SRO to regulate the activities of distributors of mutual funds. CSA members are also moving forward with plans to require dealers currently registered in the securities dealer category to join one of the SROs. (See OSC Proposed Rules 31-506 and 31-507, (1998), 21 OSCB 3875 and 3878 published in the OSC Bulletin of June 19, 1998). It is intended that the requirement for every mutual fund dealer and securities dealer to become a member of an SRO will be phased in during the years 1999 and 2000.
The Proposed Amendments
The Proposed Amendments set out requirements for SRO membership for securities dealers and mutual fund dealers.
The key aspects of the Proposed Amendments are as follows:
- A person registered in the mutual fund dealer category would be required to be a member of an SRO recognized for that purpose.
- The category of securities dealer would be eliminated. Most dealers currently registered in that category, and wishing to remain registered, would be required to join one of the existing SROs, and thereby register in the category of broker or investment dealer, or to focus their businesses solely on mutual funds, join the new mutual fund SRO and register in the category of mutual fund dealer.
- A new category of general limited dealer would be created for those dealers that the executive director concludes may appropriately be registered without becoming SRO members. This category would be reserved for dealers whose business is of a unique or highly specialized nature not suited to regulation under the SRO system and who can be regulated efficiently and effectively outside the SRO system.
- A dealer registered as a securities dealer or mutual fund dealer on the date when the proposed rule is adopted could continue to be registered in that capacity without being required to join an SRO for a limited transition period.
Anticipated Costs and Benefits
The Commission considers that greater reliance on self regulatory organizations for front line regulation of dealers would provide substantial benefits, in the form of a more efficient and effective regulatory system that provides better protection of investors. An SRO system that is well supervised by the Commission can help to ensure compliance with regulatory requirements and provide consistent application and interpretation of these requirements. SROs can bring industry expertise to bear on their members and can apply uniform standards on a consistent basis across provincial boundaries. They can react quickly to changes in market conditions and to matters of concern to their industry.
In addition, the Proposed Amendments will increase investor protection in the event that a member firm becomes insolvent. Clients of both mutual fund dealers and securities dealers will benefit from the protections afforded by an SRO system and the availability of a dealer funded contingency fund similar to the Canadian Investor Protection Fund ("CIPF"), to the extent that this provides greater protection for client assets held by a member firm that becomes insolvent.
While SRO membership will impose additional costs on registrants through membership fees, required contributions to a client compensation fund and possibly higher capital requirements, the Commission is of the view that the benefits of SRO membership to investors far outweigh costs incurred by dealers.
Comments
The Commission is interested in receiving comments on the Proposed Amendments. Interested persons are encouraged to direct written comments by September 8, 1998 to:
Brenda J. Benham
Director
Policy and Legislation
British Columbia Securities Commission
200 - 865 Hornby Street
Vancouver, BC V6Z 2H4
Comment letters submitted in response to Requests for Comment are placed in the public file and form part of the public record, unless confidentiality is requested. Although comment letters requesting confidentiality will not be placed in the public file, freedom of information legislation may require the Commission to make comment letters available. Persons submitting comment letters should therefore be aware that the press and members of the public may be able to obtain access to any comment letter.
Questions may be referred to any of:
Ross McLennan
Director
Registration
British Columbia Securities Commission
(604) 899-6685
Or 1-800-373-6393 (in B.C.)
Simon Millner
Legal Counsel
British Columbia Securities Commission
(604) 899-6642
Or 1-800-373-6393 (in B.C.)
DATED at Vancouver, British Columbia, on July 9, 1998.
Joyce C. Maykut, Q.C.
Vice Chair
OSC Proposed Rules 31-506 and 31-507
Proposed Amendments to the Securities Rules
1. Section 6 of the Securities Rules, R.B.C. Reg. 194/97, is amended by deleting subsection (2) and substituting the following:
(2) A person registered as a dealer must be classified in one or more of the following categories:
(a) broker:a person that
(i) is a member of the Vancouver Stock Exchange, and
(ii) trades in securities, exchange contracts or both;
(b) investment dealer: a person that
(i) is a member, a branch office member or an associate member of the Investment Dealers Association of Canada, and
(ii) trades in securities, exchange contracts or both;
(c) ^ limited dealer -
(i) exchange contracts dealer:a person that trades exclusively in exchange contracts, forward contracts, or both;
(ii) mutual fund dealer: a person that ^
(A)is a member of a self regulatory body or exchange that is recognized by the commission for the purpose of this clause, and
(B)trades exclusively in the securities of mutual funds;
(iii) security issuer: an issuer that trades in securities for purposes of distributing securities of its own issue exclusively for its own account;
(iv) real estate securities dealer: a person that trades in the capacity of agent or principal exclusively in real estate securities;
(v) scholarship plan dealer:a person that trades exclusively in securities of a scholarship or educational plan or trust;
(vi)general limited dealer: a person that(A)is limited to trading in those securities set out in its conditions of registration, and
(B)in the opinion of the executive director may appropriately be registered without becoming a member of a self regulatory body or exchange.(3)A person that is registered as a securities dealer on the date this subsection comes into force, and continues to be registered in that capacity, satisfies subsection (2) until the earlier of
(a)the date set for expiration of that registration occurring after •, and
(b)the first annual filing date for the dealer under British Columbia Securities Commission Rule 31-501 occurring after •1.1 The Commission expects the date in paragraphs (a) and (b) to be six months after the rule comes into effect. If the permanent registration system under proposed British Columbia Securities Commission Rule 31-501 is effective, there will be no "renewals". The proposed rule on permanent registration is expected to be published for comment in the next few months.
(4)Despite subsection (2), a person that is registered as a mutual fund dealer on the date this subsection comes into force, and continues to be registered in that capacity, is not required to be a member of a self regulatory body or exchange that is recognized for the purpose of subparagraph (2)(c)(ii) until the earlier of
(a)the date set for expiration of that registration occurring after •, and
(b)the first annual filing date for the dealer under British Columbia Securities Commission Rule 31-501 occurring after •2.2 The Commission expects the date in paragraphs (a) and (b) to be six months after the rule comes into effect. If the permanent registration system under proposed British Columbia Securities Commission Rule 31-501 (to be published for comment shortly) is effective, there will be no "renewals"
2. Section 46 is repealed and replaced by the following:
Broker’s,^ investment dealer’sand mutual fund dealer’sguidelines
46 (1) A broker, ^ investment dealer or mutual fund dealer
(a) complies with section 44 (1) if it follows the bylaws, rules or other regulatory instruments or policies relating to dealing with clients established by ^ a self regulatory body or exchange of which it is a member that is named in or recognized for the purpose of section 6 (2), and
(b) if registered as an underwriter, complies with section 45 (1) if it follows the bylaws, rules or other regulatory instruments or policies relating to underwriting established by ^ a self regulatory body or exchange of which it is a member that is named in or recognized for the purpose of section 7,
if those bylaws, rules or other regulatory instruments or policies
(c) have been filed by the ^ self regulatory body or exchange before they take effect, and
(d) subject to subsection (2), have not been objected to by the commission.
(2) If ^ a self regulatory body or exchange files a bylaw, rule or other regulatory instrument or policy in accordance with subsection (1)(c) and the commission does not give a written notice of objection within 30 days after filing, the bylaw, rule or other regulatory instrument or policy is deemed to have not been objected to by the commission.