Dealer Member Rules that will become effective in the coming months include:

Transcription

1 DEALER MEMBER QUARTERLY REGULATORY POLICY UPDATE JANUARY 2012 DEALER MEMBER RULES Upcoming Member Regulation Rule Changes: Dealer Member Rules that will become effective in the coming months include: Limitation Period on Enforcement Proceedings: The proposed amendments clarify the limitation of the time within which IIROC can pursue enforcement proceedings. Currently, there is no limitation period for existing Dealer Members and Approved Persons in the Dealer Member Rules. In contrast, former Dealer Members and former Approved Persons are subject to IIROC disciplinary proceedings for up to five years from the date they cease to be registered. The proposed amendments will implement a consistent six-year limitation period for all IIROC enforcement proceedings, whether against current or former Dealer Members or Approved Persons. The proposed amendments also subject former Dealer Members and former Approved Persons to investigation for six years after they cease to be registered with IIROC. The proposed amendments were approved by the IIROC Board of Directors on September 15, 2010, and submitted to the securities commissions for approval and published for comment for 60 days on November 26, IIROC staff are in the process of reviewing and drafting responses to comments from the public and the securities commissions. Revisions to the Definition of Securities Related Activities: The proposed amendments seek to clarify the definition of the term securities related activities as set out in Dealer Member Rule 1.1 to ensure that it specifically refers to all investment products; and to repeal the defined term securities related business currently set out in IIROC Dealer Member Rule 39.2 and replace all existing references to the term with securities related activities. The primary objective of the proposed amendments is to clearly articulate that IIROC registered advisor recommended transactions for any investment product (not just products defined as securities under provincial legislation, including principle protected notes, guaranteed investment certificates and other like products) must be conducted within and recorded on the books of an IIROC Dealer Member. The proposed amendments were approved by the IIROC Board

2 of Directors on December 10, 2008 and were submitted to the securities commissions for approval and published for comment for 60 days on April 24, The MFDA has been asked by the securities commissions to adopt similar provisions. When that has been completed, the securities commissions will finalize their comments on the IIROC proposal. New Methodology for Margining Equity Securities (Main Proposal): The objectives of the amendments to Dealer Member Rule 100 and Form 1 are to accommodate the elimination of both the market price per share margining methodology and the list of securities eligible for reduced margin. Changes have also been proposed to the margin requirements for convertible debentures and convertible preferred shares to make the requirements more consistent with those for related debt and equity securities of the same issuer. The proposed amendments were approved by the IDA Board of Directors on October 2005 and approved by the securities commissions on August 18, The amendments were subsequently adopted by the IIROC Board of Directors on July 16, 2008 and submitted to the securities commissions for approval and republished for comment for 30 days on September 3, IIROC staff are now in the process of finalizing the implementation program. Phase I of the implementation was made effective September 17, Phase II will be subject to a longer implementation period. Proposed Amendments to Simplify the Equity Margin Project: The objective of the proposed amendments to Dealer Member Rule 100.2(f) regarding the Phase II implementation of the new methodology for margining equity securities (the Equity Margin Project) is to reduce the processing complexity in the Equity Margin Project. For example, the amendments will remove the need to verify if a security has options or futures trading against it and will also allow the market price-based margin methodology to be used in a limited number of circumstances where it would be difficult for Dealer Members to apply the new methodology. The proposed amendments were approved by the IIROC Board of Directors on March 25, 2009 and have been submitted to the securities commissions for approval and published for comment for 60 days on May 1, The securities commissions made a number of comments on the proposed amendments and IIROC staff responded to them and proposed material modifications to the proposed amendments. As a result, IIROC staff will resubmit the proposed amendments with the modifications to the securities commissions for approval and republish them for comment.

3 Swap Positions Offset: The objective of the proposed amendments to Dealer Member Rule 100.4F is to extend the current margin treatment on swap offsets to partial offsets on interest rate and total performance swaps. This would permit partial notional amounts to be netted before applying the required margin to the swap position. The proposed amendments were approved by the IIROC Board of Directors on January 28, 2009 and were submitted to the securities commissions for approval and publish for comment for 30 days on February 13, IIROC staff have responded to comments from the securities commissions on the proposed amendments and will republish the proposed amendments with related housekeeping amendments to Dealer Member Rules 100.2(j) and 100.2(k) for margining unhedged swap positions. The purpose of the housekeeping amendments for margining unhedged swap positions is to clarify that there are two types of margin required inventory margin and customer account margin and that inventory margin must be provided irrespective of the counterparty to the swap. Trading in Securities of U.S. Over-The-Counter Issuers: In June 2008, the British Columbia Securities Commission (BCSC) imposed conditions of registration applicable to all investment dealers that trade in securities of U.S. OTC issuers through an office in BC. The conditions are intended to address abusive activity in the U.S. OTC markets with a connection to BC. The BCSC conditions may be grouped into three general categories: (1) beneficial ownership identification requirements prior to the sale of securities of an OTC issuer; (2) detailed reporting requirements with respect to securities of OTC issuers traded and held in the accounts of Dealer Members; and (3) designated person responsibility for certification of procedures relating to OTC trading, approval of deposits of OTC issuers, and compliance with the conditions. IIROC staff have developed a rule proposal that would adopt only the beneficial ownership identification requirements. The adoption of these requirements by IIROC is intended to discourage and prevent the abusive OTC market activity from migrating to other provinces. The proposed amendments to Dealer Member Rule were approved by the IIROC Board of Directors on April 30, 2009 for publication for comment for a period of 60 days and were published on May 22, IIROC staff have reviewed the public comments received and anticipate receiving comments from the securities commissions shortly. Client Relationship Model (Relationship Disclosure for Accounts Opened by Retail Clients): Rule XX00 seeks to implement the core principles of the Client Relationship Model (CRM), a model outlined in the Fair Dealing Model concept

4 paper issued by the Ontario Securities Commission (OSC) in January The CRM core principles are: clarity and transparency of the account relationship entered into between the client, the adviser and the dealer; transparency of the account costs to be borne by the client; transparency of conflicts that the adviser and the dealer must manage in order to put the client's interests first; transparency of account performance and the risks borne to achieve that performance; and client communication should be in plain understandable language. The rule proposals were originally approved by the IDA Board of Directors on January 30, 2008 and later adopted by the IIROC Board of Directors on May 21, The proposed amendments were subsequently revised and approved by the IIROC Board of Directors on March 25, 2009 for publication for comment for a period of 90 days. The securities commissions have established a working group and IIROC agreed to participate in that working group, however IIROC has revised the proposals and submitted them to the securities commissions for review. The proposed amendments were approved by the IIROC Board of Directors on June 24, The revised proposed amendments, proposed implementation periods and revised draft guidance note were re-published for comment for a period of 60 days on January 7, IIROC staff have finalized their responses to comments from the public and the securities commissions, and are awaiting approval from the securities commissions. Financial Planning: The objective of the proposed amendments is to ensure that minimum education and proficiency standards are met by those providing financial planning services for a Dealer Member. It is also to ensure that minimum standards are met in the supervision of employees or agents providing financial planning services for a Dealer Member. The proposed amendments were approved by the IIROC Board of Directors on July 16, 2008 for publication for comment for a period of 30 days, and were published on August 8, The comment period was subsequently extended to October 8, A roundtable was held in the spring of There continue to be concerns with the proposal. IIROC is in the process of determining whether this specific rule is still necessary, or whether reliance can be placed on the provisions relating to securities related activities.

5 Broker-to-Broker Non-Exchange Trade Matching: IIROC staff prepared amendments to Dealer Member Rule , broker-to-broker non-exchange trade matching. The current rule would be amended to change the one-hour reporting requirement to at or before 6 p.m. and have the following structure: trade matching requirement; a definition of a non-exchange trade; a list of acceptable trade matching utilities; trade classification where a Dealer Member enters a trade into the matching utility; trade classification where a Dealer Member does not enter a trade into the matching utility; and determination of monthly compliant trade percentage. The proposed amendments were approved by the IIROC Board of Directors on March 24, 2010 and submitted to the securities commissions for approval and published for comment for 60 days on April 9, IIROC staff have finalized their responses to comments from the public and the securities commissions on the proposed amendments. IIROC staff are in the process of reviewing and drafting responses to additional comments from the securities commissions. Trade Confirmation Requirements: IIROC staff prepared amendments to Dealer Member Rule 200.1(h). The current rule would be amended to allow a Dealer Member not to send trade confirmations to clients for trades that are subject to National Instrument (NI ) or Dealer Member Rule , if certain conditions are met, including the Dealer Member is in compliance with NI or Dealer Member Rule and the client has agreed not to receive trade confirmations. The proposed amendments were approved by the IIROC Board of Directors on March 24, 2010 and submitted to the securities commissions for approval and published for comment for 60 days on April 9, IIROC staff have finalized their responses to comments from the public and the securities commissions on the proposed amendments. IIROC staff are in the process of reviewing and drafting responses to additional comments from the securities commissions. Personal Financial Dealing and Outside Business Activities: The proposal will expressly prohibit personal financial dealings with clients. The proposal will clarify that, subject to specific exemptions, personal financial dealing with clients includes the following types of arrangements: receiving any direct or indirect benefit or consideration from clients, other than through the Dealer Member; entering into any private settlement agreements with clients; lending money to clients; borrowing any money from clients; and; having any control or authority over the financial affairs of clients. In addition to the prohibition against personal financial dealing with clients, the proposals will codify, in Dealer

6 Member Rule 18.14, IIROC s current expectations regarding outside business activities by imposing a specific and positive obligation on Registered Representatives and Investment Representatives to: disclose any outside business activity to the Dealer Member; and obtain the Dealer Member s approval before engaging in any outside business activity. The proposed amendments were approved by the IIROC Board of Directors on April 30, 2010 for publication for comment for a period of 90 days, and were published on May 28, IIROC staff are in the process of finalizing their responses to comments from the public and the securities commissions. In the interim, and in response to the comments received regarding the proposed amendments, IIROC staff drafted an update to existing guidance on outside business activities that was published for comment on May 11, 2011 for a period of 60 days. IIROC staff are also in the process of finalizing their responses to comments received regarding the guidance published. Margin Requirements for Foreign Exchange Contracts and Contracts for Difference: The proposed amendments seek to establish: (1) normal margin requirements for all positions in over-the-counter foreign exchange contracts (OTC FX contracts) and over-the-counter contracts for difference (OTC CFDs) that are held in other client accounts and Dealer Member inventory accounts; and (2) pre-trade margin requirements for pattern day trader trades involving OTC FX contracts and OTC CFDs. The proposed amendments were approved by the IIROC Board of Directors on May 11, IIROC staff plan on submitting the proposed amendments to the securities commissions for approval and publishing the Notice requesting comments this winter. Proposed Amendments to the IIROC Membership Disclosure Requirements: IIROC staff are preparing amendments to Rule 700 that will require Dealer Members to disclose IIROC membership in a manner similar to the Canadian Investor Protection Fund membership disclosure requirements. The proposed amendments will require Dealer Members to display the IIROC name and logo at specific locations, include the IIROC logo on each confirmation and account statement sent to clients, and make the current version of the IIROC brochure available to clients upon request. The objectives of the proposed amendments are to promote and raise public awareness of the advantages of working with an IIROC-regulated firm and advisor, and to help investors determine the regulatory status of firms and individuals. The proposed amendments were approved by the IIROC Board of Directors on September 14, 2011 and submitted to the

7 securities commissions for approval and published for comment for 60 days on December 2, Proposed Amendment to Dealer Member Rule (f)(vi), Box Spread: IIROC staff are preparing an amendment to Dealer Member Rule (f)(vi) regarding inventory box spreads. The proposed amendment would clarify the minimum capital calculation for Dealer Member inventory account positions in options that are used in a riskless option offset strategy called a box spread. The rule amendment would ensure that the minimum capital calculation for the box spread option offset strategy in Dealer Member Rule (f)(vi) accurately reflects the strategy s risk by changing the word lesser of clauses (I) and (II) to the word sum of clauses (I) and (II). The proposed amendments were approved by the IIROC Board of Directors on November 23, IIROC staff plan to submit the proposed amendments to the securities commissions for approval and publish the Notice requesting comments this month. Proposed Amendments to Schedule 12 of Form 1 and the Notes and Instructions to Schedule 12 of Form 1: IIROC staff are preparing amendments to Schedule 12 of Form 1 and the Notes and Instructions to Schedule 12 of Form 1 regarding margin on commodity concentrations and deposits. The objectives of the proposed amendments are to re-organize and re-write the Schedule and its Notes and Instructions into a simpler and more logical format, making it easier to read and interpret. The proposed amendments would clarify that the Schedule covers commodities and financial futures, the additional risk reduction offset strategies that can be excluded from the margin calculations, and that futures contracts whose maintenance margin requirements are published daily by the futures exchange may be excluded from the general margin calculation. The proposed amendments would apply to the International Financial Reporting Standards-based Form 1 (IFRS-based Form 1), because it is anticipated that Dealer Members would no longer be reporting under the Canadian Generally Accepted Accounting Principles-based Form 1 (CGAAP-based Form 1) when these proposed amendments are expected to be implemented. The proposed amendments were approved by the IIROC Board of Directors on November 23, IIROC staff plan to submit the proposed amendments to the securities commissions for approval and publish the Notice requesting comments this month.

8 Rules under Development Proposed Amendments to Counterparty Margin Requirements: IIROC staff are preparing amendments to Form 1 Schedules 4 and 5 and their accompanying notes and instructions and Schedule 9 notes and instructions. The proposed amendments would introduce new margin account requirements for Acceptable Counterparties (ACs), Regulated Entities (REs), and Acceptable Institutions (AIs) by requiring them to provide a minimum margin of 50% of normal margin for positions in their margin accounts. The purpose of the proposed amendments is to address the risk of leveraged trading by ACs, REs, and AIs. Definition of non-client : The primary objective of the proposed definition of non-client is to clearly articulate who is captured under the non-client category for the purpose of compliance with various IIROC Dealer Member Rules. IIROC staff plans on consulting advisory committees before the proposed definition is sent to the IIROC Board for approval and published for public comment. Upcoming Amendments Regarding the Plain Language Re-Write of the Rule Book: IIROC has undertaken a project to rewrite its rules in plain language. The primary objective of this project is to develop a set of rules that is more clear, concise and organized, without changing the rules themselves. IIROC has also identified a number of rules that require substantive revisions in addition to the non-substantive plain language changes. The new rules will be submitted to the Board of Directors of IIROC and issued for public comment in eight tranches. First tranche Business Conduct and Client Accounts: On January 26, 2010, the Board of Directors of IIROC approved the publication for comment of proposed Dealer Member Rules 3100 relating to business conduct and 3200 relating to client accounts. The existing rules relating to business conduct standards and client accounts have been identified as requiring substantive revisions in order to: eliminate unnecessary rule provisions; clarify IIROC s expectations with respect to certain rules; ensure that the rules reflect actual IIROC practices; and ensure consistency with other IIROC Dealer Member rules and applicable securities legislation. Proposed Dealer Member Rule 3100 is a consolidation of the

9 relevant requirements currently set out in IIROC Dealer Member Rules 17, 29, 1300 and 1500, relating to business conduct. Proposed Dealer Member Rule 3200 is a consolidation of the relevant requirements currently set out in IIROC Dealer Member Rules 29, 200, 1300, 1500, 2500, 2700, and 3200 relating to client accounts. The proposed Rules were published for comment on March 26, 2010 for a period of 90 days. IIROC staff have finalized their responses to comments from the public and the securities commissions. Second tranche Dealer Member Organization and Registration: On April 30, 2010, the Board of Directors of IIROC approved the publication for comment of proposed Dealer Member Rules 2100 through 2700 relating to the organization of Dealer Members business and registration. The existing rules relating to Dealer Member organization have been identified as requiring substantive revisions in order to: eliminate unnecessary rule provisions; clarify IIROC s expectations with respect to certain rules; ensure that the rules reflect actual IIROC practices; and ensure consistency with other IIROC Dealer Member rules and applicable legislation. Specifically, there are substantive amendments in the rules relating to the ownership of a Dealer Member, Dealer Member resignations, suspension and termination of Dealer Members, and introducing and carrying broker arrangements. The rules relating to registration do not contain any substantive amendments but are being rewritten in plain language. The 2000 series of plain language rules includes portions of existing Dealer Member Rules 4, 5, 6, 7, 8, 17, 18, 22, 29, 31, 35, 38, 39, 40, 100, 500, 600, 700, 1300, 2400, 2900, and The proposed Rules were published for comment on February 11, 2011 for a period of 90 days. IIROC staff are in the process of reviewing and drafting responses to comments received. Third tranche Financial and Operational Rules: On April 30, 2010, the Board of Directors of IIROC approved the publication for comment of proposed Dealer Member Rules 4100 through 4900 (collectively, the 4000 series of rules) relating to the general financial and operational rules of a Dealer Member. Some of the existing rules relating to the 4000 series of rules have been identified as requiring substantive revisions in order to: eliminate unnecessary rule provisions; clarify IIROC s expectations with respect to certain rules; ensure that the rules reflect current industry practices; ensure consistency with other IIROC Dealer Member rules; and streamline the decision making and rule interpretation process. Specifically, the substantive revisions in the rules relate to general Dealer Member financial

10 standards, protection of client assets, financing arrangements (e.g. repos), and operations. Proposed Dealer Member Rule 4900 relating to other internal control requirements does not contain any substantive amendments, but is rewritten in plain language. The 4000 series of rules include portions of or the entire Dealer Member Rules 1, 16, 17, 100, 200, 300, 400, 800, 1100, 1200, 1400, 2000, 2200, 2300, 2600, and The proposed Rules were published for comment on October 8, 2010 for a period of 90 days. IIROC staff are in the process of reviewing and drafting responses to comments received. Fourth tranche Dealing with Clients: On June 24, 2010, the Board of Directors of IIROC approved the publication for comment of proposed Dealer Member Rules 3400 relating to suitability requirements, 3500 relating to sales practices, 3600 relating to communications with the public, 3700 relating to handling and reporting complaints and internal investigations, 3800 relating to books and records, and 3900 relating to supervision. In addition we have identified a number of rules that also require substantive revisions. The existing rules relating to sales practices, communication with the public, books and records and supervision have been identified as requiring substantive revisions in order to: eliminate unnecessary rule provisions; clarify IIROC s expectations with respect to certain rules; ensure that the rules reflect actual IIROC practices; and ensure consistency with other IIROC Dealer Member rules and applicable securities legislation. This tranche of plain language rules contains rewrites of portions of existing Dealer Member Rules 17, 18, 29, 38, 200, 1300, 1800, 1900, 2400, 2500, 2600, 2700, 3100, and The proposed Rules were published for comment on October 8, 2010 for a period of 90 days. IIROC staff are in the process of reviewing and drafting responses to comments received. Fifth tranche Margin Requirements: On June 24, 2010, the Board of Directors of IIROC approved the publication for comment of proposed Dealer Member Rules 5100 through 5800 (collectively, the 5000 series of rules) relating to the margin requirements for investment products and their related offset strategies. Some of the existing rules relating to the 5000 series of rules have been identified as requiring substantive revisions in order to: eliminate unnecessary rule provisions; clarify IIROC s expectations with respect to certain rules; ensure that the rules reflect current industry practices; ensure consistency with other IIROC Dealer Member rules; and streamline the decision making and rule interpretation process. Specifically, the substantive revisions in the rules relate

11 to margin requirements application and definitions and the margin requirements for debt securities and mortgages, equity securities and index products, and offset strategies involving derivative products. Proposed Dealer Member Rules 5400, 5500, 5600 and 5800 do not contain any substantive amendments and are simply rewritten in plain language. The 5000 series of rules include portions of or the entire Dealer Member Rules 1, 17, 27, 100, and IIROC staff plan on publishing the Notice requesting comments in the winter of Sixth tranche Debt Markets and Inter-Dealer Bond Brokers: On January 27, 2011, the Board of Directors of IIROC approved the publication for comment of proposed Dealer Member Rules 7200 and 7300 relating to debt markets and Inter-Dealer Bond Brokers. Neither of these rules contains any substantive changes, however, they have been classified as Public Comment Rule proposals in order to maintain the transparency and consultative process of the plain language rewrite initiative. There is no Rule 7100 contained in the proposals as this number is reserved for future use when the Dealer Member Rules and Universal Market Integrity Rules (UMIR) are integrated. The 7000 series of plain language rules includes portions of existing Dealer Member Rules 29, 36, 800, 2100, 2800, and 2800B. The proposed Rules were published for comment on May 27, 2011 for a period of 90 days. IIROC staff are in the process of reviewing and drafting responses to comments received. Seventh tranche Interpretation and principles: On April 13, 2011 the Board of Directors of IIROC approved the publication for comment of proposed Dealer Member Rules 1100 through 1400 relating to rule interpretation, definitions, powers of the Corporation, and principles of conduct. The existing rules relating to interpretation and principles have been identified as requiring substantive revisions in order to: eliminate unnecessary rule provisions; clarify IIROC s expectations with respect to certain rules; ensure that the rules reflect current industry practices; and ensure consistency with other IIROC Dealer Member rules and applicable securities legislation. The proposed Rule 1100, Interpretation, provides a more comprehensive review of matters that need to be considered when reviewing and interpreting the rules. Proposed Rule 1200, Definitions, generally includes defined terms that have been used more than once throughout the Rule Book. Proposed Rule 1300, Powers of the Corporation, is based on existing Dealer Member Rule Proposed Rule 1400 includes

12 sections on Policies and procedures, and Evidence of compliance with the Corporation requirements. IIROC staff plan on publishing the Notice requesting comments in the winter of Eighth tranche Clean up amendments: On June 29, 2011 the Board of Directors of IIROC approved the publication for comment of the proposed clean up amendments. The objective of the clean up amendments is to account for all of the rule provisions which were not otherwise accounted for in one of the previously submitted series. IIROC staff conducted an overall review of the current Rule Book to ensure that all existing rules are either included as part of the plain language rules or repealed. In the course of that review IIROC staff determined the following: (1) some definitions that were originally to be included in the 1000 series, were better located in other rule series that had been previously submitted; (2) provisions from the 9000 series, which were not related to the consolidated enforcement rules had to be inserted; and (3) some provisions had been missed inadvertently. In order to demonstrate that all current rule provisions have been accounted for, IIROC staff prepared a consolidated table of concordance as part of the clean up amendments. Most of the clean up amendments are not substantive in nature; however, some substantive revisions were made in order to eliminate unnecessary rule provisions and to ensure consistency with other IIROC Dealer Member rules and/or applicable securities legislation. IIROC staff plan on publishing the Notice requesting comments in the winter of 2012.